The The FutureFutureEvaluate Skill NOT Style

Performance Performance MeasurementMeasurement

And AttributionAnd Attribution

Luck??Luck??

Skill??

Back to BasicsBack to Basics

Luck?Luck???

If you don’t know the problem,you can’t fix it.

Old Approaches Don’t Old Approaches Don’t WorkWork

Skill?? =Style??

Off-the-shelf Benchmark

Portfolio

Results

Performance AnalysisPerformance Analysis 1980’s Slicer & Dicer 1980’s Slicer & Dicer

SectorSizeYieldP/E

LuckLuckSkillSkill

Bridge the GapBridge the Gap Is Your Manager Lucky or SkillfulIs Your Manager Lucky or Skillful??

StyleStyleMatterMatterss

Past ISIS Prologue: Information Ratios and

Sortino Omegas PERSIST

M arke t Re tu rn S tyle E ffec ts

S to ck S e lec tion S ecto r Allo ca tion A ctiv ity

S k ill*

* Gruber(96), Stewart(98), Rudd & Kahn(99,00,01), Ibbotson(01)

GettingWHY’s

MPT, PMPT, APT, RBSA… Market and Style effects dominate Style-&-market-adjusted success/failure persists Signal / Noise

The difference between The difference between

Style and SkillStyle and Skill Styles go in & out of favor Skill persistsSkill persists

TheTheCostCostOfOfConfusiConfusionon

M arke t Re tu rn S tyle E ffec ts

S to ck S e lec tion S ecto r Allo ca tion

S k ill

AttributionAttribution

Against Custom Style Blend

Sources of ReturnSources of Return

Returns or Holdings

StyleStyleAnalysiAnalysiss

Value

Core

Growth

Evolution of Evolution of AttributionAttribution

ValueGrowth

Core

Portfolio

CustomBenchmark

SkillSkill

Style

Today’s Craft Today’s Craft

Sample Analysis of Skill & Sample Analysis of Skill & StyleStyle

A Close Look at Style Effects

A Closer Look at Style Effects

DetailsSector Allocation & Stock Selection

Attribution

Sector Allocation

Custom Style Benchmark

FundAllocation

Sector Allocation & Stock Selection

Fund ReturnsStyle Opportunities

Custom Style BenchmarkCustom Style Benchmark

Attribution

Attribution

StyleStyleMatterMatterss

Style Allocation & Performance

TrendsStyle AllocationSector AllocationCumulative Performance

Cum Sources of Cum Sources of Value Added – Value Added – PersistencePersistenceRelative Performance

Style Allocation History

$

Style Allocation History

Mid Growth

Mid CoreMid Value

Large GrowthLarge Core

Large Value

$

Sector Allocation

Technology

Finance

Non-Durables

Health

$

Cumulative Growth

Fund

MarketStyle

Ranks

Consistent Consistent Sources of Sources of

Value AddedValue Added

The Best The Best Picture Picture

Sources of Value Added -- Persistence

Stock Selection

Sector Allocation

Activity

Sources of Value Added -- Persistence

Stock Selection

Sector Allocation

Activity

BenefitsBenefits Identify Skillful Investment ManagersRisk Control (MDAs)GlobalHedge Funds

Talent Contest Talent Contest Made Easy Made Easy

Winners of the Style-Style-adjustedadjusted Performance Race

Reasons for Win ConfirmPeople, Process, Philosophy

Equity Equity DiversificationDiversification

Sector: Technology, Consumer, Health Care

Characteristics: Capitalization, P/E, yield, R-squared

Equity Equity DiversificationDiversification

Sector: Technology, Consumer, Health Care

Characteristics: Capitalization, P/E, yield

StyleStyle

ExtensionsGlobal

Hedge Funds

Hedge FundsHedge FundsLeverageDirection

Amount long & amount short

StyleStyle

Off-the-shelf Benchmark

Portfolio

Results

The PastThe Past

ValueGrowth

Core

Portfolio

CustomBenchmark

SkillSkill

Style

The The FutureFuture

No standardization in sight, but…

Style Indexes

Style EffectsStyle Effects(Holdings or Returns-(Holdings or Returns-

Based)Based)

Growth

Core

Value

Some Suggested Criteria

Mutually Exclusive: Multicollinearity/ Holdings Reports

Exhaustive (Includes everything): Fit/ Holdings Reports

Regular Rebalancing: Adjust to Change

Core: Value-Growth Compromise

Surz Style DefinitionsSurz Style Definitions

Capitalization

Large : Top 65% of $s

Mid : Next 30%

Small : Bottom 5%

E/P + y + B/P

Value : Top 40%

Core : Middle 20%

Growth : Bottom 40%

Rebalanced Quarterly

Research

Caution PopularityPopularity is notis notNecessarilyNecessarilySynonymous Synonymous withwith QualityQuality

Mobius ResearchMobius Research

Candidates : Russell, Surz, Pru, Wilshire, Vestek

Fundamental : All win except WilshireTracking error : Surz & RussellMulticollinearity : SurzCoverage : Surz & Russell

IMCA ResearchIMCA ResearchCandidates: Barclays, Barra, Dow Jones, IIA, OakBrook, Parametric, Prudential, Russell, S&P, Salomon, Surz, Wilshire

Criterion: Best Average Fit ( Adjusted R2) Separate Account Winners:

Russell, Surz, S&P/BGIRussell, Surz, S&P/BGIMutual Fund Winners:

Russell, Surz, WilshireRussell, Surz, Wilshire

Surz Stuff is FREEFREEwww.PPCA-Inc.com

The The FutureFuture

Style matters

Returns-based

complements

holdings-based Evaluate Evaluate StyleStyle