Performance Analysis

Executive summary

Performance Analysis

History has provided many instances where professional money managers with the best intentions either negated to resist external or internal pressures or simply had obtained power and social status that they used to satisfy self-serving interest, the adherence to process and procedures are the tools that can limit such influences. Attribution analysis is critical toward recognition of these unfortunate realities and places the emphasis on performance and identification of the associated risk.

Performance analysis should be fund sponsor’s critical tool and ultimate objective identifier regarding a fund’s investment policy. Fund manager’s knowledge and skill affect active management decisions that impact fund risk management and alpha. Attribution analysis results highlight investment strengths and weakness that decision maker can utilize to focus attention on risk and performance. The fund manager also benefits since performance evaluation is an objective investigation of the fund management investment process and impact on alpha and finally, performance analysis supplies the evidence to determine whether the investment program is being effectively managed.

Relationships are critical and fund sponsors rely on these relationships to identify and retain professional money managers that they trust and have the best intentions. It is true that past performance is the best indicator of future performance and past performance is no guarantee of future results good or bad; however, it is not just about performance but the investment process and active management decisions that impacted performance achieved. Simply put attribution analysis is extremely important to understanding risk adjusted performance and answers the question where is the value added.

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Service Methodology

Service methodology is composed of 4 distinctive steps: The first step is pre-consulting to meet with fund sponsors’ key decision makers to learn and understand their current performance measurement process and reporting frequency. The purpose of this initial step is to determine if the fund sponsors current performance measurement process and reporting frequency is applicable and sufficient.

The second step, if the analytical results of step one identifies areas of concern, is to establish conditions of satisfaction and justify the importance of performance evaluation and the performance evaluation process.

Because performance evaluation involves measurement and assessment of the outcomes of the investment management decisions and process. The third step is to separate performance evaluation into its distinctive components, performance measurement, i.e. calculate portfolio performance based on investment-related changes in the portfolio’s value over specified time periods, performance attribution, i.e. analyze the sources of performance (“returns”) relative to a designated benchmark and their impact on performance and performance appraisal, i.e. critiquing whether returns were achieved due to skill of the investment manager or random chance and assessing magnitude and stability of funds relative performance.

Attribution analysis is a repetitive process and as a management control tool it is important that it does not become normalized and dismissed. In the fourth step, assessment of macro attribution performance is conducted to determine if quality control processes and procedures regarding asset allocation decisions are appropriate, evaluate the information utilized to make asset allocation decisions at the fund sponsor level and assess the current knowledge, understanding, and analytical skills of the asset allocation decision maker or team to determine areas of reinforcement.

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Service Options

Companies can elect whether they just require Appleton Greene for advice and support with the Bronze Client Service, for research and performance analysis with the Silver Client Service, for facilitating departmental workshops with the Gold Client Service, or for complete process planning, development, implementation, management and review, with the Platinum Client Service. Ultimately, there is a service to suit every situation and every budget and clients can elect to either upgrade or downgrade from one service to another as and when required, providing complete flexibility in order to ensure that the right level of support is available over a sustainable period of time, enabling the organization to compensate for any prescriptive or emergent changes relating to: Customer Service; E-business; Finance; Globalization; Human Resources; Information Technology; Legal; Management; Marketing; or Production.

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Service Mission

Service Mission Statement: To provide fund sponsors attribution performance analysis process improvement and or implementation tools that will permit fund sponsors to better measure and understand returns produced relative to appropriate benchmarks in an effort to identify true performance in risk adjusted terms.

Mr. Turner is an experienced multi-billion-dollar portfolio administrator. Having obtained the level of lead trust and funds services analyst at one of the nation’s largest financial institutions where he trained many analyst and was recognized as a risk analysis and process standardization subject matter expert. Mr. Turner is a continuous learner having received his undergraduate BBA degree in economics and finance, from Eastern Michigan University, he has earned multiple master degrees, recently a Master of Security Analysis and Portfolio Management degree from Heider Business School at Creighton University and an MBA at Hult International Business School in Cambridge, MA where he worked as a management consultant on an action project for a fortune 250 company.

Mr. Turner has significant experience in building and modifying financial models to accurately reflect portfolio performance and understands that performance must be measured against risks assumed and to thoroughly understand how to maximize risk adjusted returns, allocate capital to investment management firms and various professional money managers fund sponsors should rely on attribution analysis as a management control system. Mr. Turner utilizes multiple approaches to delivering the subject matter; however, understanding and listening are the core of his methodology as he attempts to build on current systems through process improvement or implement attribution analysis tools and techniques that will permit fund sponsor to better align their strategic objectives and monitor risk adjusted performance. Mr. Turner has experience in the automotive, banking, chemical and financial services industries.

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Service objectives

The following list represents the Key Service Objectives (KSO) for the Appleton Greene Performance Analysis service.

1. Client Evaluation
   The importance of this service objective is to stress to clients the importance of utilizing applicable performance evaluation methods. Fund sponsors can move past the noise and focus their effort on maximizing gains, minimizing losses and or reducing risk exposure to an acceptable target. It is imperative that risk exposure correspond with alpha and the relative distinction between alpha and beta is of immense importance to fund sponsors and portfolio managers. In cases where fund sponsors rely on fund managers, their financial institution or other financial institutions to provide fund performance analysis that is on a non-risk adjusted basis-this is fundamentally incorrect and can result in inadvertent performance evaluations, macro and micro attribution error and unjustifiable performance related fees. Furthermore, it is critical that performance is measured on a risk adjusted and applicable benchmark basis which is the foundation of this service objective. Risk-Adjusted performance analysis is the tool that gives fund sponsors an objective “quality control” methodology and should be part of the investment management process and thoroughly documented within the Investment Policy Statement (IPS) and fund sponsors that receive fund performance on a risk-adjusted basis should have the capability to critique performance evaluation reports. Fund sponsor identification and complete understanding of the portfolio managers investment management process, strategy and associated risk should precede any prior performance results when deciding to select a specific portfolio manager for a particular investment mandate or several portfolio managers across multiple asset categories.
2. Fund Monitoring
   The purpose of this service objective is to develop methods that can assist fund sponsors with evaluating and identifying fund managers that are or are not adhering to their strategic investment directive. As such, it is critical that fund evaluation periods are conducted on regular intervals e.g., monthly, quarterly, semi-annual and annual. In fact, risk adjusted performance analysis may be required weekly in situations of continued risk adjusted over and under performance. In addition, as needed reconciliation and investment style analysis is critical toward early identification of non-compliance which can result in strategy re-evaluation, capital at risk reallocation and or reassigning of portfolios. The Investment Policy Statement (IPS) should have specific risk-adjusted performance language that trigger performance evaluation period changes given portfolio manager’s performance. Early identification is essential to avoiding unjustified management fees and perhaps significant portfolio losses. Obviously, risk of loss is inherent with all investments and volatility of markets are uncertain which is why risk-adjusted performance assessment periods should be driven by relative performance factors and not by fund manager convenience. Furthermore, performance evaluation is a relative concept which is why appropriate benchmarking is critical. A benchmark should have clearly defined identities and weights of securities or factor exposures constituting the benchmark, represent an investable passive alternative, benchmark returns should be readily calculated and on regular intervals, be appropriate for the investment manager’s investment style or area of expertise, be reflective of the portfolio manager’s current investment position and knowledge of the securities or factor exposures composing the benchmark, known to all stakeholders prior to the performance analysis period, accepted and acknowledged by the portfolio manager as an appropriate determinate of performance.
3. Data Quality
   Identifying, evaluating and determining data quality is highly important. Because data quality ultimately determines the accuracy of measuring performance and it is critical that appropriate data collection methods are utilized as calculated returns of various investments can significantly distort fund and portfolio manager performance. The purpose of this service objective is to recognize data quality issues such as rate of return reliability, collection of market transaction data regarding equity, fixed-income securities, liquid and illiquid transactions, valuation and cash flow recognition. Consistency and confidence in the data quality cannot be stressed enough. Fund sponsors must clearly identify and evaluate data quality and reliability on an ongoing basis. Internal and External data quality checks should be conducted on regular intervals and randomly if data quality concerns have been problematic in the past. By utilizing data warehouses or business management applications fund sponsors can be confident that they are using best practices and that data quality procedures are incorporated in the attribution analysis and performance evaluation process. Questions such as what data is required, where is the data obtained, how much data, is the data accurate, can data accuracy be improved and what rules and processes are required to ensure that data is accurately maintained from establishment through historical reference (data storage). Fund sponsors and portfolio managers must identify and eliminate data errors at their source to have complete confidence in the attribution analysis and performance evaluation process. Simply put data should be Correct, Complete and Current.
4. Behavioral Bias
   Artificial Intelligence (AI) usage and acceptance is growing within the financial services spectrum. At the present, most fund sponsors rely on people to make investment objective, policy and asset allocations decisions. As such, being human, behavioral biases and their implications can affect investment policy and asset allocation choices, risk-adjusted performance evaluation can be used to identify, evaluate, and reduce cognitive errors and emotional biases at the fund sponsor level. The purpose of this service objection is to recognize that cognitive errors and emotional biases are factors that arise when individuals must make difficult decisions specifically under conditions that require considerable time and cognition, and in many cases where courses of action can have undesirable effects. Decisions that are made under the tenant that they are “acceptable” can lead to incorrect choices within the macro attribution process such as fund sponsor’s risk tolerance, fund sponsor’s short and long-term expectations concerning investment risks and returns, fund sponsor’s liabilities, missed investment opportunities or worst substantial investment losses. Identifying, categorizing and explaining these behavioral biases can assist fund sponsors and portfolio managers as cognitive errors tend to be more “correctable” than emotional biases. Emotional intelligence is important and intuition can be an invaluable quality; however, spontaneous driven decisions that are a result of beliefs, attitudes, and feelings can be highly problematic as fund sponsors attempt to identify and distinguish between competing investment strategies and fund managers. Although, cognitive errors are not the result of predetermined attitudes or beliefs they often are the result of inaccurate reasoning, inferior information or advice and education thus most cognitive biases can be mitigated or corrected with education and or training to be able to better recognize and evaluate information and or advice.
5. Attribution Analysis
   What does it all mean? Analyzing fund assets, fund structure, and fund manager style against fund sponsor investment strategy directive, investment policy documents and applicable performance benchmarks, quantitative and qualitative metrics can be used to measure risk adjusted alpha and assist fund sponsors and portfolio managers in the achievement of the funds directive, mitigate acceptability heuristics, conformity and groupthink assessment bias. The purpose of this service objective is to establish or improve risk-adjusted performance analysis and examine strategic fund management alignment with risk. Here we answer questions such as 1) What was the fund’s (account’s) performance, 2) Why did the fund (account) generate the identified performance, and 3) Is the fund (account) performance a result of chance or investment manager skill. Ultimately, the purpose of performance evaluation is to evaluate investment manager skill and to determine whether retention of their services is warranted or otherwise no longer reasonable for the fund sponsor’s investment objective and critique fund sponsor’s performance as well. This service objective is the capstone and observed results are from choices and decisions made during the evaluation period. What you see here are the consequences of those prior choices and decisions but perhaps what is more important is the knowledge gained can be readily utilized to critique, establish and or improve current performance evaluation processes and or procedures that will directly affect future choices and decisions. And with continued training it is highly foreseeable that best practices can be established throughout the organization.

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Testimonials

Sherwin – Williams

“As a result of the outstanding work he did for Sherwin-Williams, I strongly recommend Mr Turner. His focus, dedication, intensity, and hard work were unmatched during the project he undertook for us while he was earning his MBA at The Hult School. His work was thorough and insightful. He was undaunted by the enormity of the assignment, and unintimidated by the executives he interacted with during the project. And thus, I expect Mr Turner to be one of those executives in the near future.”

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Bank of America

“I worked with Mr Turner for a few years at Bank of America. He is very detail oriented and always produced quality work. He understood his product mix and was considered a subject matter expert with his CDO deal responsibilities. He trained a number of other analysts in a best practice approach for the company.”

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LaSalle Bank

“I was consistently impressed by both Mr Turner’s attitude towards his work and his performance on the job. His interpersonal and communication skills allowed him to develop productive working relationships with both our counterparties and our team members. Mr Turner had the listening skills necessary to extract information from our counterparties while performing financial assessments. He also demonstrated the analytical skills to diagnose problems and devise viable solutions. His ability to remain unflustered during frenzied periods proves his ability to work well under pressure.”

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Flagstar Bank

“As a commercial client for the Bank, Mr Turner took great care in providing the Financial services that our company needed to be successful. Mr Turner worked with our CFO to meet all our needs in the area of finance and banking. Mr Turner delivered the needed services on time and at very competitive rates. I recommend him to all who may be looking for a quality banker.”

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Guaranty Bank

“I was working with Mr Turner for all my needs at Real Technologies USA, based out of MI state. He was always nice to me whenever I visited the bank, not to mention completing wire transfers / adjusting credit limits for the Line of Credits, allowing for the general operational features permissible within the norms of the banking regulation. Mr Turner is a people person, and polite towards his customers and clients. On many occasions, I watched him help and take extra time with his customers and clients. Last but not the least, I would always seek him out when I had business at the bank. I wish him all good luck.”

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More detailed achievements, references and testimonials are confidentially available to clients upon request.

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Industries

This service is primarily available to the following industry sectors:

Banking & Financial Services

Banking and Financial Services continues to play a critical role in our economy and nation’s economic future. Banks are intermediaries, that is, they are between savers of capital and individuals and entities that seek capital and their health and soundness is vital as the “Great Recession” reminded us. Today, the United States Banking Industry holds over $15.4 trillion dollars in assets, according to data compiled by SNL Financial. As economic activity continues to expand and financial markets reach new highs this value can only increase. With increase valuation and economic activity comes added risk and uncertainty. Fund sponsors within banking and financial services understand all too well these concerns and the pressures that exist within many financial institutions to meet and or exceed quarterly earnings estimates which is why fair and accurate attribution analysis is extremely important to understanding the risk accepted to achieve the performance result.

Banks and Financial Institutions are in the business of managing risk and fund sponsors should completely understand the risk banks and financial service firms manage on their behalf. Attribution analysis gives fund sponsors the ability to truly understand performance of fund managers and identifies the real contribution of the manager’s investment decisions with regard to overall investment policy, asset allocation, security selection and activity. The U.S. banking and financial service industry will continue to lead the world as they continue to create and develop new services and innovative products to meet the ongoing and critical challenges of their customers and clients.

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