Friday, January 28, 2005

Duty to Monitor

Year end investment review meetings are underway for pension fiduciaries. It is always amazing how little useful information is actually provided. Here is what to expect:

Market Overview - An extensive retrospective of prior year activity is traditional. This section of the review is mandatory since; it is presumed you were in a coma over the last year, you need to be reminded of the depth of investment intellect and insight available to you (but unfortunately not applied to your portfolio), there's a 99% chance they will be right and finally what else would you talk about.....real competitive performance?? If you have experienced relationship managers you may also receive an optional forward forecast. The words you will likely hear this year are; Fed raising rates 100 bpts, flattening yield curve, slowing but robust economic growth, moderate inflation, moderating oil, continued weak case you nod off ...simply remember what you were told about last year. The consensus forecast is usually last years review in reverse order.

Stock Talk- during this portion of the meeting you will hear in detail about one or two of the managers best investment theses (bets) in the portfolio. This is designed to illuminate for you how a disciplined investment process will routinely ferret out those companies which will be well-rewarded by the less efficient market. By the way, this is the audience participation phase where you are are encouraged to waste additional time by discussing your own personal investment activity. Once rapport has been established the humility, balance and fair disclosure phase may begin. This is where you will hear about the stock that didn't work. Occasionally things don't work according to thesis. This phase often culminates in the recognition that you might have lost significantly more if it weren't for the nimbleness and insight of your manager.

Performance Review- After there is general acknowledgement that you are running late, you will gallop through an abbreviated quantitative performance review phase. You will recognize this phase by the the introductory remarks along the lines of ..."I don't want to bore you with numbers" or "you can review these later at your leisure". With a desire to minimize your stress as a fiduciary and to end every interaction on a positive note, the manager previously established a benchmark system designed to find the silver lining in any cloud. The general principles of this system are; show all performance before fees, avoid showing aggregate historical performance, compare every stock account regardless of content and risk to the S&P500, compare every bond account regardless of content or risk to the highest credit quality bond benchmark, compare hedge funds to treasuries, provide additional loosely defined peer universes, provide footnotes in invisible print which detail the limitations and inadequacies of the data that is printed visibly.

For fiduciaries and investors, appropriate benchmarking and effective attribution analysis are the singular most important issues in portfolio monitoring and should be the centerpiece of any portfolio review. If you feel vaguely uncomfortable or you don't fully understand your managers is probably by design. I would be interested in hearing about your experiences. Send me an e-mail


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