Part 7 - Due Dilligence And Selecting Managers

Question 1

Define Information Ratio, Information Coefficient, Breadth and Transfer Coefficient

Answer 1

IR = Ratio of manager’s estimated alpha divided by estimated volatility
IC = Measure of manager’s skill
BR = Number of independent forecasts that a manager can make in a given period
TC = Ability of manager to implement recommendations, indicates the correlation between forecasted active returns and active weights

Question 2

What are the three important characteristics of sound TAA model development

Answer 2

1. Use of economically meaningful signals
2. Absence of data mining
3. Avoidance of overfitting

Question 3

What is the Fund Performance Persistence Hypothesis WRT PE?

Answer 3

Fund managers generate returns that contradict the weak form efficient markets hypothesis by offering excess returns in two or more non-overlapping time periods that exhibit statistically significant correlation

Question 4

Define Blue chip, established, emerging and re-emerging

Answer 4

Blue Chip - all funds, top quartile, two business cycles
Established - most funds, top quartile, two business cycles
Emerging - limited history but characteristics to become established
Re-emerging - previously established or Blue Chip, restructured and has potential.

Question 5

What are the three fundamental screening questions regarding an investment process?

Answer 5

1. What is the investment objective of the fund
2. What is the investment process of the fund manager
3. What is the nature and source of any value added by the fund manager

Question 6

What is the distinction between information gathering and information filtering?

Answer 6

Information gathering - ability of manager to gain access to or have access to better information

Information filtering - ability to use available data but glean better insights from it.

Question 7

What is gaming in the context of DD?

Answer 7

Investment activity designed to generate favourable measures rather than truly enhanced performance. EG Smoothing.

Question 8

In the context of op risk, what is fund culture?

Answer 8

Shared set of priorities and values within the organisation. Competences honesty and diligence are desirable values.

Question 9

Issues to consider when analysing past performance

Answer 9

• Accuracy
• Gaming
• Representativeness
• Stationarity
• Appropriateness