fund evaluation group, llc (“feg”) presentation to: state ... · pdf...
TRANSCRIPT
November30,2016
Fund Evaluation Group, LLC (“FEG”) presentation to:State of Utah, School and Institutional Trust Funds Office (“SITFO”)
Confidential– NotforRedistribution1©2016FundEvaluationGroup,LLC
RELATIONSHIPSUPPORTSTRUCTURE
InvestmentPolicyStatementRefinement
GovernanceSupport
PortfolioModeling
PortfolioConstruction
OngoingAnalysis
KnowledgeSharing
CONSULTINGTEAMDavidCenter&RebeccaWood
ManagerResearch
ManagerVetting
AlternativesExpertise
OngoingDueDiligence
CapitalMarketResearch
RESEARCHTEAM&INVESTMENTPOLICYCOMMITTEE
GregoryDowling
TransitionManagement
PerformanceReporting
AnalyticalSupport
RegionalSupport&Education
BackOfficeSupport*
CLIENTSERVICE&ADMINISTRATIONTEAM
KevinKersting
* Available to SITFO through FEG’s Consulting Implementation Services solution.
FEG serves as a full-service consultant and expert research provider. The diagram below illustrates how FEG supports SITFO
OLEMISS’PARTNERSHIPWITHFEGWHYOUTSOURCE?UNDERSTANDINGOURFIDUCIARYDUTIESFEGFUNCTIONSASASINGLECONSULTANTSOLUTION
State of Utah, School and Institutional Trust Funds Office
SITFO’SLEADCONSULTANTDavidD.Center,CFA
Confidential– NotforRedistribution2©2016FundEvaluationGroup,LLC
FEGINVESTMENTPROCESS
1
4
3
2
Step1:
OBJECTIVES
Step2:
STRATEGY
Step3:
IMPLEMENTATION
Step4:
ONGOINGMANAGEMENT
FEGwillinitiatetherelationshipwithadeepdiveintoyourorganization’suniquemission,governance,needs,
goalsandobjectives
Oncegoalsaresolidified,wewillleverageourexpertiseinstrategicassetallocationtodefineacustomstrategyandcreateanInvestment
PolicyStatement(IPS)
FEGwillworkwithyoutodelivertheinvestmentstrategy,including
positioningportfoliostomeetgoalsandconstraints,andprovidethe
rightlevelofservice
Asmarketschangeovertime,FEGwillcontinuallymonitoryourportfoliotoensureitremains
withinpolicyranges
Confidential– NotforRedistribution3©2016FundEvaluationGroup,LLC
DIVERSIFICATIONBYGLOBALRISKFACTORSFEG’sindustry-leadingresearchoncapitalmarketsandassetallocationstrivestoprovideportfoliodiversificationwithoutsacrificingperformance.Webelieveportfoliosshouldbeconstructedtoachievediversificationbyglobalriskfactors.Todo so werecommenddiversificationbytheassetcategorieslistedbelow,aswellaswithineachcategory.
ASSETCATEGORIES ROLE RISK
GLOBALEQUITYStocks,PrivateEquity,Long/ShortHedgeFunds TotalReturn StockMarketDeclines
GLOBALFIXEDINCOMEANDCREDITBonds,BankLoans,CreditHedgeFunds
EquityRiskMitigationandTotalReturn
Rising Ratesand/orCreditDowngrades
REALASSETSRealEstate,NaturalResources,Infrastructure
InflationProtectionandTotalReturn Deflation
DIVERSIFYING STRATEGIESEventDriven,RelativeValue,Macro
Diversification andTotalReturn ActiveManagement
“Alternative” investments can span every asset class and should be categorized by underlying risk factors, rather than by legal structure.
Confidential– NotforRedistribution4©2016FundEvaluationGroup,LLC
RESEARCHTEAM
Gregory M. Dowling, CFA, CAIA / Managing Principal / CIO & Head of ResearchMichael J. Oyster, CFA / Managing Principal / Chief Investment Strategist
Nolan M. Bean, CFA, CAIA / Managing Principal / Head of Institutional Investments
INVESTMENTPOLICYCOMMITTEE(IPC)Avg.IndustryExperience:17years
Gregory D. Houser, CFA, CAIA / Senior Vice PresidentMark A. Koenig, CFA / Director of Quantitative Analysis
As of September 27, 2016 there are 22 members on our Research Team. Members include all individual names listed above, exempting the consulting liaisons,as well as two addition team members dedicated to Research Services. See Appendix for CFA and CAIA definitions.
CIO,HEADOFRESEARCHGregoryM.Dowling,CFA,CAIA
GlobalEquity– PublicAvg. IndustryExperience:8years
GlobalEquity – PrivateAvg. IndustryExperience:15years
GlobalFixedIncome&CreditAvg. IndustryExperience:13years
RealAssetsAvg. IndustryExperience:8years
DiversifyingStrategiesAvg. IndustryExperience:10years
BrianA.Hooper/VicePresidentCherylA.Barker /SeniorResearchAnalystStevenG.Thieme,CFA /SeniorResearchAnalystSamuelA.Ragan/ResearchAnalyst
NathanC.Werner,CFA,CAIA/SeniorVicePresident/DirectorofPrivateEquityG.ScottTabor,CAIA /VicePresidentSkyeBarry/ ResearchAnalyst
KeithM.Berlin/SeniorVicePresident/DirectorofGlobalFixedIncomeandCreditJeremyM.Albers,CFA,CAIA/ResearchAnalystKevinC. Dee /ResearchAnalyst
ChristianS.Busken/SeniorVicePresident /DirectorofRealAssetsJay R.Johnston /SeniorResearchAnalyst
KevinJ.Conroy, CFA,CAIA /VicePresidentSeanP.McChesney /VicePresidentMichaelB.Franke,CFA /ResearchAnalyst
StephenM.Hodson,CFA,CAIA/SeniorVicePresident
MatthewR.Veith/SeniorVicePresident
DouglasW.Walouke,CFA/VicePresident
BruceA.Benjamin,CFA/ManagingPrincipal
DavidD.Center,CFA/SeniorVicePresident
Research Team
Consultant Liaisons
ENTERPRISERISKCOMMITTEE
Supporting Committees
CAPITALMARKETS&RISK
ASSET&RISKALLOCATIONTEAM
Confidential– NotforRedistribution5©2016FundEvaluationGroup,LLC
MANAGERSELECTION
FEGseekstoidentifymanagerswith:• Experiencedpersonnel• Soundinvestmentphilosophy• Demonstratedabilitytooutperform
Six-TenetManagerReviewProcess
CONVICTION strongbeliefintheinvestmentphilosophy;willingtoputinvestmentdecisionsaheadofbusinessdecisions; investsalongsideofclients,aligninginterests
CONSISTENCY stabilityoforganizationalstructure,compositionoftheinvestmentprofessionals,andtheinvestmentphilosophyandprocess
PRAGMATISM understandcore strengthsandhavetheabilitytocapitalizeandsustaintheircompetitive edge
INVESTMENTCULTURE
strong ethicalfoundation,passionateaboutinvesting;properorganizationalandcompensationstructure;culturepervadesacross organization
RISKCONTROL notblindrisktakers,butriskconscious; acknowledgemistakes;robustandeffectiveriskmitigation
ACTIVERETURN abilitytoidentifyandprofitfrominvestmentopportunities;successfultrackrecord
1432
Confidential – Not for Redistribution6©2016 Fund Evaluation Group, LLC
Source1 Fund/StrategyCombinationsDow Jones Private Equity Analyst 300+eVestment Alliance 17,300+HedgeFund.Net 7,100+Lipper, Inc. 23,500+Morningstar DirectSM 350,000+Morningstar® Principia® 27,600+PerTrac Analytics 30,400+Preqin Real Estate Online 3,700+Preqin Private Equity 17,000+Thomson Reuters 5,800+
In addition to identifying managers through industry relationships, FEG tracks a universe of hundreds of thousands of investment managers and strategies through several external databases.
The table to the right details the number of funds/strategies within each external database.
FEG’S PROPRIETARY DATABASEThrough a combination of quantitative and qualitative review factors, FEG narrows the universe down to a list of 5,000+ strategies to add to our proprietary, internal database.
These 5,000 strategies are further refined to a list of 500+ that adhere to FEG’s strict criteria for approval to be included into FEG’s clients’ portfolios.
1 As FEG subscribes to various data sources, the fund / strategy combinations listed above potentially include strategies that could be found in more than one data source.
MANAGERSOURCING 14
3
Confidential – Not for Redistribution7©2016 Fund Evaluation Group, LLC
0.8 0.9 0.9 1.2 1.5 1.9 2.03.8
5.2
12.4
15.0
17.3
02468101214161820
Percen
tagePoints
CoreFixedIncome
HighYield
U.S.LargeCap
U.S.SmallCap
EmergingMarketsGlobal
DiversifyingStrategies
Int’lDeveloped
BuyoutAll
PrivateEquity
VentureCapital
U.S.MicroCap
• Indexinefficientassetclasses,whetherbymarketcapitalization-weightedindexingorfundamentalindexing
• Focusactivemanagereffortsinlessefficientassetclasses• Managerselectionisimportantduetothewidevarianceofreturnsbetweentopandbottomquartile
performance
ACTIVEIMPLEMENTATION
Data Sources: Lipper, HFRI, Preqin, PerTrac. Private Equity Data for vintage years 2002 through 2011, performance available through June 30, 2015. WhatInvestors Can Learn From Successful Endowment Strategies, 2008 Annual CFA Conference, Bob Boldt. Returns are in U.S. dollars net of fees.
PERFORMANCEDIFFERENCEBETWEENTOPANDBOTTOMQUARTILE10YearsEndingDecember31,2015
432
Confidential – Not for Redistribution8©2016 Fund Evaluation Group, LLC
Inadditiontoportfolio-levelreporting,detailedinformationonmanagersisproactivelymadeavailabletoclients,including:• QuarterlyDueDiligence• RiskExposureSummary• ComprehensiveResearchReports
MANAGERMONITORING
QUARTERLY DUE DILIGENCE RESEARCH REPORT
Confidential – Not for Redistribution9©2016 Fund Evaluation Group, LLC
RISKMODELUPDATERESPONSIBILITIESWHYOUTSOURCE?UNDERSTANDINGOURFIDUCIARYDUTIESPORTFOLIOPERFORMANCE&RISKMONITORING
• FEG’s proprietary portfolio management tools are customizable and afford deeper understanding and interactive views into portfolio risk and return across the total portfolio
• VIGILANCESM, FEG’s risk management tool, evaluates risk across all asset classes and risk factors, unlike many off-the-shelf solutions
• TRIBUTESM, FEG’s performance attribution tool, uncovers the impact of asset allocation decisions and manager selection
SampleVIGILANCESM Report SampleTRIBUTESM Report
MarketUpdate:Consequencesof“ZIRP”
11©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
ECONOMIC&POLICYCONSEQUENCES
• Asyieldsarepushedintonegativeterritory,holdingbondstomaturityrepresentsalossofpurchasingpower;someinvestorsmaytakemorerisktocompensate
• Conversely,negativeandlowrateshurtsavers,who,whenfacedwithlowrate,maybeforcedtoincreasesavings,furtherconstraininggrowth
0%
5%
10%
15%
20%
0
500
1000
1500
2000
2500
1979 1983 1987 1991 1995 1999 2003 2007 2011 2015
RisingStocksandFallingYields
S&P500Index(LHS) 10-YearTreasuryYield(RHS)
Datasources:Standard&Poor'sandBloombergLP
12©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
6 9 9 10 11 11 12 12 13 14 15 16 17 18 18 19 20 21 22 23 24 26 29 41
3-yearSu
bseq
uentReturn
Price/Earnings(Real10-YearNormalized)Data source: Robert Shiller and Standard & Poor’s
HISTORICALVALUATIONS:U.S.PRICE/10-YEARNORMALIZEDEARNINGSS&P500,1926- Present
ExpensiveCheap
CurrentMeasure:26.5x
Rank:90%
ALLOCATIONIMPLICATIONS
U.S. equities are priced for lower returns, although some periods (thetechnology bubble) provided strong 3-year returns following prices at theselevels, the market also has a history price corrections from these levels
Strong Market Momentum (Tech & Housing Bubbles)Muddle Along
Price Correction
13©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
0
5
10
15
20
25
1994 1998 2002 2006 2011 2015
HighDividendStockValuations
MSCIHighDividendYieldIndexP/E Average
Datasource:MSCI
ECONOMIC&POLICYCONSEQUENCES
Investors pursuit of yield has led to strongperformance and high valuations amongthe highest dividend paying stocks
High dividend stocks areas expensive as they haveever been, equaled onlyduring the 1990s bubble
14©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
ALLOCATIONIMPLICATIONS
• Investorscannolongerrelyonfixedincomeallocationstoprovidemuchbeyondnominalpreservationofcapitalandastoreofvalue
15©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
ECONOMIC&POLICYCONSEQUENCES
Investors globally have pursued yield to achieve return goals against low andnegative rates
Foreign Demand for U.S. Treasuries(Indirect Bidding for 10-year Treasury Note)
Foreign demand for U.S. Treasuries, which have a higher yield than that of many other nations, is increasing amid NIRP
AllocationImplications
17©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
ECONOMIC&POLICYCONSEQUENCES
Lower rates, which result in lower investor discount rates (the rate at whichinvestors discount expected future cash flows), have led to strong recentperformance in bonds, real estate, and stocks, but have dampened expectedreturns
2.0%
5.0%
0%
2%
4%
6%
8%
10%
12%
14%
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
ExpectedRealReturnofaHypotheticalU.S.60/40Stock/BondPortfolio
ExpectedRealReturn Long-termAverage
Datasource:RobertShillerandStandard& Poor's,adaptedfromAQR.U.S.stocksexpectedrealreturncalculatedfrom50%oftheearningsyield*1.0107plus50%dividendyield+1.5%toaccountforrealearningsgrowth.U.S.bondyieldisthegovernmentrate- FEG's10-yearinflationforecast.Pleaseseeappendixforfulldisclosure.
18©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
POTENTIALACTIONS
• Despitesomeassetclassespresentinghistoricallylowexpectedreturns,therearesomeopportunitiestoearnincrementalreturn,andnotallrequireafullshifttohigherrisk
U.S.Equity
EmergingMarkets
PrivateEquity
Core(InvestmentGrade)
MLPs
DiversifyingStrategies
0%
2%
4%
6%
8%
10%
12%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Expe
cted
Return
ExpectedStandardDeviation
FEG10-yearCapitalMarketAssumptions
Source:FundEvaluationGroup,LLC
19©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
Some solutions to NIRP are untenable, such as taking more risk or broadly applyingleverage to traditional asset classes. Investors should, however, understand the roleof each allocation in the portfolio and ensure alignment with near-term risks andlong-term return potential.
Viable Options:• Provide Liquidity- Invest where compensated by expected return that is commensurate with the risk- Courage is required to invest in areas of market stress instead of the recent hot areas
• Find Unique Opportunities- Pursue alpha by finding opportunities in MLPs, emerging markets, metals & mining, direct lending,
macro strategies, and other private capital strategies
Poor Options:• Broad Use of Leverage- Not a recommended course of action, often a poorly managed means of increasing risk without
understanding the degree of risk taken; targeted leverage in specific strategies can be a viable option
• Blanket Increase to Risk Profile- Difficult to do when primary investment assets are expensive
POTENTIALACTIONS
Appendix:TheImportanceofDueDiligence
21©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
KEYRISKFACTORS
KEYRISKFACTORSTOBEAWAREOFWHENINVESTING:• Leverage• Operational
• Fraud• Liquidity
Amaranthgiftfrom2006
22©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
IMPORTANCEOFMANAGERMONITORING
THREEYEAREXCESSRETURNBeforeandAfterManagerTerminationandHiring
Data Sources: Goyal, Amit and Wahal, Sunil, The Selection and Termination of Investment Managers By Plan Sponsors. Journal of Finance, August2008 & Heisler, Knittel, Neumann, Stewart,Why Do Institutional Plan Sponsors Fire Their Investment Managers?, 2004.
16
12
8
4
0
-4
-6
Percen
tagePoints
PRE-FIRING
PRE-HIRING
POST-HIRING
POST-FIRING
QualitativeEvaluation
24©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
MANAGERSELECTION
FEGSEEKSTOIDENTIFYMANAGERSWITH:• Experiencedpersonnel
• Soundinvestmentphilosophy
• Demonstratedabilitytooutperform
25©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
SIXTENETS:CONVICTION
TRAITSWELOOKFOR:• Strongbeliefintheinvestmentphilosophy
• Willingtoputinvestmentdecisionsaheadofbusinessdecisions
• Investsalongsideofclients
• Aligninginterests
Strongconvictionishelpfultoavoidthosethatsayonethingbutdoanother.
26©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
SIXTENETS:CONSISTENCY
INVESTMENTPERSONNELCHANGES(ANALYSTORHIGHER)
2013 2012 2011 2010 2009 2008
+ - + - + - + - + - + -
ManagerA 3 1 4 3
ManagerB 0 0 2 1
ManagerC 3 0 4 0 4 2 14 13 10 17 16 23
ManagerD 0 0 1 3 0 0 1 3 1 9 14 7
ManagerE 0 0 6 1 0 2 1 8 3 2 0 7
ManagerF 4 4 6 1 0 1 0 1 1 5 3 5
ManagerG 0 1 3 4
ManagerH 3 1 6 2 3-6 3-6 3-6 3-6 3-6 3-6 3-6 3-6
Source:FundEvaluationGroup.ForIllustrativePurposesOnly.
TRAITSWELOOKFOR:• Stabilityoforganizationalstructure
• Compositionoftheinvestmentprofessionals
• Theinvestmentphilosophyandprocess
27©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
SIXTENETS:PRAGMATISM
TRAITSWELOOKFOR:• Understandcorestrengths
• Havetheabilitytocapitalizeandsustaintheircompetitiveedge
FEGlooksformanagersthatcanclearlyarticulatetheirstrengthsandstayfocusedontheirstrengths.
28©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
SIXTENETS:INVESTMENTCULTURE
TRAITSWELOOKFOR:• Strongethicalfoundation
• Passionateaboutinvesting
• Properorganizationalandcompensationstructure
• Culturepervadesacrossorganization
29©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
SIXTENETS:RISKCONTROL
Source:FundEvaluationGroup.ForIllustrativePurposesOnly.
TRAITSWELOOKFOR:• Notblindrisktakers,butriskconscious
• Acknowledgemistakes
• Robustandeffectiveriskmitigation
• Propercounterpartymanagement
FEGDIVERSIFYINGSTRATEGIESCOUNTERPARTYEXPOSUREManager Auditor Administrator Legal PrimeBroker
Manager1 PricewaterhouseCoopers InternationalFundServices Ropes&GrayLLP GoldmanSachsandCreditSuisse
Manager2 PricewaterhouseCoopers SEIInvestments Akin,Gump,Strauss,Hauer&Feld,LLP JPM,DB,BNP,CreditSuisse
Manager3 PricewaterhouseCoopers InternationalFundServices(AStateStreetCompany)
U.S.:Seward&KisselLLP(onshore)/Ogier(offshore) GS,MS,DB,JPM,Citigroup,Pershing,RBS
Manager4 Deloitte&Touche,LLP InternationalFundServices SidleyAustin,LLP CreditSuisse,DeutscheBank,JPMorgan,BofAMerrillLynch,NorthernTrust
Manager5 KPMG Maples Onshore-Skadden,Arps/OffshoreMaples&Calder MorganStanley
Manager6 PricewaterhouseCoopers GlobeOpFinancialServices,LLC
Seward&Kissel,LLP(U.S.),Maples&Calder(Cayman)
GoldmanSachs&Co.,JPMorgan,BNPParibas,TotalReturnSwapCounterparty:BarclaysBank(retainedJanuary2007),JPMorgan(retainedJune2007)
Manager7 PricewaterhouseCoopers Onshore-SelfAdministers/Offshore-BNY SchulteRoth&Zabel MerrillLynch,MorganStanley,Citigroup,DeutscheBank,
UBS,Goldman,JPMorgan,RBC
30©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
SIXTENETS:ACTIVERETURN
TRAITSWELOOKFOR:• Abilitytoidentifyandprofitfrominvestmentopportunities
• Strongriskadjustedreturn
• Proofofstrategy
• Successfultrackrecord
Thechartisaprobabilityanalysistounderstandthefrequencyandmagnitudeofmanageralphas(excessreturn)versustheirbenchmarkoverthree,five,andtenyearsbasedonmanageralphaandtrackingerrorassumptions.
Thealphaineachcolumnisassumedtobewhatthemanagerswillrealizeoverthelong-term.
Source:FundEvaluationGroup.
TrackingError 6% 12% 6% 12% 6% 12% 6% 12%
Probabilityof3yearalpha<-2% 25% 39% 21% 36% 13% 31% 5% 21%Probabilityof3yearalpha>0% 54% 50% 60% 53% 71% 58% 87% 70%Probabilityof3yearalpha>2% 32% 39% 37% 42% 48% 47% 70% 59%
Probabilityof5yearalpha<-2% 19% 37% 14% 32% 8% 26% 1% 15%Probabilityof5yearalpha>0% 55% 50% 62% 54% 76% 61% 92% 74%Probabilityof5yearalpha>2% 26% 36% 33% 39% 48% 46% 76% 61%
Probabilityof10yearalpha<-2% 11% 32% 7% 26% 2% 19% 0% 7%Probabilityof10yearalpha>0% 57% 48% 67% 55% 84% 64% 98% 81%Probabilityof10yearalpha>2% 18% 29% 26% 33% 47% 43% 83% 64%
Alpha=0.5% Alpha=1.0% Alpha=2.0% Alpha=4.0%
62%
EVENTHEBESTMANAGERSUNDERPERFORM
31©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
QUALITATIVEEVALUATIONRATING
FEG’sSYSTEMATICRESEARCH(QER)• BasedonFEG’ssixattributesofsuccessful
managers1. Conviction2. Consistency3. Pragmatism4. InvestmentCulture5. Riskcontrol6. ActiveReturn
• Aonetofournumericalrankingisgiventomanagersforeachattributebasedonfindingsfromallaspectsoftheduediligenceprocess
• Multipleanalystsscoreeachmanager• Initialscoringperformed,thenupdatedannually• Allprospectivefundsareincluded
TheQualitativeEvaluationRating(QER)processprovidesasystematicframeworkforanotherwisesubjectiveandesotericaspectofmanageranalysis.
32©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
QERSCORECARD
FEGHEDGEFUNDREVIEWQualitativeQuestionnaire Date: Dec-14
Conviction Consistency Pragmatism InvestmentCulture RiskControl ActiveReturn Total15% 15% 15% 20% 15% 20% 100%
1 2 Avg 1 2 Avg 1 2 Avg 1 2 Avg 1 2 Avg 1 2 Avg 1 2 AvgManager A 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.5 3.3 3.5 3.5 3.5 3.0 3.0 3.0 3.5 3.0 3.3 3.2 3.2 3.2
Manager B 2.5 2.5 2.5 3.0 3.0 3.0 3.5 3.5 3.5 3.0 3.5 3.3 3.0 3.5 3.3 2.5 2.5 2.5 2.9 3.1 3.0
Manager C 3.0 3.5 3.3 3.0 3.0 3.0 3.5 3.0 3.3 3.5 3.5 3.5 3.5 3.5 3.5 3.0 3.0 3.0 3.3 3.3 3.3
Manager D 3.0 2.5 2.8 3.0 3.0 3.0 3.5 3.0 3.3 3.0 3.5 3.3 3.0 3.0 3.0 3.5 3.5 3.5 3.2 3.1 3.1
Manager E 2.5 2.5 2.5 2.0 2.5 2.3 3.0 3.0 3.0 2.5 2.0 2.3 2.5 3.0 2.8 4.0 4.0 4.0 2.8 2.8 2.8
Source:FundEvaluationGroup.ForIllustrativePurposesOnly.
0.00.51.01.52.02.53.03.54.0
ManagerA ManagerB ManagerC ManagerD ManagerE
Analyst1 Analyst2
2014QERAVERAGES 2013QERAVERAGEvs.2014QERAVERAGE
0.00.51.01.52.02.53.03.54.0
ManagerA ManagerB ManagerC ManagerD ManagerE
2013Average 2014Average
ManagerSelectionProcess
34©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
THEIMPORTANCEOFDUEDILIGENCE
35©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
Investment
SourceManagers
IntroductoryMeeting
ReviewDueDiligenceQuestionnaireandRequestedDocuments
PerformanceEvaluationandVerification
ReferenceChecks- KeyRelationships
On-siteDueDiligence
ResearchReportand(QER)
IPCReviewandApproval
Themanagerselectioncriteriaanddetailedprocessmayvarybetweenassetclasses,strategies,andaccessvehicles.ThefollowingoutlinesthetypicalduediligencestagesandprocessforamanagertoreachFEG’srecommendedcoveragestatus.
MANAGERSELECTIONPROCESS
36©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
SOURCEMANAGERSPrimarilythrough:• IndustryNetwork• Fund-of-fundManagers• SelectPlacementAgents• DirectSolicitations• Duetoourclientbase,FEGseekstogainaccessandcapacitywithsome
premierfundsthatmaybeclosedtootherinvestors
INTRODUCTORYMEETINGORCALL• ManageroverviewusedtoinitiallygaugethemanagersfitwithinFEG’s
sixtenetinvestmentphilosophy• Verifystrategicfitofstrategywithcurrentmacroanalysisandportfolio
needs
• OtherManagers• Clients• OtherLimitedPartners• Conferences RECOMMENDED
MANAGER
ReviewDocuments
SourceManagersIntroductoryMeeting
PerformanceEvaluationReferenceChecksDueDiligence
ReviewIPC
MANAGERSELECTIONPROCESS
37©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
Emerging
Growth Maturity
0
20
40
60
80
100
120
140
IllustrativeHedgeFundLifeCycle
ExcessReturnPotential BusinessRisk
Revitalization
MANAGERLIFECYCLE
Long/ShortEquityFIRMSIZE INFRASTRUCTURE PROCESSAssetsUnderAdvisement NumberofFunds/Products NumberofKeyDecisionMakersTotalNumberofEmployees NumberofDistributionChannels NumberofDirectReportstoPMNumberofInvestmentProfessionals NumberofOffices CompensationStructureRateofGrowth OwnershipStructure ChangeinVolatilityProfileStrategyDriftAGE UNIQUENESS INVESTORBASEFundAge CorrelationScore InvestorBaseStabilityAgeofKeydecisionMakers HoldingsOverlap InternalCapitalAlignmentAspirations Concentration
Source:FundEvaluationGroup.Forillustrativepurposesonly.
38©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
REVIEWQUESTIONNAIREANDREQUESTEDDOCUMENTS• Comprehensiveduediligencequestionnairesspecializedforeachasset
strategy• Reviewkeydocuments:Offeringdocuments(notalegalreview),
auditedfinancials,ADV(ifapplicable),ComplianceManual
RECOMMENDEDMANAGER
SourceManagersIntroductoryMeetingReviewDocuments
PerformanceEvaluationReferenceChecksDueDiligence
ReviewIPC
MANAGERSELECTIONPROCESS
COMPLIANCEQUESTIONNAIRE
39©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
RECOMMENDEDMANAGER
SourceManagersIntroductoryMeetingReviewDocuments
PerformanceEvaluationReferenceChecksDueDiligence
ReviewIPC
MANAGERSELECTIONPROCESS
PERFORMANCEEVALUATIONANDVERIFICATION• Comprehensivestatisticalreview• Focusonperformanceversusobjectivesandmarketconditions• Comparisontorelevantpeergroup• Trackrecordverification
MULTI-FACTORREGRESSIONMODEL
STRATEGYEXPOSURESEventDriven Macro
RelativeValue
Manager A 67% 33% 0%ManagerB 33% 46% 21%ManagerC 17% 68% 15%Manager D 22% 35% 43%ManagerE 26% 36% 39%ManagerF 10% 1% 89%Manager G 12% 12% 76%ManagerH 99% 0% 0%Current 32% 28% 40%Proposed 20% 34% 46%
Source:FundEvaluationGroup.ForIllustrativePurposesOnly.
40©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
RECOMMENDEDMANAGER
SourceManagersIntroductoryMeetingReviewDocuments
PerformanceEvaluationReferenceChecksDueDiligence
ReviewIPC
MANAGERSELECTIONPROCESS
REFERENCECHECKSANDVERIFICATIONOFKEYRELATIONSHIPS• Favorindustrynetworkratherthanmanagerprovidedreferences• Documentedconversationswithsignificantclients• Verificationoftenureandqualityofrelationshipswithadministrator,
auditor,accountant,legalcounsel
41©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
RECOMMENDEDMANAGER
SourceManagersIntroductoryMeetingReviewDocuments
PerformanceEvaluationReferenceChecksDueDiligence
ReviewIPC
MANAGERSELECTIONPROCESS
DUEDILIGENCE– PORTFOLIOMANAGEMENT• Reviewofinvestmentphilosophyandprocesswithkeydecisionmakers• Observesystemsusedinportfolioconstructionandoverallmanagement• Discussionofinvestmentpolicieswithafocusonriskmanagement• Discusspersonnelinvolvedinthisprocessandspecificroles• Evaluateinvestmentculture
DUEDILIGENCE– BACKOFFICE• Discussvaluationandverificationtechniques• Reviewtreasurymanagementandwiringpolicies• Examinetechnologyrequirementsandcapacity• Detaildisasterrecoveryplansandback-upsystems
42©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
RESEARCHREPORT• Afterasatisfactoryoperationalreview,acomprehensiveresearchreport
ispreparedandsubmittedtotheInvestmentPolicyCommittee(IPC)
RECOMMENDEDMANAGER
SourceManagersIntroductoryMeetingReviewDocuments
PerformanceEvaluationReferenceChecksDue Diligence
ReviewIPC
MANAGERSELECTIONPROCESS
MANAGERRESEARCHREPORT
43©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
RECOMMENDEDMANAGER
SourceManagersIntroductoryMeetingReviewDocuments
PerformanceEvaluationReferenceChecksDue Diligence
ReviewIPC
MANAGERSELECTIONPROCESS
INVESTMENTPOLICYCOMMITTEE(IPC)REVIEWANDAPPROVAL• ManagerisvettedbyInvestmentPolicyCommitteeandthefullResearch
team• Followuponquestionsandissues• IPCvotesonapproval• RecommendedmanagersareaddedtotheResearchteam’s
recommendedlistofmanagersforconsultantuse
SAMPLERECOMMENDEDMANAGERLIST
OngoingManagement
45©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
ONGOINGMONITORING
MONTHLYUPDATES• Contactwithmanagerifperformanceoutside
expectations
QUARTERLYCONFERENCECALL• Qualitativeandquantitativeinformationrequest
• Formalcallwithportfoliomanager
• One-pagereportonqualitativeandquantitative
ANNUALREVIEW• ReviewquantitativeandqualitativeQERscoring
• Formalauditreview
• Attendannualmeetings
MonthlyUpdates
QuarterlyConference
Call
AnnualReview
Ongoingmanagementiskeytoperformingduediligence.FEGfollowsthecyclebelow:
46©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
ONGOINGMANAGEMENT– MANAGERFLOWS
20132Q 20131Q 20124Q 20123Q 20122Q 20121Q Date PeakAUM CurrentAUM
Manager1 7.0% 0.0% -5.9% 2.0% 2.7% 3.2% $2,686
Manager2 9.0% 4.4% -0.1% 20.2% 16.3% - 6/2013 $5,500 $5,500
Manager3 8.4% 8.8% 10.9% 21.1% 2.4% 22.1% 6/2013 $3,900 $3,900
Manager4 3.5% -2.1% -14.0% -3.6% -0.4% -6.1% 12/2007 $3,042 $2,497
Manager5 1.8% -5.8% -2.6% 4.6% 2.2% 15.9% 6/2013 $5,960 $5,960
Manager6 -17.1% -15.0% -12.1% -14.1% -7.1% 14.9% 3/2011 $8,800 $4,800
Manager7 5.4% 1.5% -2.0% 2.8% 3.0% 0.6% 6/2013 $3,235 $3,235
Manager8 0.1% -4.4% 1.5% -2.2% 2.2% -3.4% 6/2013 $7,723 $7,723
Manager9 -9.7% -7.7% -7.6% -4.0% -5.6% -4.9% 10/2010 $4,790 $2,945
Manager10 -1.0% -9.9% -1.1% -2.4% 1.4% -8.5% 6/2008 $8,588 $4,034
Manager11 -3.5% -3.2% 2.5% 20.1% 9.6% 6.0% 6/2013 $1,600 $1,600
Manager12 0.5% 3.7% 2.0% -5.1% 3.7% 24.1% 5/2011 $1,056 $1,027
Manager13 0.6% -21.5% -5.4% -2.1% -5.9% 6.1% 9/2008 $1,987 $1,656
Manager14 23.2% 15.1% -1.6% -2.5% 0.8% 9.5% 6/2013 $1,407 $1,407
Manager15 0.4% -8.2% 0.5% 1.4% -0.2% -4.9% 6/2008 $3,317 $3,208
Manager16 7.8% 3.7% 23.1% 18.4% 25.0% 15.9% 6/2013 $4,404 $4,404
Manager17 5.5% -15.3% -11.7% -6.8% -8.5% 06/2011 $1,661 $1,218
Manager18 -4.0% -6.1% -2.2% -11.3% -5.4% 1.7% 1/2008 $3,600 $1,700
Manager19 2.7% 1.9% -1.7% -5.3% -5.1% -13.4% 6/2013 $2,941 $2,941
QUARTERLYFLOWS(%OFAUM)
Source:FundEvaluationGroup.ForIllustrativePurposesOnly.
47©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution
ONGOINGMANAGEMENT– AUDITEDFINANCIALSSUMMARY
AnnualAuditReview Manager1
Manager2
Manager3
Manager4
Manager5
Manager6
Manager7
Manager8
Manager9
Manager10
Manager11
Manager12
AUDITPERIODCOVERED 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012
DATEAUDITISSUED Feb-13 Mar-13 Mar-13 Apr-13 Apr-13 Feb-13 Mar-13 Mar-13 Apr-13 Apr-13 Apr-13 Mar-13
RECOGNIZEDAUDITOR Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
UNQUALIFIEDOPINION Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
EXPENSERATIO
Total 2.4% 4.5% 4.8% 4.9% 2.8% 9.8% 3.8% 6.6% 6.7% 2.4% 7.0% 3.3%
Incentive 0.0% 2.7% 0.0% 3.1% 0.0% 0.4% 2.0% 0.0% 1.0% 1.0% 3.2% 1.0%
OperatingExpenses 2.4% 1.7% 4.8% 1.7% 2.8% 2.1% 1.8% 6.6% 5.7% 1.3% 3.8% 2.3%InterestDividendsStockLoanFees 0.0% 0.2% 0.0% 0.0% 0.0% 7.3% 0.0% 0.0% 0.0% 0.1% 0.0% 0.0%
RETURNRECONCILIATIONAuditedReturnsReconcileWithReported Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
VALUATION
LevelIAssets 91% 22% 76% 5% 1% 10% 47% 39% 40% 55% 23% 6%
LevelIIAssets 9% 55% 23% 61% 36% 90% 41% 33% 50% 30% 77% 94%
LevelIIIAssets 0% 24% 1% 34% 63% 0% 12% 28% 10% 14% 0% 0%
Source:FundEvaluationGroup.ForIllustrativePurposesOnly.