Peer & Competitive Analysis
How do you compare a fundamental active manager, a quantitative active manager, and a smart beta product?
Professional fund buyers and fund sellers don’t just look at historic performance or fees to differentiate equity products. Fund buyers demand more visibility into what they are buying or holding. What is the future potential for return and risk? Will buying or holding this product match their investment preferences and fit into their existing portfolio? Will the fund provider continue to manufacture a consistent product? Fund sellers also know that clear portfolio insights are essential to deliver their key messages and help them stand out from the crowd. They need proof statements to help them win business and retain clients. As in any market, other than competing on price, sellers must differentiate – or they will die. Read More
As factor-based investment products and strategies become increasingly prolific and sophisticated, it’s paramount for associated analytics to evolve at the same pace. Dr. Peter Hopkins, COO of Style Research, recently addressed this topic at the AIMSE Europe Consultants Conference, held on April 25th, 2017. Peter discussed new methods to incorporate a consistent, factor-based approach across market performance, peer group comparisons and individual portfolio analytics to differentiate investment products.
Differentiating Products Using a Factor Framework: presentation by Dr Peter Hopkins of Style ResearchMonday 24th April, 2017
Dr Peter Hopkins, COO of Style Research has been invited as an expert speaker at the AIMSE London Consultants Conference this month. The event is Tuesday, April 25th, 2017 at the Courthouse Hotel in London.
His session “Differentiating Products Using a Factor Framework” will cover:
- A brief history of factor investing and how it has evolved over the last several decades
- A look at popular factors and their recent behaviour across global equities
- A Case Study review focusing on a custom peer group of Large Cap Global managers, using a factor-based view of the market
- An examination of specific funds within this group, using a factor framework to highlight differentiations
In this installation of our series on the importance of consistent factor analysis, we dive into the Peer Group and Competitive perspective. In our previous entry, we introduced the notion of using well-known, approachable factors in assessing the recent market environment.
As Q1-2017 draws to a close, the investment community is preparing for the upcoming performance review season. During these investment performance reviews, investors are seeking objective and comprehensible stories that ultimately serve to either shake or strengthen their investment manager relationships. However, performance reviews are not solely about measuring performance to the third basis point. Investors are also incorporating context and perspectives about what has happened in various geographic markets and how that led to specific classes or peer groups having outperformed. Performance review season is ultimately about creating, delivering and gaining confidence around a story. It is a complex process and, unfortunately, today there exists a widespread problem.
BOSTON (October 12, 2016) – Style Research, an independent, global provider of portfolio style, risk and performance analytics, was awarded Best Research and Data Vendor at the Fund Intelligence US Mutual Fund Services Awards. Read More
The sheer volume of funds available on the investment market – and the analytics and research around them – creates an array of challenges that any fund manager, fund buyer or investment consultant is all too familiar with. How do you determine the most relevant research and data to filter through to make the best decisions for building a fund, marketing it to investors or deciding to buy into it? And then, how can you assess what is driving a portfolio’s results? Is it still a strong option compared to other funds?
The limitation is that most information, even the high-end research and tools available to institutional investment professionals, only skims the surface. This leaves many gaps to fully understand the makeup, underlying exposures and potential risk within portfolios. The result is an incomplete analytical picture and funds appearing to be quite similar, even when they might not be.
LONDON (September 13, 2016) – Style Research, an independent, global provider of portfolio style, risk and performance analytics, today debuts its Peer Insights portfolio comparison solution in the UK and Europe, expanding upon its initial US launch earlier this year. By sourcing stock-level, holdings data from Morningstar, Peer Insights allows fund managers, fund buyers and consultants to directly compare portfolios based on style factors, providing detailed and unbiased insight into the drivers of portfolios. The solution empowers investment professionals to operate with confidence in an increasingly complex and saturated landscape.
With the proliferation of smart beta and factor-based investing opportunities in the market, sophisticated analytic solutions have become a necessity. Peer Insights empowers clients to go beyond the label of mutual funds to differentiate between seemingly similar options, with an unprecedented depth of detail into their underlying – and potentially unforeseen – exposures. With 8,000 UK and EU registered funds, 17 universes and over 100 commercial benchmarks, the expanded Peer Insights solution brings peer analysis into the modern world by allowing investors to make informed decisions between an ever-growing list of portfolio options.
Although active share has the popular appeal of being a simple proxy for portfolio active risk, it shouldn’t be relied on as the only risk measure when differentiating between funds. A deeper exploration of predicted tracking error can reveal significant differences – including allocation of risk – that should be understood when assessing and comparing portfolios.
In a previous post, DISCOVERING RISK DIFFERENCES BETWEEN COMPETING FUNDS, we compared the overall levels of portfolio diversification for two mutual funds, the Oakmark Global Fund (“Oakmark”) and the RBC Global Opportunities Fund (“RBC”). These results were shown against a backdrop of competing global equity products in the Morningstar World Stock universe of US domiciled funds, as at end March 2016.
We had noticed that, although both funds were both stock-concentrated and both had similarly high levels of active share, the predicted tracking errors (a.k.a. active risk) of the funds vs. the MSCI World index were significantly different. Oakmark had a predicted tracking error of 5.5% per annum (16th percentile vs. peers), while RBC had a predicted tracking error of 3.6% per annum (median vs. peers).
IDENTIFYING AND COMPARING RISK CONTRIBUTORS BETWEEN FUNDS
The charts below show how each fund’s tracking error can be decomposed into sources of risk. The red bars show the main sources of risk from currency, market, sector, style and equity (stock selection). The blue bars simply reflect the potential diversification or concentration arising from correlations between these risk sources.
(Click for a larger image.)
It’s clear from the charts that sector risk is a more significant source of risk for Oakmark, and indeed there is some extra reinforcement of risk between styles and sectors in that fund (the “Style XTerms” blue bar).
In fact, the active sector positions in RBC accounted for only 0.2% of the fund’s 3.6% tracking error, compared with 1.6% out of 5.5% for Oakmark. This is perhaps not surprising given that RBC was fairly sector-neutral with the largest active sector weight being only a +3.3% overweight in Consumer Discretionary. Oakmark had a +12% overweight in Information Technology, a -9.5% underweight in Healthcare, and a -9.3% underweight in Consumer Staples. The charts are therefore fairly intuitive, and convey important distinctions between these two funds.
Further decomposition of the funds (not shown here) revealed that RBC had a significant +18% overweighting in Large Growth and a +15% overweight in Mid Growth. This compared with Oakmark’s underweights of -14% and -4% in the same two style categories respectively. Oakmark’s style positioning within sectors was also risk-concentrating, with, for example, a +7% overweighting in Large Value stocks within Financials.
COMMUNICATING RISK DIFFERENCES BETWEEN FUNDS
So, although active share can offer a simple, handy estimate of a fund’s active risk, it doesn’t always provide the insights necessary to differentiate between funds. As we’ve seen here, further risk and style insights can often reveal essential differences between funds. Incorporating these objective comparisons can support further decision making and clearer portfolio communications, such as for quarterly portfolio reviews or positioning a fund against its peers.
Learn More & Request a Complimentary Report
To learn more, contact Style Research.
You can also request a free Peer Insights report to compare your fund.
How can we compare portfolio risk between competing funds based on their holdings?
How do we know what typical levels of portfolio risk are, and what is considered high or low versus competitors?
The information that investors typically use to compare risk is based on backward-looking returns. But if we are comparing funds, we need answers about the actual portfolios that we are investing in now. Let’s take a look at some practical ways that holdings-based portfolio risk measures can help answer these questions.