1) The New Trust but Verify 2) Fundsppca-inc.com/pdf/CFA_Seattle-20100309.pdf · Ron Surz, CIMA,...
Transcript of 1) The New Trust but Verify 2) Fundsppca-inc.com/pdf/CFA_Seattle-20100309.pdf · Ron Surz, CIMA,...
1) The New Trust but Verify
2) Target Date Funds
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March 9, 2010 Luncheon
Denotes Information you can useRight Now
(Find all 8)
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Ron Surz, CIMA, MS, MBAPresident, PPCA IncPresident, Target Date Solutions(949)[email protected]
GIPS committees:
Investment Performance CouncilAfter-Tax Investor/Consultant
About the Presenter
AgendaAgenda
The New Trust but VerifyBenchmarksStatistical SignificanceAttribution
Target Date FundsFiduciary ConsiderationsGlide Paths
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ItIt’’s All About the Spins All About the Spin
“…each money manager has ready stories about other money managers with low alphas who snatched clients through clever marketing.”
- Professor Meir Statman
I have never met a money manager who has performed below median.
Every manager wins against the right benchmark.
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Winners and Losers:Winners and Losers:
1. What does this manager do?
2. Does he/she do it well?
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Use the right tools to addressUse the right tools to addressthe 2 central due diligence questions:the 2 central due diligence questions:
TruthsTruths
1. Custom benchmarks best define what a manager does.
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Evaluate Skill, NOT Style
We Have a WinnerWe Have a Winner
02468
10121416 14.4
11.7
Returns for Q1/03 to Q2/07 (4.5 Years)
LargeGrowth
Manager
Russell1000
Growth
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Asset Allocation24-Month Moving Windows, Computed Monthly
Edgewood Mgmt: Growth Equity
0%
20%
40%
60%
80%
100%
Jun 2004 Mar 2005 Dec 2005 Sep 2006 Jun 2007
Citigroup 3-month T-billRussell Top 200 ValueRussell Top 200 GrowthRussell Midcap ValueRussell Midcap GrowthRussell 2000 ValueRussell 2000 Growth
Asset Allocation24-Month Moving Windows, Computed Monthly
Edgewood Mgmt: Growth Equity
0%
20%
40%
60%
80%
100%
Jun 2004 Mar 2005 Dec 2005 Sep 2006 Jun 2007
Citigroup 3-month T-billSurz US Large ValueSurz US Large GrowthSurz US Small ValueSurz US Small GrowthSurz US Large CoreSurz US Mid ValueSurz US Mid CoreSurz US Mid GrowthSurz US Small Core
Large Growth Large Growth
Small Growth
Russell
Russell and Surz agree manager is NOT Russell 1000 Growthbut disagree on Small Growth Exposure
g y24-Month Moving Windows, Computed Monthly
July 2002 - June 2007
rlgval rlggro
rmidval rmidgro
r2value r2growthSmall
-1
0
1
Large
Value -1 0 1 Growth
SULrgVal SULrgGro
SUMinVal SUMinGro
SULrgCor
SUMidVal SUMidCor SUMidGro
SUMinCorSmall
-1
0
1
arge
Value -1 0 1 Growth
LG Manager
Russell Surz
Russell 1000Growth
Russell 1000 Growth
Russell Surz
Mid
MidMid
Small
Core
LG Manager
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What this manager does?What this manager does?
Mostly large cap growth, with mid cap growth and other styles added in.
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Evaluate Skill not StyleEvaluate Skill not Style
0
5
10
15
20
14.411.7
1518.4
LG Manager Russell LCG CustomRussell MCG
Returns for Q1/03 to Q2/07 (4.5 Years)
*
* Custom Determined with Returns-Based Style Analysis10
TruthsTruths
2. Custom benchmarks best define what a manager does. Building blocks (indexes) matter a lot
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Dr. William F. SharpeDr. William F. Sharpe
“It is desirable that the selected asset classes be:
Mutually Exclusive (no class should overlap with another)
Exhaustive (all securities should fit in the set of asset classes) ”
Neither S&P nor Russell Indexes Meet These Criteria
“Determining a Fund’s Effective Asset Mix”, Investment Management Review, December, 1988, pages 59-69.
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Large Middle Small
Value
CoreCore
Growth
SurzSurz Style PureStyle Pure®® IndexesIndexesCore behaves differently than Value and GrowthCore behaves differently than Value and Growth
1986 1997 2010
Surz Morningstar
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2009 Style Quandary 2009 Style Quandary Demonstrates The Importance of :Demonstrates The Importance of :(1) Style Classification Characteristics (P/E (1) Style Classification Characteristics (P/E vsvs P/B), andP/B), and(2) Core, the stuff in between value & growth (2) Core, the stuff in between value & growth
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15
21
3234
2624
0
5
10
15
20
25
30
35
40S&P500 Russell 200 Surz Large Cap
VALUE
GROWTH
VALUE
VALUE
GROWTH
GROWTH
CORE
14Forthcoming in the Journal of Investing: Becoming Style Conscious
Lens
The Year 2009The Year 2009
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History History
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AgendaAgenda
The New Trust but VerifyBenchmarks
Statistical SignificanceAttribution
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Winners and LosersWinners and Losers
What does this manager do?Custom Benchmark
Does he/she do it well?
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TruthsTruths
1. Custom benchmarks best define what a manager does. Building blocks (indexes) matter a lot
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2. Statistical significance can be achieved over short periods of time.
CFA Institute CFA Institute Benchmark Committee ReportBenchmark Committee Report
•Be wary of peer groupsClassification, composition & survivor biases
•Use custom benchmarks instead
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The Wait:The Wait:Number of Years to Achieve SignificanceNumber of Years to Achieve SignificanceRegardless of the Benchmark, It Takes Decades to Exhibit StatistRegardless of the Benchmark, It Takes Decades to Exhibit Statistical Significanceical Significance
0
20
40
60
80
100
120
140
160
A Little Skill Good Skill Great Skill
# of years = (1.35/IR)221
Test the Hypothesis “Performance is Good” using Virtual Peer Groups (VPGs): Transforms a Custom Benchmark into a “Peer Group”
Benchmark ConstructionRules
Simulator
PortfolioOpportunities
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Source: PPCA/Cainsoft, A Joint Software Development Venture
Pure Style Peer Groups for the Decade of the 2000s
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Style Quandary for the DecadeStyle Quandary for the Decade
S&P 500 Russell 3000 Surz Style Pure Value 1 3 7Growth -3 -3 -8Core 1
-10-8-6-4-202468
Ann
ualiz
ed R
etur
nsSurz Style Pure® Indexes are Rebalanced Quarterly
Lens
Winners and LosersWinners and Losers
What does this manager do?Custom Benchmark
Does he/she do it well?Hypothesis Test.
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AgendaAgenda
The New Trust but VerifyBenchmarksStatistical Significance
Attribution
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ItIt’’s all about the Futures all about the Future
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TruthsTruths
1. Custom benchmarks best define what a manager does. Building blocks (indexes) matter a lot
2. Statistical significance can be achieved over short periods of time.
3. Knowing why (attribution) is the key, but if the benchmark is wrong all of the analytics are wrong.
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Attribution: Sources of ReturnAttribution: Sources of Return
Evaluate Skill: Not Style, Not Luck
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Custom AttributionCustom Attribution
Sample Fund
Fund Return
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Lg Growth
LgValue
Core
Sector Opportunities in 2009: S&P500 ranked against Total Market
Source: PPCA/Cainsoft, A Joint Software Development Venture 31
-4.57
Attribution for S&P in 2009Attribution for S&P in 2009
32Source: PPCA/Cainsoft, A Joint Software Development Venture
By Sector
By Style
INTEGRATE INTEGRATE
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Allocating (Indexes)to Skillful Managers (Benchmarks)
Coordination is the KeyCoordination is the KeyCORE is the LocksmithCORE is the Locksmith
1. Find Skill by Looking Everywhere, not Just Style Corners.
2. Allocate to Skill to Maintain Diversification (Optimize).
CORE
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The Folly of Common PracticeThe Folly of Common Practice
Common practice sometimes defies common sense.35
Everyone U
ses
Brand Index
es
& Peer Grou
ps
TruthsTruths
1) Custom benchmarks best define what a manager does. Building blocks (indexes) matter a lot
2) Statistical significance can be achieved over short periods of time. Hypothesis test using simulations.
3) Knowing why (attribution) is the key, but if the benchmark is wrong, all of the analytics are wrong.
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That’s Hard !!Every noble work is at first impossible.
- Thomas Carlyle
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You have to use theright tools for the job!
#One
AgendaAgenda
The New Trust but VerifyBenchmarksStatistical SignificanceAttribution
Target Date FundsFiduciary ConsiderationsGlide Paths
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Fiduciary Best Practices inFiduciary Best Practices inTarget Date FundsTarget Date Funds
It’s All About the Beneficiaries
2008 Has Been a Safety Test2008 Has Been a Safety TestShould Investors be Better Protected?Should Investors be Better Protected?
‐40
‐35
‐30
‐25
‐20
‐15
‐10
‐5
0Current 2010 2020 2030 2040
One
Yea
r A
nnua
l Ret
urn
(S&P Return: -37%)
2010 Funds Are the Focus Of SEC & DoL HearingsAverage Equity Allocation
= 45%
Fund companies assure all is OK
Who wins?Who wins?
Closed architecture using proprietary products
High equity allocation (high fees), especially near the target date
Most Most TDFsTDFs are are ““ThroughThrough”” FundsFundsand this is a BIG mistake and this is a BIG mistake
Designed to Miss Their Target Date on Purpose
Because They Target Death
The Purpose Cannot Be Served Because:
1. Retirees Exitthe Fund atTarget Date
AND
2. Longevity riskcannot be
managed with aGlidepath
Fiduciary ChoicesFiduciary ChoicesSee See ““Target Date FixTarget Date Fix””, 2/10 , 2/10 Financial Planning Financial Planning
1. Type of Qualified Default Investment Alternative (QDIA)
Target Date FundBalanced Fund
Managed Account
2. Type of Target Date Fund
To: Ends at target dateThrough: Continues beyond target date
3. Type of “To” Fund
Zero equities at target because it actually ends at target dateFlat equity exposure at target date and beyond because it’s a fake “To” fund
4. Glide Path of “To” fund that ends at zero equities
Financially engineered Safe Landing Glide Path™No model: simple equity reduction through time
RecordkeepersRecordkeepers Keep Records.Keep Records.Financial Engineers Design Safe Glide Paths.Financial Engineers Design Safe Glide Paths.
The “Capital Market Line.”Dr. William F. Sharpe won a Nobel Prize for it. Liability Driven Investing (LDI) guides the allocation along the line. It is the Safe Landing Glide Path™. The Risky Portfolio is
extremely well‐diversified:World Portfolio moves EfficientFrontier up & to the left. Dr. Harry Markowitz won the Nobel Prize for the EfficientFrontier.
The Reserve Asset protects against losses,both absolute & against inflation:TIPS and Treasury Bills
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Glide Paths: Equity Allocations ofGlide Paths: Equity Allocations of““TOTO”” versus versus ““THROUGHTHROUGH””
SimilarRisk
S&P Target date index is an industry average of all target date funds.SLGP is our Safe Landing Glide Path™ – a “TO” Fund
Objective transitions from growth to preservation,with BIG difference near target date
Benefits of The Best Glide Path Benefits of The Best Glide Path
++
= Safe Landing Glide Path™+
The Proof of the PuddingThe Proof of the Pudding
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BibliographyBibliography
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http://www.ppca‐inc.com/WhitePapers/white_papers.htm
http://www.ppca‐inc.com/Commentaries/Commentaries.htm
http://www.targetdatesolutions.com/fiduciary‐corner.html