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‘ Do funds do what they say?’ My proposal for fund governance across different asset classes.. March 2010 Jon Beckett, ASCI
Chasing a Holy Grail? "Any intelligent fool can make things bigger and more complex... It takes a touch of genius - a...
Treating Customers Fairly “ Consumers are provided with products that perform as firms have led them to expect and the ass...
Morale hazards “ There are 2 kinds of rugby players - there's the honest ones and then the rest.” Jim Telfer, 1997 Lions t...
Building a Framework <ul><li>TCF Outcome 5 </li></ul><ul><li>Products not performing in line with:  </li></ul><ul><li>Inve...
Expected behaviours? Governance: Do Funds do what they say?
Unexpected behaviours? Positive Distribution – Cash Fund (R)  Change in sector classification to riskier peer group.  (R) ...
Dispersion - Attribution Conventional attribution: standard time period average. Governance: Do Funds do what they say? <u...
MI & Analysis <ul><li>Identify risk: build framework </li></ul><ul><li>Baseline expected behaviours </li></ul><ul><li>Stat...
Appendices 1. Escalation 2. Thresholds 3. Holding Periods 4. Histograms 5. Tracking Maps Summary Governance: Do Funds do w...
Escalation:  (R) Red  (Action to remedy) (A) Amber  (Alert for issues) (G) Green  (Business as usual) Appendix 1 Governanc...
MI: Managing Thresholds Appendix 2 Governance: Do Funds do what they say?
Appendix 3 Holding Periods Governance: Do Funds do what they say?
Expected Behaviours: Histograms (IMA) IMA UK Index-Linked Gilt IMA Global Emerging Mkts IMA North America IMA Global Growt...
Reporting: Seeing the big picture at a glance.. Appendix 5 Governance: Do Funds do what they say?
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Governance Interview (proposal Mar2010)

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Ensuring: \'Do funds do what they say\' and \'how does that vary by asset class\'

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Governance Interview (proposal Mar2010)

  1. 1. ‘ Do funds do what they say?’ My proposal for fund governance across different asset classes.. March 2010 Jon Beckett, ASCI
  2. 2. Chasing a Holy Grail? &quot;Any intelligent fool can make things bigger and more complex... It takes a touch of genius - and a lot of courage to move in the opposite direction.&quot; Albert Einstein Governance: Do Funds do what they say? Simple Complex &quot;&quot;... a speculator is one who runs risks of which he is aware and an investor is one who runs risks of which he is unaware.“ John Maynard Keynes
  3. 3. Treating Customers Fairly “ Consumers are provided with products that perform as firms have led them to expect and the associated service is both of an acceptable standard and as they have been led to expect..” ‘ Treating Customers Fairly: Measuring Outcomes’ Outcome 5: FSA Progress Update June 2008 Governance: Do Funds do what they say? TCF #5
  4. 4. Morale hazards “ There are 2 kinds of rugby players - there's the honest ones and then the rest.” Jim Telfer, 1997 Lions tour Governance: Do Funds do what they say?
  5. 5. Building a Framework <ul><li>TCF Outcome 5 </li></ul><ul><li>Products not performing in line with: </li></ul><ul><li>Investor expectations </li></ul><ul><li>Investment guidelines </li></ul><ul><li>On the basis sold </li></ul>Governance: Do Funds do what they say? Sector Volatility FOREX Credit & Issuer Market (Beta) Inflation & Interest Counter-party Liquidity Cash x x x x Structured x x x x Bond x x x x x Equity x x x x Commodity x x x x Property x x x x x x Derivative x x x x x x
  6. 6. Expected behaviours? Governance: Do Funds do what they say?
  7. 7. Unexpected behaviours? Positive Distribution – Cash Fund (R) Change in sector classification to riskier peer group. (R) Presence of non-Cash, CDO, CMBS, ABS etc (A) Nominal Return below LIBOR, poor Real Rate of Return (A) Excessive positive returns (E..g +100bps >LIBOR) (A) Use of non-deposit short-term paper, gilts (A) Monthly returns dip below LIBOR/SONIA (A) Redemptions or Falling assets (A) Rising Volatility of returns Uniform Distribution – Gilt or Bond Fund ( R) Sovereign downgrade of core holding(s) (R) Heavy use of CDS and derivatives (R) Rising Correlation to Equities and HY (A) Multiple netting agreements, strips etc (A) Long and rising Duration/Maturity (A) Falling Yields/Narrowing Spreads (A) Growing negative skewness; rising Kurtosis (A) Tracking Error above benchmark limits Normal Distribution – UK Eq Income Fund (R) Maximum Loss in excess of expected (R) Large reduction in yield pay-out (A) High Cash (close or above IMA limits) (A) High P/Earnings, Low or falling P/Cash Flow (A) High 12mo portfolio turnover relative to peers (A) Change in mandate to allow non-Equities (A) High non-UK exposure (A) Downgrade of FMR from S&P Left-Tail Distribution – EM Equity Fund (R) High concentration in single country (E.g. China) (R) High XS Value at Risk, frequent violations (R) Fund manager change, high team turnover (A) Rating downgrade of core countries held (A) Large swings in quartile deviation (A) Excessive Liquidity into/out of Sector (A) Significant dispersions away from sector (A) High TER, non-performance linked Distinct sets of KRIs per category! Bell Uniform Left-tail Governance: Do Funds do what they say?
  8. 8. Dispersion - Attribution Conventional attribution: standard time period average. Governance: Do Funds do what they say? <ul><li>Targeted attribution: standard time period to date of request. Check for changes: E.g. </li></ul><ul><li>Mandate or benchmark </li></ul><ul><li>Portfolio holdings </li></ul><ul><li>Percentile ranking </li></ul><ul><li>Quartile deviation, inter-quartile range </li></ul><ul><li>Tracking Error (R 2) </li></ul>“ Only takes one tree, to make a thousand matches Only takes one match, to burn a thousand trees” Stereophonics, 1997
  9. 9. MI & Analysis <ul><li>Identify risk: build framework </li></ul><ul><li>Baseline expected behaviours </li></ul><ul><li>State unexpected behaviours (KRIs) </li></ul><ul><li>Methodical flow of questions </li></ul><ul><li>Common score across Funds </li></ul><ul><li>Thresholds and escalation </li></ul>Governance: Do Funds do what they say? The KRI score is directly linked to the number of ‘Yes’ responses in the logic test: The test is summarised as a score, as shown above (6 ambers + 2 greens + 0 reds = total score of 8):
  10. 10. Appendices 1. Escalation 2. Thresholds 3. Holding Periods 4. Histograms 5. Tracking Maps Summary Governance: Do Funds do what they say?
  11. 11. Escalation: (R) Red (Action to remedy) (A) Amber (Alert for issues) (G) Green (Business as usual) Appendix 1 Governance: Do Funds do what they say? (R) (R) (A) (A) G (A) (G) (G) (A) (A) (A) (A) Q. Maximum Losses and/or Drawdowns rising above expected outcomes and previous water lines? Yes/ No Q. VaR greater than expected for strategy, sector? Yes/ No Q. Rising Negative Skewness, Volatility or other downside indicators? Yes /No Q. Redemptions in excess of 10% of tna; within 3months, or coupled to zero/flat gross sales? Yes/ No Q. Unusual Correlation to Benchmark/ peers, Attribution or risk factors (E.g. Barra) Yes /No Q. VaR continuing to rise, risk of violations above permitted number for model? Yes/ No Q. Any unexpected turnover, cash, concentrations or portfolio indicators? Yes/ No Q. Any unexpected drop off in performance or rising volatility? Yes/No Q. Recent material changes in the Fund? Yes /No Q. Unusual sector flows/redemptions (E.g. herding, momentum or retraction)? Yes /No (A) Alert for systemic issues Business as usual Actions for Remedy Q. Excess redemptions or sales volatility over sector peers? Yes /No Q. Do redemptions appear to have impacted falling performance? Yes/ No 12 (R) 11 (R) 10 (A) 9 (A) 8 (A) 7 (A) 6 (A) 4 (A) 2 (G) 5 (A) 3 (A) 1 (G)
  12. 12. MI: Managing Thresholds Appendix 2 Governance: Do Funds do what they say?
  13. 13. Appendix 3 Holding Periods Governance: Do Funds do what they say?
  14. 14. Expected Behaviours: Histograms (IMA) IMA UK Index-Linked Gilt IMA Global Emerging Mkts IMA North America IMA Global Growth Appendix 4 Governance: Do Funds do what they say?
  15. 15. Reporting: Seeing the big picture at a glance.. Appendix 5 Governance: Do Funds do what they say?

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