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Investment Management Tutorial Unit 2Implementing and monitoring
11 September 2007
Simon Eagleton, [email protected]
Mercer Investment Consulting 2J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Performance based analysis
Can be used as a screen to narrow down large manager universes.
Typical Performance measures– Absolute return
– Excess return
Typical Risk Measures– Standard Deviation (SD)
– Tracking Error (TE)
– Value at Risk (VaR)
– Drawdown
– “Hit rate” and other consistency measures
Risk Adjusted Performance Measures– Information Ratio (IR)
– Sharpe Ratio
– Sortino Ratio
Mercer Investment Consulting 3J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Performance Based Analysis – cont’d
Performance Surveys
•Mercer
•Intech
•Russell
•Morningstar
•etc
A u s tra lia n S h a re s S p e c ia lis t - A c tiveR e tu rn s fo r p e r io d s e n d e d 3 0 J u n e 2 0 0 5
M a n a g e r/F u n d F u n d F u n d 3 M o n th s 1 Y e a r 2 Y e a rs 3 Y e a rs 5 Y e a rsS iz e T yp e (% ) R a n k (% ) R a n k (% p a ) R a n k (% p a ) R a n k (% p a ) R a n k
A B N A M R O A u s t E q u ity M S 7 .1 (2 ) 3 4 .4 (6 ) 2 8 .5 (9 ) 1 7 .2 (1 0 ) n aA M P C a p ita l A c tiv e Q u a n t L U C 4 .7 (4 4 ) 2 8 .2 (4 0 ) 2 5 .6 (2 3 ) 1 5 .6 (2 5 ) 1 0 .6 (2 6 )A M P C a p ita l C a p ita l A p p ro a c h L U C 5 .0 (3 3 ) 2 9 .0 (3 1 ) 2 5 .7 (2 1 ) 1 5 .3 (3 2 ) 9 .5 (3 6 )A M P C a p ita l V a lu e P lu s L U C 2 .7 (7 3 ) 2 8 .1 (4 1 ) 2 7 .7 (1 2 ) 1 8 .2 (6 ) n aA N Z A u s t S h a re s L U C 5 .1 (3 1 ) 3 1 .1 (1 5 ) 2 5 .2 (3 1 ) 1 5 .3 (3 2 ) 9 .0 (4 0 )A b e rd e e n A u s t E q u ity M S 3 .5 (6 7 ) 2 2 .1 (6 8 ) 2 1 .4 (6 1 ) 1 4 .7 (4 8 ) 9 .7 (3 5 )A lle ro n G ro w th S U C 4 .3 (5 5 ) n a n a n a n aA llia n c e A u s t E q u ity L A C 5 .5 (1 9 ) 2 9 .9 (2 2 ) 2 5 .5 (2 5 ) 1 4 .7 (4 8 ) 7 .9 (4 4 )A lp h a In v e s tm e n t M a n a g e m e n t L A C 4 .1 (5 8 ) 2 5 .8 (5 8 ) 2 2 .8 (5 8 ) 1 5 .1 (4 0 ) 1 1 .7 (1 5 )A u s b il A u s t A c tive E q u ity L A C 3 .9 (6 4 ) 3 4 .7 (5 ) 3 2 .3 (1 ) 1 9 .4 (2 ) 1 3 .6 (8 )B G I A u s t A lp h a E q u ity L U C 4 .6 (5 0 ) 2 7 .2 (5 0 ) 2 4 .2 (4 9 ) 1 5 .9 (2 0 ) 1 1 .7 (1 5 )B T In s titu tio n a l C o re A u s t S h a re M S 5 .6 (1 7 ) 2 9 .3 (2 7 ) 2 8 .2 (1 0 ) 1 7 .0 (1 1 ) 1 0 .2 (2 9 )B T In s titu tio n a l Im p u ta tio n S e c to r T ru s t M S 5 .1 (3 1 ) 3 1 .3 (1 4 ) 3 0 .1 (4 ) 1 8 .8 (5 ) n aB e rn s te in V a lu e L S 5 .4 (2 1 ) 3 3 .4 (7 ) 2 9 .2 (7 ) n a n aC F S W 's a le A u s t S h a re L S 4 .8 (4 2 ) 3 0 .1 (2 0 ) 2 3 .9 (5 3 ) 1 5 .3 (3 2 ) 9 .5 (3 6 )C F S W 's a le A u s t S h a re F u n d - C o re L S 5 .3 (2 2 ) 2 9 .4 (2 5 ) 2 5 .5 (2 5 ) 1 5 .2 (3 7 ) 1 1 .2 (2 1 )C F S W 's a le Im p u ta tio n L S 5 .3 (2 2 ) 2 8 .9 (3 2 ) 2 2 .7 (5 9 ) n a n aC F S W 's a le L o w T ra c k in g E rro r - C o re L S 4 .9 (3 7 ) 2 7 .7 (4 6 ) 2 4 .3 (4 6 ) 1 4 .7 (4 8 ) 9 .8 (3 2 )C S A M A u s t S h a re s L S 5 .0 (3 3 ) 2 4 .1 (6 3 ) 1 9 .7 (6 4 ) 1 0 .1 (5 8 ) 4 .3 (4 6 )C h a lle n g e r A u s t E q u it ie s C o m p o s ite L U C 6 .0 (1 0 ) 2 8 .9 (3 2 ) 2 3 .9 (5 3 ) 1 6 .3 (1 8 ) 1 3 .9 (6 )C h a lle n g e r S e le c t A u s tra lia n S h a re s M 3 .3 (6 8 ) n a n a n a n aC itig ro u p E q u ity M o d e l C o m p o s ite L A C 5 .0 (3 3 ) 2 4 .6 (6 2 ) 2 2 .5 (6 0 ) 1 5 .4 (3 0 ) 1 1 .3 (1 9 )C o n c o rd C a p ita l A u s t E q u it ie s C o m p L A C 3 .9 (6 4 ) 2 8 .0 (4 2 ) 2 5 .1 (3 4 ) 1 5 .9 (2 0 ) 1 2 .0 (1 3 )C o n s te lla tio n C a p ita l M a n a g e m e n t L I 2 .8 (7 2 ) 2 2 .3 (6 7 ) 2 4 .3 (4 6 ) 1 6 .5 (1 7 ) n aC o n ta n g o A u s t E q u ity L I 5 .2 (2 8 ) 3 1 .8 (1 0 ) 2 5 .5 (2 5 ) 1 4 .9 (4 4 ) 9 .8 (3 2 )D e u ts c h e A u s t E q u ity A lp h a C o m p o s ite L A C 4 .4 (5 4 ) 2 9 .3 (2 7 ) 2 5 .5 (2 5 ) 1 5 .1 (4 0 ) 9 .2 (3 8 )D e u ts c h e A u s t E q u ity C o re C o m p o s ite L A C 5 .3 (2 2 ) 2 9 .1 (3 0 ) 2 4 .9 (3 7 ) 1 5 .3 (3 2 ) 9 .8 (3 2 )D im e n s io n a l A u s t V a lu e L S 1 .7 (7 7 ) 2 5 .8 (5 8 ) 2 9 .7 (5 ) 1 9 .8 (1 ) 1 8 .3 (2 )D re s d n e r R C M A u s t E q u ity C o m p o s ite M U C 5 .2 (2 8 ) 2 6 .6 (5 6 ) 2 3 .2 (5 7 ) n a n aF id u c ia n A u s tra lia n S h a re s F u n d M S 4 .0 (6 1 ) 2 5 .0 (6 0 ) 2 4 .1 (5 0 ) 1 5 .5 (2 8 ) 1 1 .2 (2 1 )G M O A u s t E q u ity M o m e n tu m M S 5 .3 (2 2 ) 3 2 .9 (8 ) 2 7 .4 (1 3 ) n a n aG M O A u s t E q u ity T ru s t L U C 4 .7 (4 4 ) 2 7 .3 (4 9 ) 2 3 .3 (5 6 ) 1 6 .2 (1 9 ) 1 3 .7 (7 )G o ld m a n S a c h s J B W e re A s s e t M G T L P 6 .1 (8 ) 3 2 .1 (9 ) 2 6 .6 (1 6 ) 1 5 .8 (2 2 ) 1 1 .3 (1 9 )H S B C A u s t E q u ity C o m p o s ite (S p e c ia lis t) L U C 6 .0 (1 0 ) 2 6 .3 (5 7 ) 2 5 .0 (3 5 ) 1 4 .8 (4 7 ) 9 .1 (3 9 )H S B C P re m ie r A c tive A u s t E q u ity M S 6 .0 (1 0 ) 2 7 .1 (5 2 ) 2 5 .7 (2 1 ) 1 4 .7 (4 8 ) 1 0 .8 (2 4 )H y p e rio n A u s tra lia n G ro w th S I 3 .8 (6 6 ) 3 1 .4 (1 3 ) 2 4 .8 (3 8 ) 1 1 .5 (5 7 ) n aIA G A M A u s tra lia n S h a re s - C o re L I 5 .8 (1 6 ) 2 9 .4 (2 5 ) n a n a n aIA G A M R e s e a rc h F u n d L I 7 .1 (2 ) 3 7 .9 (1 ) n a n a n aIN G A u s t S h a re s C o m p o s ite L A C 5 .3 (2 2 ) 3 1 .5 (1 2 ) 2 5 .9 (1 9 ) 1 5 .6 (2 5 ) 1 1 .6 (1 7 )IN G S e le c t L e a d e rs M S 4 .9 (3 7 ) 3 5 .0 (4 ) n a n a n aIN V E S C O A u s t S h a re s C o m p o s ite L A C 4 .9 (3 7 ) 3 0 .2 (1 9 ) 2 9 .3 (6 ) 1 8 .1 (8 ) 1 2 .2 (1 1 )In d e p e n d e n t A s s e t M a n a g e m e n t M I 3 .1 (6 9 ) 3 0 .5 (1 6 ) 2 8 .6 (8 ) n a n aIn v e s to rs M u tu a l L S 3 .0 (7 0 ) 2 1 .4 (6 9 ) 2 1 .4 (6 1 ) 1 5 .1 (4 0 ) 1 5 .2 (5 )J F C a p ita l P a rtn e rs L U C 4 .7 (4 4 ) 3 0 .5 (1 6 ) 2 8 .1 (1 1 ) 1 5 .8 (2 2 ) 7 .6 (4 5 )
S u rve y c o n tin u e s o n th e n e x t p a g e ...W e s tA M A u s t E q u ity T ru s t M S 5 .3 (2 2 ) 2 8 .9 (3 2 ) 2 4 .6 (4 1 ) 1 6 .7 (1 6 ) n aW e s tp e a k A u s t E q u ity S tra te g y M U C 4 .5 (5 1 ) 2 0 .7 (7 0 ) 2 1 .0 (6 3 ) 1 3 .8 (5 5 ) 8 .9 (4 1 )N u m b e r o f F u n d s 7 7 7 2 6 4 5 8 4 6U p p e r Q u a rtile 5 .5 3 0 .2 2 6 .6 1 6 .9 1 2 .1M e d ia n 4 .9 2 8 .7 2 5 .2 1 5 .4 1 1 .0L o w e r Q u a rtile 4 .1 2 6 .9 2 4 .2 1 4 .9 9 .7
S & P /A S X 3 0 0 (A ll O rd s b e fo re 1 /4 /2 0 0 0 ) 4 .7 (4 4 ) 2 6 .0 (5 8 ) 2 3 .9 (5 3 ) 1 4 .7 (4 8 ) 9 .5 (3 6 )S & P /A S X 1 0 0 L e a d e rs 5 .0 (3 3 ) 2 5 .9 (5 8 ) 2 3 .7 (5 6 ) 1 4 .4 (5 3 ) 9 .5 (3 6 )S & P /A S X 2 0 0 (A ll O rd s b e fo re 1 /4 /2 0 0 0 ) 5 .0 (3 3 ) 2 6 .4 (5 7 ) 2 4 .0 (5 3 ) 1 4 .7 (4 8 ) 9 .4 (3 8 )
C O P Y R IG H T 1 A u g 2 0 0 5A ll ra te s o f re tu rn a re b e fo re ta x a n d b e fo re m a n a g e m e n t fe e s . R a te s o f re tu rn a re a n n u a lis e d fo r p e rio d s e xc e e d in g o n e y e a r.F u n d S iz e C o d e s : "S " = S m a ll (< $ 2 0 m ) "M " = M e d iu m ($ 2 0 -$ 2 0 0 m ) "L " = L a rg e (> $ 2 0 0 m )F u n d T yp e C o d e s : "S "= s e c to r p o o l "P "= c o m p o n e n t o f d ive rs if ie d p o o le d fu n d "A C /U C "= a u d ite d /u n a u d ite d c o m p o s ite " I"= in d iv id u a l a c c o u n t "R "= re ta il p ro d u c t
Mercer Investment Consulting 4J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Performance Based Analysis – cont’dComparison with the Mercer Overseas Shares Universe
Annualised Tracking Error and Excess Return for 5 years ended June 2007(before tax and before fees) - - - - Median
7.5
5.5
3.5ExcessReturn(% pa)
1.5
-0.5
-2.5
-4.5
-6.5
0.0 2.0 4.0 6.0 8.0 10.0Annualised Tracking Error vs MSWXAUNAUD (% pa) calculated monthly
Mercer Investment Consulting 5J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Performance based analysis - cont’d
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
Apr 1999 Dec 1999 Aug 2000 Apr 2001 Dec 2001 Aug 2002 Apr 2003 Dec 2003 Aug 2004 Apr 2005 Dec 2005 Aug 2006 Apr 2007
Mon
thly
Exc
ess
Ret
urn
(%)
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
Excess R
eturn (%)
Rising Markets Falling Markets 12 Month Rolling Excess Return
Excess Return in Overseas Shares from Apr 1999 to Jul 2007BGIA versus MSWXAUNAUD (before tax and before fees)
BGI International Alpha Equity Fund
Mercer Investment Consulting 6J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Performance based analysis - cont’d
Performance AnalyticsOverseas Shares (all funds) Monthly Returns - before tax and before feesfor the 100 Month period from Mar 1999 to Jun 2007
Manager Returns Standard Reward Semi Standard Deviation Tracking Information T-score Confidence
Total Annual Excess Deviation to Risk against mean against zero Error Ratio on IR of Value
(%) (%pa) (%pa) (%pa) Ratio (% per mth) (% per mth) (%pa) Added (%)
NAS 124.8 10.2 8.6 19.7 0.5 3.5 3.0 13.4 0.6 2.0 98
BGIA 30.9 3.3 1.6 11.8 0.3 2.5 2.3 1.0 1.6 4.3 100
BERV 111.3 9.4 7.8 12.3 0.8 2.7 2.3 8.1 1.0 2.6 100
Benchmark:
MSWXAUNAUD 14.5 1.6 12.0 0.1 2.6 2.5
Upper Quartile 63.9 6.1 4.5 12.7 0.5 2.7 2.5 6.0 1.1 3.0 100
Median 42.6 4.4 2.7 12.0 0.3 2.6 2.4 4.5 0.9 2.4 99
Lower Quartile 22.1 2.4 0.8 11.4 0.2 2.4 2.2 3.0 0.4 1.1 87
Mercer Investment Consulting 7J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Performance based analysis - cont’d
Performance AnalyticsOverseas Shares (all funds) Monthly Returns - before tax and before feesfor the 100 Month period from Mar 1999 to Jun 2007
Manager Distribution of Regression Analysis: y = a + b * index
Excess Returns Alpha (a) Beta (b) R-squared Correlation T-score Confidence of
Skewness Kurtosis (% pa) (%) Alpha<>0 Value Added (%)
NAS 1.9 9.1 9.1 1.22 55 0.74 1.9 97
BGIA 0.2 -0.2 1.6 0.98 99 1.00 4.6 100
BERV 0.0 2.2 8.2 0.80 61 0.78 2.9 100
Benchmark:
MSWXAUNAUD
Upper Quartile 1.0 5.0 4.7 1.01 94 0.97 3.4 100
Median 0.3 2.6 2.7 0.98 88 0.94 2.5 99
Lower Quartile -0.2 1.7 1.1 0.84 77 0.88 1.3 90
Mercer Investment Consulting 8J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Performance based analysis - cont’dOverseas Shares Style Analysis
51
11
20
5
37
44
1
80
51
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
BGIA BERV NAS
7 Years ending June 2007
% o
f Tot
al SPCPMIWXAUV
SPCPMIWXAUG
SPCEMIWXAUV
SPCEMIWXAUG
Mercer Investment Consulting 9J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Performance based analysis – con’td
Persistence - Does historic performance predict the future?
Many studies have been carried out:– Some have found that past performance has no predictive power
whatsoever
– Others have found a modest degree of predictive power
– Lots of research, but still no definitive answer
Why the conflicting conclusions?– Different time periods
– Different asset classes
– Different data sources
– Different past performance measures being tested
Mercer Investment Consulting 10J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Performance based analysis – cont’d
Problems with performance based analysis
Individuals change
Teams change
Processes evolve
Markets evolve
Funds under management change
Hard to discern between skill and luck
Be aware of survivor bias and incubation bias in data
Mercer Investment Consulting 11J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Performance based analysis – cont’d
Part 1 Results: Australian Equity
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
0 1 2 3 4 5 6 7 8 9
Length of Track Record (Years)
Ave
rag
e R
elat
ive
Per
form
ance
O
ver
Fo
llo
win
g T
hre
e Y
ears
(%
pa)
Length of track record is a negative predictor of future performance.
Part 1 Results: Global Equity
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
0 1 2 3 4 5 6 7 8 9 10 11 12
Length of Track Record (Years)
Ave
rag
e R
elat
ive
Per
form
ance
O
ver
Fo
llo
win
g T
hre
e Y
ears
(%
pa)
Mercer Investment Consulting 12J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Identifying future outperformers Researching managers
15,000+ strategies monitored
1400+ strategies rated ‘A’ or ‘A-’
4,000+ strategies rated
Idea generationHow strong is the manager’s ability to generate value-adding investment ideas?
Portfolio constructionHow effectively are these investment ideas translated into weightings within portfolios?
ImplementationHow much of the value added is given back in the form of transaction costs and opportunity costs?
Business managementWell managed investment firms are more likely to maintain and enhance the competitiveness of their investment strategies over time.
Mercer Investment Consulting 13J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Holdings-Based Analysis
Generally used for risk analysis, style classification or both
Providers– Barra
– Style Research Associates
– Goldman Sachs
– Northfield
– Risk Metrics
– APT
– Others…
Mercer Investment Consulting 14J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Holdings based analysis – cont’d
1.6
-0.1
1.91.5
3.7
1.9
1.00.7
-0.4
2.3
-2.0
0.8 0.7
1.7
2.6
1.8
-1.4 -1.6
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
Sty
le T
ilt™
Style Factors
Portfolio Style Skyline™
Mercer Investment Consulting 15J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Global (All-caps)Rolling 5yr Quality Signals
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
May-92 May-93 May-94 May-95 May-96 May-97 May-98 May-99 May-00 May-01 May-02 May-03 May-04 May-05 May-06 May-07
Sustainable Growth ROE Debt to EquityEarnings Growth Stability Poly. (ROE) Poly. (Earnings Growth Stability)Poly. (Sustainable Growth)
Global Equities (all-cap)Rolling 1 Year Excess Returns of SRA Quality Factors
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
May-87
May-88
May-89
May-90
May-91
May-92
May-93
May-94
May-95
May-96
May-97
May-98
May-99
May-00
May-01
May-02
May-03
May-04
May-05
May-06
May-07
ROE Debt to Equity Earnings Growth Stability Sustainable Growth
Factor analysis
“Quality” factors– A strong indicator of returns through the cycle
– Surprisingly weak in recent periods
Mercer Investment Consulting 16J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Value and Quality
Contrarian Value
Value and (lots of) Momentum
Yield- focused Value
-7.0
-5.0
-3.0
-1.0
1.0
3.0
5.0
7.0
Boo
k to
Pric
e
Div
iden
d Y
ield
C'F
low
Yie
ld
Sal
es to
Pric
e
IBE
S E
ngs
Yld
Ear
ning
s G
row
th
Sal
es G
row
th
IBE
S 1
2Mth
Gr
IBE
S E
ngs
LTG
Sus
tain
able
Grt
h
Rtn
on
Equ
ity
Low
Gea
ring
Ear
ning
s G
r S
tab
Mar
ket C
ap
Mar
ket B
eta
Mom
entu
m S
T
Mom
entu
m M
T
IBE
S 1
Yr
Rev
Sty
le T
ilt™
'Value' Factors 'Growth' Factors Other Style Factors
Mar 2007 vs Historical Tilt Range - Mar 2004 to Mar 2007 (12)ARROWST - Global Equity Strategy
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
Boo
k to
Pric
e
Div
iden
d Y
ield
C'F
low
Yie
ld
Sal
es to
Pric
e
IBE
S E
ngs
Yld
Ear
ning
s G
row
th
Sal
es G
row
th
IBE
S 1
2Mth
Gr
IBE
S E
ngs
LTG
Sus
tain
able
Grt
h
Rtn
on
Equ
ity
Low
Gea
ring
Ear
ning
s G
r S
tab
Mar
ket C
ap
Mar
ket B
eta
Mom
entu
m S
T
Mom
entu
m M
T
IBE
S 1
Yr
Rev
Sty
le T
ilt™
'Value' Factors 'Growth' Factors Other Style Factors
Mar 2007 vs Historical Tilt Range - Jun 2005 to Mar 2007 (4)EDINPTNR - Focus
Contrarian Value
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
Boo
k to
Pric
e
Div
iden
d Y
ield
C'F
low
Yie
ld
Sal
es to
Pric
e
IBE
S E
ngs
Yld
Ear
ning
s G
row
th
Sal
es G
row
th
IBE
S 1
2Mth
Gr
IBE
S E
ngs
LTG
Sus
tain
able
Grt
h
Rtn
on
Equ
ity
Low
Gea
ring
Ear
ning
s G
r S
tab
Mar
ket C
ap
Mar
ket B
eta
Mom
entu
m S
T
Mom
entu
m M
T
IBE
S 1
Yr
Rev
Sty
le T
ilt™
'Value' Factors 'Growth' Factors Other Style Factors
Mar 2007 vs Historical Tilt Range - Jun 2006 to Jun 2007 (5)PZENA - Pzena Global Value Strategy
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
Boo
k to
Pric
e
Div
iden
d Y
ield
C'F
low
Yie
ld
Sal
es to
Pric
e
IBE
S E
ngs
Yld
Ear
ning
s G
row
th
Sal
es G
row
th
IBE
S 1
2Mth
Gr
IBE
S E
ngs
LTG
Sus
tain
able
Grt
h
Rtn
on
Equ
ity
Low
Gea
ring
Ear
ning
s G
r S
tab
Mar
ket C
ap
Mar
ket B
eta
Mom
entu
m S
T
Mom
entu
m M
T
IBE
S 1
Yr
Rev
Sty
le T
ilt™
'Value' Factors 'Growth' Factors Other Style Factors
Mar 2007 vs Historical Tilt Range - Jun 2001 to Mar 2007 (12)DIA - Global Value Equity
Manager selection – diversity of Alpha
Mercer Investment Consulting 17J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Portfolio analytics: example portfolio
Risk Feature % pa
Tracking Error (TE)
0.9
Components of TE
- Market Risk * 0.1
- Sector Risk * 0.1
- Style Risk * 0.1
- Equity Risk * 0.3* Refer to Appendix A for definitions of each risk component.
Note: Components do not sum to total due to interactive effects.
Style and Risk Characteristics:
(8 managers covering 1453 of 2655 stocks)
International Shares Manager Mix as at 31 Mar 2007
1.0
-0.7
2.1
1.4
3.6
1.1 1.1
-1.0 -1.1
1.2
-0.7
1.2
-1.0
0.1
1.61.2
-0.5 -0.4
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
Book t
o Pric
e
Divide
nd Y
ield
C'Flow
Yie
ld
Sales t
o Pric
e
IBES E
ngs
Yld
Earni
ngs G
rowth
Sales G
rowth
IBES 1
2Mth
Gr
IBES E
ngs
LTG
Susta
inable
Gro
wth
Mar
ket C
ap
Mar
ket B
eta
Mom
entu
m S
T
Mom
entu
m M
T
IBES 1
Yr Rev
Rtn o
n Equ
ity
Low G
earin
g
Earni
ngs G
r Sta
bility
Style Factors
Sty
le T
ilt™
Could increase this significantly with a different
manager line-up
Mercer Investment Consulting 18J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Portfolio analytics
Manager correlations and risk characteristics:Cont.To TV
Fund Weight TE % Volatility BetaFund of Funds - 0.86 - 11.55 1.00Alliance Capital 16.00 2.34 9.55 11.98 1.02GMO Global 15.00 1.84 9.68 11.38 0.97Bernstein Global Value 15.00 2.33 23.51 11.84 1.00BGI International 20.00 1.28 9.56 11.62 1.00Credit Suisse International 19.00 2.67 29.05 11.62 0.98Lazard Emerging Markets 3.00 10.42 1.78 17.02 1.18MBA Asian Investment 2.00 9.69 4.83 14.40 0.92MFS Global Equity 10.00 2.90 12.04 11.67 0.98
Fund of Funds Alliance Capital GMO Global Bernstein Global BGI International Credit Suisse Lazard Emerging MBA Asian MFS Global Fund of Funds 1.00Alliance Capital 0.22 1.00GMO Global 0.30 -0.16 1.00Bernstein Global Value 0.57 -0.21 0.26 1.00BGI International 0.32 -0.02 0.39 0.16 1.00Credit Suisse International 0.49 -0.11 -0.16 0.07 0.07 1.00Lazard Emerging Markets 0.05 0.03 -0.43 0.09 -0.55 -0.10 1.00MBA Asian Investment 0.21 -0.07 -0.28 0.09 -0.36 0.06 0.52 1.00MFS Global Equity 0.36 -0.02 0.40 0.09 0.24 -0.07 -0.37 -0.13 1.00
Relatively high
Large proportion of the risk budget
Mercer Investment Consulting 19J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
Rolling Three Year Excess Return of Global Equity Managers from GIMD (US$)
Grouped by TE Quartile
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(%)
Top Quartile
2nd Quartile
3rd Quartile
4th Quartile
Manager selection – active risk level
Mercer Investment Consulting 20J:\Consulting\Team\Simon\Institute of Actuaries\IMtutorial_2007_unit2.ppt
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