Manager selection

Important measures constituting manager DNA:

• Nominal annualized returns – How have the managers performed in comparison to peers?
• Nominal annualized standard deviation – How volatile have they been in comparison to peers?
• Win-loss ratio – How consistently have they “got it right”?
• Maximum drawdown – a proxy for shortfall risk – have the managers successfully protected the downside?

Standard deviation, win-loss ratio and maximum drawdown are combined to form a composite measure. Manager DNA is visualized by charting returns versus the composite measure as shown in figures 1-3 alongside. Candidate selection regions of the investment universe differ according to the strategy.

The preferred selection regions for candidate funds are highlighted alongside for each of the Inflation Plus Portfolio strategies. Ideally we would like to earn high returns with minimum exposure to risk but, by design, earning higher returns generaly involves taking on more risk.

For the more conservative strategies, particularly the Inflation Plus 2-3 Portfolio strategy, we are more conscious of protecting the downside and so we are willing to sacrifice some returns in order to improve the risk characteristics of the portfolio.

For the more aggressive strategies – the Inflation Plus 6-7 portfolio and the Flexible Growth portfolio – the focus shifts to higher returns with a greater tolerance for risk exposure.

We aim to combine managers with different DNA to create synergy – the 1+1=3 philosophy. The process involves combining some higher risk, higher return managers with some lower-risk, lower-return managers which serve as the stable core for the portfolio.

Likelihood of the fund outperforming the peer average

• Cost
• Qualitative Considerations: reputation, confidence in brand, quality and stability of management team, size constraints of the fund, understanding of manager’s position, remaining true to DNA (see manager review and monitoring process on page 3).

Based on thorough analysis of the factors described above, the preferred combination of managers is decided on.