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7/28/2019 Managing Investment Firms_PQ Version
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Managing Investment Firms
a review of maximizing potential
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Agenda
Expert opinion input from industryleaders
Management philosophy and culture
Management Fundamentals Special situations
A framework for managing alpha teams
Conclusions
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Organizational culture
Guiding principles : the equations Philosophy + People + Process = Performance
Performance = Investment results + Client service
Maximum performance = Maximum business results
Guiding principles : the beliefs Teamwork is the collegial interaction and collaborative activity that form a common bond
for achievement
Execution supersedes intention Quality in everything we do preempts quantity
The pursuit of excellence must be pervasive and unrelenting
There are no higher ethical values than truth, honesty and professionalism
Commitment, dedication and hard work are our instruments of success
Enjoying ourselves and maintaining a pleasant working environment are important
elements of success Individual rewards are tied to performance meritocracy
We will always benefit from critical review and a goal of constant improvement
Gary Brinson Brinson Partners
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Organizational culture
Observations Success comes to those who increase their worth. To increase your worth, you have to
do more than gain new knowledge and skills. You have to become the kind of person
with whom others like to work
The greatest ability is dependability
Enthusiasm makes ordinary people extraordinary
Gary Brinson Brinson Partners
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Critically Appraising Management Truths
Never forget : this is a people business Any number of approaches can work but each is dependent on talented people
The key to success is the attraction, motivation and retention of talented people
There are no right answers it depends on the people
Elements of Organizational Success The most efficient answer to an organizational issue is often not the most effective
Investment success is about anticipating change
Where companies are located is becoming decreasingly important
Investment organizations have to act locally and think globally
Be careful of profit centers within the organization
Do not over-manage the effort
Having fun is important
Success is defined in terms of the team rather than individual needs and
aspirations
David Fisher Capital Group Companies
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Managing Investment Companies
Seven components of success An effective leader with a clear vision of Where the firm is going
What is necessary to get there
The ability to effectively communicate that vision across the entire organization
A clearly articulated investment discipline
An appropriate business strategy and the structure to support it
The right investment talent
Objective incentives that pay employees well and help retain them
A clear understanding of the culture of the organization and how to maintain that culture
The technology necessary to enable the staff to perform their jobs well
Emphasis of team over individual
Channel competition externally not internally
Compensate staff in line with client objectives
Alison Winter Northern Trust Bank of California
James Rothenburg Capital Research and Management Company
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Leading Investment Professionals
Managerial stance Empathy and humility mistakes are inevitable
Understanding why decisions were made is as important as the decision itself
Work habits of successful analysts Be prepared
Set priorities
Ask impertinent questions
Analyze the analyses of others
Discipline Investment discipline every holding should have a purpose
Communications discipline recommendations need to be unambiguous
Objectivity - do not get too close to a company
Creativity Challenge staff to be creative and come to conclusions in innovative ways
Claude Rosenburg RCM Capital Management
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Job Satisfaction among Investment Professionals
Russell Reynolds Surveys
Factors influencing job satisfaction 2004 1996
Most influential
Work itself / Day-to-day responsibility 87% 78%
Sense of professional achievement 80% 86%
Taking responsibility 80% 77%
Relationship with supervisor 70% 40%
Balance between work and personal life 68% 35%
Outlook for advancement 68% 52%
Compensation 66% 54%
Relationship with colleagues 60% 40%
Least influential
Work conditions 25% 23%
Policies on HR / operational matters 21% 9%
Job title / Status 18% 33%
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A Framework for Managing Alpha Teams
An investment paradox If managers can truly add alpha to a pre-defined benchmark, then any constraints can
only add inefficiency
Fund objectives are far more efficiently achieved through maximizing tracking error inyour alpha component and adjusting a beta component to target overall tracking error
Yet we always target overall tracking errors through constraining alpha managers!!
Practical considerations
IR = / Stdev(i) IR = IC * B * TC : f(Skill, Breadth & Transfer coefficient)
= Volatility * IC * Score : f(Volatility, Skill & Expectations)
Factors are not independent e.g.
Skill and transfer coefficient both decrease with breadth
Alphas deteriorate with tracking error
Skill deteriorates with volatility that is inversely related to expectations certainty Alphas and information ratios are subject to significant change
It is thus practically expedient to constrain alpha managers
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A Framework for Managing Alpha Teams
Optimal approach is to give managers maximum freedom within setparameters
Manager autonomy
Every mandate requires Explicit benchmark
Set parameters
Agreed targets (Alpha, information ratio, horizon)
Fund &Benchmark
# of stocks / concentration
Tracking error
Style / Size bias
Turnover
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The Importance of Benchmarking
Criteria of good benchmarks Unambiguous (securities and weights clearly identifiable)
Investable (can be fully replicated)
Timeous (specified in advance)
Accurate (correct representation of objective)
Sustainable (information required for build available in forseeable future)
Benchmarks give us insight into
Universe
Opportunity set
Beta or default position
Benchmarks are the standards by which success is measured If the performance yardstick is the competition, the benchmark should represent them
If the performance yardstick is the non-investable (e.g. CPI), the benchmark must reflect
the neutral policy that achieves the goal over time
Benchmarks provide enormous insight into the competitive investmentlandscape
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Delineating responsibilities for Alpha Teams
Management provides support Infrastructure including
Real-time comparison of fund vs benchmark Structure Performance Attribution Compliance Scenario analysis
Decision support tools Database Analytical tools Research and recommendation representation
Environment
Teams implement decisions Execution Decision review
Adherence to mandate and parameters Results
Agreed time frame (synchronized to client service needs)
Client service requires input from both sides
Systemsarekey
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Conclusions
Jim Ware describes managing investment firms like trying to herd cats Investment professionals are independent, skeptical, curious, resistant to authority and
generally intelligent
Managing these individuals is best achieved through a respectful partnership
Success is a combination of talent & environment, infrastructure and interaction
Teams are more consistently successful than individuals
It is better to have a good performer that lives the firms values than a star whodoesnt
By definition, successful Alpha investment firms are required to deliver alpha Fund managers and analysts are paid to make and effect decisions that deliver results
Management is required to provide the environment that maximizes potential results
These two roles are not interchangeable but are interdependent
Failure of either will generate sub-optimal results and must be addressed
Success is defined in terms of the team not individuals
Performance = Investments results + client service
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Regulatory Information
Peregrine iQ (Pty) Ltd
Physical Address:
6th Floor, Letterstedt House
Newlands on MainNewlands
7700
Telephone number: 021 670 4900Internet website: www.pq.co.za
Peregrine iQ (Pty) Ltd is an authorised financial services provider (license no. 608) approved by the Registrar of Financial
Services Providers (www.fsb.co.za) to provide intermediary services and advice in terms of the Financial Advisors and
Intermediary services Act 37 of 2002.
Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of
investments. Since the performance of financial markets fluctuate, an investor may not get back the full amount invested.
Past performance is not necessarily a guide to future investment performance. All returns are rand returns, unless otherwise
stated.
Investment deals done on behalf of clients by Peregrine iQ are all done on an arms length basis.