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Asset management: How to interpret managers awards?

One needs just to visit the premises of an asset management firm or to browse its website to find trophies and awards proudly displayed. What credit should be given to these awards?

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All the investment professionals involved in fund selection (multi-management or investment advisory) will describe, with more or less emphasis on specific points, the selection process as a duty that requires availability, a good network, a methodology, know-how, rigor and more specifically continuous monitoring. An insightful, powerful and credible description of what is the heart of their business.

However, simply visit the premises of an asset management firm - randomly chosen - or surf on its website to realize that the firm has at least once received an awards certifying its management quality. Well, are they all good? Or have they all been good at least once? A quick shortcut will lead to an affirmative answer, but some questions remain...

First: The period of analysis

Unlike to the fund management and / or fund selection which are designed as processes continuous in time, the reward is only valid in a time window not necessarily in line with the minimum investment horizon recommended by managers themselves. It is not uncommon to smile at the sight of rewards based on less than two years whereas just reading the prospectus and other documents of the Fund suggests investing for a much longer time. Moreover, very few ranking systems achieve a study on the solvency of structures: The well known "due diligence" is replaced by a list of simple rules (minimum assets under management, maximum inception date, etc...). It is therefore not surprising to see the stars of today becoming the lagers of the day after or even worse, going bankrupt. Remember you have already been warned with the famous "Past performances ..."

Second: The ranking criteria

Entities performing the ranking are aware of the limitation and they try to correct the bias by using metrics designed to "normalize" comparisons between different periods and different market scenarios. Innovative approach but one should really check the relevance and especially make sure that the end customer understands something. What is a simple metric ? Here are some observed samples
- Performance over the period: This might seem to be a natural choice for a novice, but it is not necessarily relevant because it favors those who take too much or too little risk over the period and it carries another bias related to assets under management. Nearly all strategies exhibit a critical size beyond which the performances decrease and a minimum size necessary to reduce scale costs. Finally common sense tells us that it is easier to manage 70 million than 500 million.
- The performance per unit of risk taken: This is a "smart" criterion but the statistical significance of the metric used can often be easily challenged. Remember that most data are monthly, and at best weekly
- The changes in assets under management excluding performances effects: This choice aims to measure the quality of investor interest but there is an obvious risk of actually measuring the marketing power of the structure (which may be independent of the quality of management) and the representativeness of the investors can be questioned: the ticket of a major pension fund - nominal value - can worth several institutional tickets.
- A vote of investors and/or multi-managers: brilliant idea but that might exhibit a bias opposite to that of the previous criterion. Mechanically, the investor / multi-manager will tend to vote for the products he knows and especially for the manager in which he has himself invested (thereby enhancing its internal selection process) and funds with more investors (in number) have a good chance to rise to the top and to the podium

We can study a lot of other criteria. Subsequently, we will assume to have found THE solution or a relatively good criterion

Third: The level of granularity

There are several and various management styles. Naturally, common sense urges us to proceed to "homogeneous" comparisons. The sake of completeness leads to numerous sub-classifications which may ultimately distort the prestige of the podium by attributing it to everyone: Just be positioned in a category - or create a new one - in which you believe to have the best assets to win. As an illustration, for the equity asset class, there are classifications taking into account management styles, types of underlying, geographical areas of investment, currency, etc... It leads to very broad categories when integrating all the types

Fourth: Consistency

Assuming you have found answers to all the questions above, there is still a problem of consistency. There are almost as many rankings as number of data providers / analysis on manager’s funds and / or their risks. And the results are more or less variable for a ranking to another. How to provide explanation without taking the shortcut to think that the real purpose of the awards is more marketing than true indication of quality. The answer is probably tied to another question: Who care more about these awards, the end customer or the company? Feel free to provide your own answer.

We cannot finish without a mention to a specific universe almost "anti-trophy" due to secrecy of the recipe for success: hedge funds. Even though a segment of hedge funds is already open or plans to be open to transparency, it is clear that these players are not the leaders or "stars" of the industry. For the leading players, disclose even achieved performances could expose them to "reverse engineering" or disclosure of "secret recipe" and probably would reduce the future expected returns. But they do not take into account the "privileged" but "zealous" investor who will "whisper" an indication of performances to newspapers - hence the systematic use of conditional when writing about performances - As unbelievable as it sounds, the performances of major stars or references of the industry are always conditional (very little available evidence except the wealth or misfortune of officers) and we have here a kind of ranking system based only on reputation.

Finally, it is not so easy to have a clear view. Investment advisers and multi-managers are probably right: it is a profession that cannot be summed up in one article, but probably also one or more awards.

B.N , March 2011

Article also available in : English EN | français FR

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