Investment Selection – Process Overview
Mix (Model 3)
Qualitative review per Search
Objectives and Interview.
Includes ratio analysis.
Find most efficient mix subject to
risk tolerance. (Model 2)
Best Peer Alpha - Minimize by eliminating those
with high correlation yet lower performance to
each other. Reduce to less than 100. (Model 1)
Initial Screens – 4 Year Management Tenure; Best Fit Alpha >0;
Correlation to Benchmark Index – Best Fit R2 >.65
Reduce from 49,000 to 4,000
Overall Objective: (a) Select set of 11-12 Active or Passive Managers for
Fully Diversified Portfolio; or (b) select single manager.
• Consistent out performance of benchmark
• Consistent out performance versus peers
• Downside protection; substantial upside participation
• Risk-Controlled Approach
• Lower volatility of Composite, good diversifiability of unsystematic risk
• Good risk-adjusted returns
• Superior Kurtosis, Treynor, and Sortino ratios with Positive Skew.
• External Diversification across Other Pension Assets
• Internal Default diversification within Fund
• Depth of Team
• Experienced and consistent team
• Limited exposure to “star” Manager – prefer Team Approach
• Personal commitment to strategy. No style drift.
• Discipline to style/process
• Appropriate amount of assets under management
• Sound approach whether Bottom-up or Top-Down
• Depth of Firm
• Going Concern/Stable Organization
• Commitment to Strategy
• Research capabilities – value-added
• Competitive Fees
• No 12(b)-1 Fees
• Only Class A or Better quality, oldest share class.
• Dynamic financial and economic time series
inherently exhibit some form of instability or
nonstationarity. Thus daily data of
correlation coefficients are collected and
tested for nonstationarity.
• Funds that are not covariance stationary are
replaced so that you are never left with a
portfolio with highly correlated components.
• Best Fit Alpha > 3%
• Base Currency US dollar
• Use the oldest share class and highest
quality, i.e. Institutional trumps Class A
which trumps Class B.
• Inception Date <7/1/2005
• Opened to New Investors
Intrepid Small Cap (ICMAX) versus Best Fit Index Russell Mid-Cap
Best Fit Alpha = 13.34% annualized