Managing Investment Firms_PQ Version

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.

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Managing Investment Firms_PQ Version