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The Future

Performance Measurement And Attribution. The Future. Evaluate Skill NOT Style. Back to Basics. Skill??. Luck??. Old Approaches Don’t Work. Skill??. = Style??. Luck??. If you don’t know the problem, you can’t fix it. Performance Analysis 1980’s Slicer & Dicer. Sector Size

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The Future

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  1. Performance Measurement And Attribution The Future Evaluate Skill NOT Style

  2. Back to Basics Skill?? Luck??

  3. Old Approaches Don’t Work Skill?? = Style?? Luck?? If you don’t know the problem, you can’t fix it.

  4. Performance Analysis 1980’s Slicer & Dicer Sector Size Yield P/E Off-the-shelf Benchmark Results Portfolio

  5. STYLE Skill Luck Bridge the Gap Is Your Manager Lucky or Skillful?

  6. Style Matters

  7. Past IS Prologue:Information Ratios and Sortino Omegas PERSIST * MPT, PMPT, APT, RBSA… Market and Style effects dominate Style-&-market-adjusted success/failure persists Signal / Noise Getting WHY’s * Gruber(96), Stewart(98), Rudd & Kahn(99,00,01), Ibbotson(01)

  8. Styles go in & out of favor Skill persists The difference between Style and Skill

  9. The Cost Of Confusion

  10. Sources of Return Style Analysis Returns or Holdings Value Growth Core Attribution Against Custom Style Blend

  11. Evolution of Attribution

  12. Today’s Craft Value Growth Core Skill Custom Benchmark Portfolio Style

  13. Sample Analysis of Skill & Style

  14. A Close Look at Style Effects

  15. A Closer Look at Style Effects

  16. Details • Sector Allocation & Stock Selection • Attribution

  17. Sector Allocation Fund Allocation Custom Style Benchmark

  18. Sector Allocation & Stock Selection Custom Style Benchmark Fund Returns Style Opportunities

  19. Attribution

  20. Attribution

  21. Style Matters

  22. Style Allocation & Performance

  23. Trends • Style Allocation • Sector Allocation • Cumulative Performance • Cum Sources of Value Added – Persistence • Relative Performance

  24. Style Allocation History $

  25. Style Allocation History $ Mid Growth Mid Core Mid Value Large Growth Large Core Large Value

  26. Sector Allocation $ Finance Technology Health Non-Durables

  27. Cumulative Growth Fund Style Market Ranks

  28. The Best Picture Consistent Sources of Value Added

  29. Sources of Value Added -- Persistence Stock Selection Sector Allocation Activity

  30. Sources of Value Added -- Persistence Stock Selection Sector Allocation Activity

  31. Benefits • Identify Skillful Investment Managers • Risk Control (MDAs) • Global • Hedge Funds

  32. Talent Contest Made Easy Winners of the Style-adjusted Performance Race Reasons for Win Confirm People, Process, Philosophy

  33. Equity Diversification • Sector: Technology, Consumer, Health Care • Characteristics: Capitalization, P/E, yield, R-squared

  34. Equity Diversification • Sector: Technology, Consumer, Health Care • Characteristics: Capitalization, P/E, yield • Style

  35. Extensions • Global • Hedge Funds

  36. Hedge Funds • Leverage • Direction Amount long & amount short • Style

  37. The Past Off-the-shelf Benchmark Results Portfolio

  38. The Future Value Growth Core Skill Custom Benchmark Portfolio Style

  39. Style Indexes No standardization in sight, but…

  40. Style Effects(Holdings or Returns-Based) Core Growth Value

  41. Some Suggested Criteria • Mutually Exclusive: Multicollinearity/ Holdings Reports • Exhaustive (Includes everything): Fit/ Holdings Reports • Regular Rebalancing: Adjust to Change • Core: Value-Growth Compromise

  42. 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% Surz Style Definitions • Rebalanced Quarterly

  43. Research Caution Popularity is not Necessarily Synonymous with Quality

  44. Mobius Research Candidates : Russell, Surz, Pru, Wilshire, Vestek • Fundamental : All win except Wilshire • Tracking error : Surz & Russell • Multicollinearity : Surz • Coverage : Surz & Russell

  45. IMCA Research • Candidates: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/BGI • Mutual Fund Winners: Russell, Surz, Wilshire

  46. Surz Stuff is FREE www.PPCA-Inc.com

  47. The Future • Style matters • Returns-based complements holdings-based Evaluate Style

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