How to Select Investment Managers and Evaluate Performance: A Guide for Pension Funds, Endowments, Foundations, and Trusts

Preface ix

About the Authors xi

CHAPTER 1 Investment Sponsors 1

The Investment Committee 4

The Variety of Investment Sponsors 7

Taxable Investment Sponsors 24

Summary 29

Chapter 2 Investment Policy Statement 31

Investment Philosophy and Goals 31

Investment Return Objectives 32

Risk Tolerances 32

Constraints 33

Investment Strategy 33

In-House or Outside Manager 34

Investment Policy 34

Securities Types and Risk Characteristics 35

Asset Allocation Guidelines 39

Evaluation of Performance 41

Benchmark Portfolios 51

Periodic Review 52

Summary 53

Chapter 3 Investment Overview 55

Capital Appreciation versus Current Income 55

Active versus Passive Investment Approaches 57

Investment Styles-Equity Managers 57

International Investing 65

Investment Styles-Fixed Income Managers 65

Summary 68

CHAPTER 4 Alternative Investment Vehicles 71

Hybrid Securities 72

Derivative Contracts 75

International Investment Vehicles 81

Real Estate Investment Vehicles 91

Investment Vehicles for Accredited Investors 93

Commodities and Collectibles 102

Summary 104

Chapter 5 Return Measures and Reporting Techniques 105

Dollar-Weighted Rate of Return 105

Time-Weighted Rate of Return 108

Annualized Rates of Return 110

Geometric Mean 111

Total Return and its Components 112

Compound Growth 115

Summary 118

Chapter 6 Return-Risk Measurement 119

Return Relative 119

Standard Deviation 121

Portfolio Risk Measure 124

Scatter Diagram 127

Coefficient of Variation 128

Regression Analysis 129

Portfolio Size and Diversification Levels 131

Regression Analysis of Fund I 132

Additional Performance Indexes 133

Summary 134

Chapter 7 Portfolio Performance Evaluation 137

Performance Results 138

Composite Index 139

Return Risk Analysis 140

Universe Comparison 141

Evaluating the Asset Allocation Decision 143

Summary 155

Chapter 8 Equity Performance Evaluation 157

Equity Performance Criteria 158

Sector Analysis 159

Return-Risk Comparison 163

Market Characteristics 164

Attribution Analysis 169

Summary 171

Chapter 9 Fixed Income Performance Evaluation 173

Asset Allocation Ranges and Anticipated Contributions 174

Issuers of Fixed Income Securities 174

Bond Indexes 176

Bond Prices and Yields 177

Term Structure of Interest Rates 180

Quality of Fixed Income Securities 181

Credit Risk 181

Interest Rate Risk 184

Duration 186

Convexity 189

Maturity Characteristics 191

Return Analysis 191

CFA Institute Standards 195

Fixed Income Management Styles 196

Passive Fixed Income Management 196

Active Fixed Income Management 198

Performance Analysis 199

Summary 202

CHAPTER 10 Investment Companies as Investment Vehicles 203

Investment Companies 205

Regulation of Investment Companies 207

Types of Investment Companies 208

Selecting Mutual Funds 215

Performance Evaluation 216

Summary 217

Chapter 11 Investment Manager Search Process 219

Search Committee 219

Establishing Goals 220

Number of Managers 220

Candidate Identification 222

Management and Related Fees 223

Firm Size and Ownership 225

Request for Proposals (RFP) 225

Screening of Candidates 230

Candidates Presentations 234

Verification and Reference Checking 236

Cost of Switching 239

Administration of Change 240

Summary 240

Chapter 12 Conducting Investment Committee Meetings 243

Meeting Preparations 243

Agenda and Meeting Materials 245

Setting the Agenda 245

Responsibilities of the Chairperson 246

Investment Consulting Services 246

Investment Performance Review and Outlook 247

Old Business 250

New Business 251

Summary 251

Index 809