Mutual Fund Directors Forum Evaluation of Fund Performance Information Keil Fiduciary Strategies LLC. Ft. Myers, FL Jeffrey C. Keil January 14, 2009

Transcription

1 Mutual Fund Directors Forum Evaluation of Fund Performance Information Keil Fiduciary Strategies LLC Ft. Myers, FL Jeffrey C. Keil January 14, 2009

2 Successful Performance Evaluation Goals what does the board expect to accomplish? Expectations determine advisor materials Knowledge know what to ask and look for Basis(es) For Comparison valid? Advisor Rationale parameters vs. actions Consider Action Guidelines funds of concern Board Counsel right questions? Advisor Discussion(s), Negotiations (as necessary) Documentation Follow-up (as necessary)

3 Performance Periods Most current end date feasible Short and long-term returns minimum 5 years (if applicable) Standard periods: most current qtr or y-t-d, 1-yr, 3-yr, 5- yr, 10-yr 12-mo. rolling results consistency; less point-in in-time dependency Quarterly returns again, indicative of consistency Consider more rigorous review during your 15(c) cycle Funds of board concern

4 Performance Comparisons Data providers Lipper, Strategic Insight, M* Net, gross traditional (exp. deducted) vs. exp. reinvested Benchmarks o Market indices required o Fund Lipper, M* indices o Custom indices Risk-adjusted returns Capital, income return Peer group limitations o Parameters vs. chosen investments (Saturn) o Non-core portfolio assets shift o Year-over over-year changes o Truly unique fund? o No peer group is perfect

5 Assessment of Performance Results How does the fund profess to invest/seek to perform? Fund Rankings favorable, volatile? Index Rankings lag? mimic? market condition-driven? driven? Short- vs. Long-Term correlation? style in/out of favor? manager changes? Risk/Volatility (Standard deviation, Sharpe Ratio, Beta, Alpha, Information Ratio) strengths, differences (handout) Consistency in rankings? Gross vs. Net Returns expenses impactful? Capital vs. Income return income objective? competitive?

6 Subject Funds Performance [Review Lipper performance material content, format: pgs. 8-11, each Fund] Neptune Consistent performer (long-term in 2 nd quintile); slipping 1-yr return (almost 4 th quintile); volatility generally lower than average (Figure 14) Saturn Strong long-term (2 nd ), yet deteriorating short-term term results; 5 th quintile for 1-yr performance; performance tends to be polar (more 1 st & 5 th rankings); consistently above-average average volatility, more so recently Polaris Consistent performer (2 nd ) long-term; return slipped to almost 4 th for latest year; volatility methodically dropping over most recent periods

7 Issues with Subject Funds What should be of concern? Very poor/poor short-/longer-term results 2+ years Very high (relative) volatility Very inconsistent rankings Low correlation w/chosen indices Questions, Discussions, Solutions Why did the fund perform the way it did? out/underperform? Volatility levels result of what portfolio management decisions, tools? Management actions? style change, personnel resource, tool resources, compliance monitoring, investment policies altered, risk mgmt. Action plan, expected results, follow-up review

8 Management s Perspective The funds advisor will provide rationale behind divergent and/or lagging performance results what to buy? TOP 10 REASONS PERFORMANCE LAGGED 10. Our fund is unique. 9. Our investing style is out of favor. 8. Market indices don t correlate well with our fund. 7. We didn t hop on the [hot sector] bandwagon. 6. We don t seek high rankings, rather low volatility.

9 Management s Perspective 5. Lipper and M* have misclassified our fund. 4. Our selection was solid, but our timing was off. 3. We had turmoil in our portfolio manager and analyst ranks. 2. We chose to be defensive and were punished for our conservative stance. 1. Our investment ideas value has not yet been fully recognized by the markets. [Many of these statements could be true, but may require validation]

10 Separate Account vs. Fund Performance SMA/Fund cost and thus performance comparability highly questionable, yet Performance review documentation prudent Align similar investment objectives Data presentation comprehensive, transparent Identify conflicts of interest and related procedures Inquire re: manager incentives for funds vs. SMAs Question when similar fund/sma performance diverges widely Indices match?

11 Aligning Manager/Shareholder Interests Portfolio manager incentives based on relative or absolute return, income, and/or risk measures, not assets Periods measured short- and long-term Investment policy adherence compliance Risk monitoring awareness of process, overlap, changes in risk profile etc. Awareness of all relative costs borne by shareholders, contractual or otherwise Potential Board actions during underperformance scenarios?? [To be addressed later]

12 Conclusion Questions, comments and discussion