rda - investment planning - Fund Selection Process

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			Fund Selection Process The investment committee recognises past performance is not a guide to future performance and as such performance plays only a small role in our selection. The selection process uses inputs from the OBSR Ratings Agency, calculations regarding Risk Adjusted Returns and Consistency of Performance. We use Forsyth OBSR as the main screen for the funds that are available.
			Ratings Agencies: A key part of our investment process is studying the output of the Ratings Agencies. These organisations have huge research resources and high levels of access to fund groups & fund managers. OBSR The Forsyth-OBSR Fund Ratings Service aims to identify funds which will achieve their objectives. The award of a Forsyth-OBSR Rating does not imply, however, that a fund will achieve positive returns, nor is the award an indication of the prospective returns from any particular asset class or asset allocation strategy. Forsyth-OBSR Ratings are intended to be 'predictive' in nature. The aim is to identify the winning funds of tomorrow. How ratings are determined Key Factors - Forsyth-OBSR Fund Ratings are determined on the premise that the fund selection process should, whilst taking past performance into consideration, ascribe greater weight to identifying the factors which will affect future performance. This process demands a much stronger emphasis on a qualitative examination of funds. Consistency of Performance: As we have already established, past performance is not a guide to future performance. What is useful however is to establish which funds have generated consistent performance. We therefore look at Discrete Quartile Ranking over the following time periods 1 year from 12 Months ago 1 year from 24 months ago 1 year from 36 months ago Risk Adjusted Returns Information Ratio vs. a defined benchmark The information ratio is used to help put the returns a fund manager generates into context given the level of benchmark risk they take on (measured by portfolio tracking error). By performing this analysis relative to a defined benchmark, the team are able to gauge what level of added value the manager would have historically achieved, and how this ranks (on a level playing-field) relative to their peers. The information ratio is essentially a measure of excess return over and above a benchmark, realised for each unit of active risk assumed (measured by tracking error). A higher information ratio indicates a higher rate of active risk-adjusted return. Ideally, the team would like to be able to use the information ratio in isolation. However in practice, their experience has shown it to be subject to issues such as inconsistency of calculation methodology and data integrity. As such, it tends to be an imperfect measure when reviewed in isolation. Analysing it alongside their performance consistency measure however, has proven to be highly informative, as performance data tends not to be subject to such issues. In addition, the information ratio, although indicative, only tends to become statistically significant when utilising data spanning three years or more. Alpha and Tracking Error vs. a defined benchmark It is equally important to understand the determinant of a fund’s information ratio. The team achieve this by analysing alpha (volatility-adjusted performance) and portfolio tracking error (active benchmark risk). In doing so, they are seeking to identify those funds with either below average risk/above average alpha (considered core) or those with a high tracking error and high alpha (considered satellite). Alpha and Tracking Error vs. Fund Manager’s benchmark The same characteristics are also looked at when analysing funds relative to their own benchmarks. This enables the team to see if a fund’s performance and risk profile is of equal strength and whether real value is added given its stated mandate. Standard Deviation The standard deviation of returns is an indicator of absolute risk and presents an alternative perspective of the risk characteristics of a fund. It also captures those elements of non-benchmark component risk, such as a cash weighting significantly above average. Contact us today