Fund Selection

Question 1

In a broad sense, what is fund selection all about?

Answer 1

“Fund selection is about creating alpha by selecting the best funds and managers that deliver excess returns over a complete business cycle.”

Question 2

What is the 4 P process of manager selection?

Answer 2

people, process/philosophy, portfolios, and performance

Question 3

Key considerations for the ‘People’ in the 4P process?

Answer 3

Who is in charge? What are the ownership levels of the principals?
How stable is the team, how do they work together?
A strong team approach lends itself to a measure of stability in that the loss of one individual would not drastically impact fund performance negatively.

Question 4

Key considerations for the ‘Process’ in the 4P process?

Answer 4

How disciplined is the team to implement their investment process?
What is that investment process?
Can it be easily defined?
Why will their approach result in future outperformance in the near and long future?

Question 5

Key considerations for the ‘Performance’ in the 4P process?

Answer 5

We compare how a fund performed versus a relevant benchmark as well as performance within its peer group.
We consider the percentile ranking the fund received over different periods of time, including the 1, 3, 5, and 10 year periods.
We target funds in the top quartile in their respective categories.
It is imperative that fund managers demonstrate the ability to consistently perform well throughout different market cycles.

Question 6

Name a number of fund rating companies?

Answer 6

Longboat, Morningstar, Lipper, FundCalibre, S&P

Question 7

Name a number of fund rating companies?

Answer 7

Longboat, Morningstar, Lipper, FundCalibre, S&P, CItywire

Question 8

What is an IPS?

Answer 8

investment policy statement (IPS)

Question 9

Manager selection is “a xxxxxx step in establishing and implementing a comprehensive investment plan

Answer 9

Final

Question 10

What does the comprehensive investment plan start with?

Answer 10

starts with formulating an investment policy statement (IPS)

Question 11

What are the main parts of an IPS?

Answer 11

That IPS articulates investors’

1) objectives (return and risk) and
2) constraints (liquidity, time horizon, taxes, legal or regulatory environment and any unique circumstances) to shape the manager selection process and the ongoing monitoring

Question 12

Using Paul’s alphabet of Fund selection Criteria what is the letter C?

Answer 12

Capitalization focus - small, mid, large

Question 13

Using Paul’s alphabet of Fund selection Criteria what is the letter D?

Answer 13

Diversification vs Concentration - to sectors, industries, themes

Question 14

Using Paul’s alphabet of Fund selection Criteria what is the first letter E?

Answer 14

Expenses - No history of funds with high fees outperforming over the LT

Question 15

Using Paul’s alphabet of Fund selection Criteria what is the second letter E?

Answer 15

Experience
Credentials (academic qualifications)
Years of experience
cycles been through

Question 16

Using Paul’s alphabet of Fund selection Criteria what is the letter F?

Answer 16

Fund Family - Have their been significant liquidations or roll ups in the fund family?

Question 17

Using Paul’s alphabet of Fund selection Criteria what is the letter I?

Answer 17

Independent Rating Agencies

What do they say about the firm / fund / Manager?

Question 18

Using Paul’s alphabet of Fund selection Criteria what is the letter L?

Answer 18

Length of time in biz for Management firm

Question 19

Using Paul’s alphabet of Fund selection Criteria what is the letter M?

Answer 19

Management Strength
Does it have enough human capital to execute the processes?
How much experience does each team member have?
Key man risk - how vulnerable is the fund to the loss of one person.
Skills in one area like asset allocation or a certain geographic focus specific role and experience level of the research analyst who tends to have closer relationships with mgmt suppliers and competitors.

Question 20

Using Paul’s alphabet of Fund selection Criteria what is the letter O?

Answer 20

Objectives
what are the funds objectives?
have they managed to acheive them?

Question 21

Using Paul’s alphabet of Fund selection Criteria what is the letter P1?

Answer 21

Performance
Absolute
Relative - vs benchmark
versus Peers
1,3,5, 10 years
Risk adjusted?
Consistency

Question 22

Using Paul’s alphabet of Fund selection Criteria what is the letter P2?

Answer 22

Process
Rigourous
Inline with stated objectives

Question 23

Using Paul’s alphabet of Fund selection Criteria what is the letter R?

Answer 23

Risk Management and Downside Focus
Standard deviation of returns
Maximum drawdown
Sharpe ratio
Sortino ratio
Correlation

Question 24

Using Paul’s alphabet of Fund selection Criteria what is the letter S1?

Answer 24

Skin in the game
Does the manager invest in their own funds?
Are the manager and unit holder interests aligned

Question 25

Using Paul’s alphabet of Fund selection Criteria what is the letter S2?

Answer 25

If the fund size is too large relative to its investment universe it may be difficult for the investment company to invest in illiquid, mid- to small-cap stocks.
Lots of evidence of decreasing returns with scale
However, Size of the firm can be an asset as they are able to hire some of the brightest asset managers.

Question 26

Using Paul’s alphabet of Fund selection Criteria what is the letter T?

Answer 26

Does the fund have high turnover or

Does it have high manager turnover

Question 27

Using Paul’s alphabet of Fund selection Criteria what is the letter U?

Answer 27

Underperformance
After periods of significant U, did we see
Shifts in risk appetite,
Shifts in net exposures
Shifts in industry or sector exposures
shorter time horizons,
style drift