1. Provide the following data for the firm and product-specific assets (in mil- lions). Insert additional rows if you have more than four products. Include the status of each product (open to new clients/assets or closed).
138 EQUITY AND FIXED INCOME MANAGER ANALYSIS
Open/Closed 12/03 12/02 12/01 12/00 12/99 Product #1
Product #2 Product #3 Product #4 Total firm assets
ccc_travers_ch07_133-154.qxd 6/2/04 4:09 PM Page 138
2. Please list any products that your firm has completely liquidated or merged with existing products. Include the reason(s) why the product was liquidated and/or merged with another product.
3. Complete the following client-related information:
Performance Data
4. Provide monthly historical performance figures (net of all fees) in the fol- lowing table. Add rows to the table if the track record goes back further than five years.
Information Gathering 139
12/03 12/02 12/01 12/00 12/99
Total Firm
# Clients
# Clients gained (year)
# Clients lost (year) Assets
Assets gained (year) Assets lost (year)
% Firm assets with top five clients
Product-Specific
# Clients
# Clients gained (year)
# Clients lost (year) Assets
Assets gained (year) Assets lost (year)
% Firm assets with top five clients
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2003 2002 2001 2000 1999
ccc_travers_ch07_133-154.qxd 6/2/04 4:09 PM Page 139
5. Is the performance history submitted AIMR compliant? If yes, has this per- formance history been certified by an independent auditor? Please provide a copy of the audit results. If no, please explain.
6. Please describe the data and methodology used to calculate the perfor- mance record stated in the previous question.
7. Please provide a copy of the full performance disclosures for the product under review. The disclosure should include the following for each year-end:
a. Number of accounts included in the composite.
b. Assets of those accounts.
c. Number of accounts managed in a similar style, but not included in the composite.
d. Assets of those accounts.
e. Reasons why those accounts were not included in the composite.
f. Number of accounts added to/subtracted from the composite in each year.
8. Please state the most appropriate benchmark for the product under review and include its performance history for the same time period listed previ- ously for the product.
140 EQUITY AND FIXED INCOME MANAGER ANALYSIS
Description Y/N Explanation
Composite of separate accounts Equal weighted
Size weighted
Record linked from prior affiliation Representative account
Commingled/mutual fund Simulated performance
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2003 2002 2001 2000 1999
ccc_travers_ch07_133-154.qxd 6/2/04 4:09 PM Page 140
9. Please provide performance attribution in the following format:
10. Do you utilize any internal or third party performance and/or attribution soft- ware/systems? If yes, please provide a list of the systems used and their purposes. In addition, please include with this questionnaire a sample of the attribution report for the latest month or quarter end.
11. What is the product’s capacity? At what point would you close to new clients? At what point would you close to new assets from existing clients?
Portfolio Data
12. Please provide a representative portfolio for each of the last four quarter-end dates. The portfolios should be provided in Microsoft Excel format and should include the following information: security identifier (ticker), number of shares held, and each security’s name. Include the following information regarding the selected representative account:
a. Type of account.
b. Account’s inception date.
c. Account size.
d. Monthly historical performance for the account (to determine how closely it tracks the composite).
Information Gathering 141
Product Index Reasons for Out/Underperformance Year Return Return +/– (please be as thorough as possible) 2003
2002 2001
ccc_travers_ch07_133-154.qxd 6/2/04 4:09 PM Page 141
13. Provide the following geographical allocation data for the product in per- centage of total assets (add rows for countries not included in the table, but are part of the portfolio):
142 EQUITY AND FIXED INCOME MANAGER ANALYSIS
Country 12/03 12/02 12/01 12/00 12/99
North America United States Canada
Europe Austria Belgium Denmark Finland France Germany Ireland Italy Netherlands Norway Spain Sweden Switzerland United Kingdom Other
Pacific Basin Australia New Zealand Hong Kong Japan Other
Cash and Equivalents
ccc_travers_ch07_133-154.qxd 6/2/04 4:09 PM Page 142
14. Provide the following sector allocation data for the portfolio in percentage of total assets (please use the sector descriptions provided in the table):
15. Provide industry allocation data for the portfolio in percentage of total assets for the top 20 industries:
Information Gathering 143
Sector 12/03 12/02 12/01 12/00 12/99
Basic Materials Commercial Services Consumer Cyclicals Consumer Noncyclicals Consumer Services Energy
Financial Services Health Care Industrials Technology Telecommunications Transportation Utilities
12/03 12/02 12/01
# Industry Weight # Industry Weight # Industry Weight
1 1 1
2 2 2
3 3 3
4 4 4
5 5 5
6 6 6
7 7 7
(Continued) ccc_travers_ch07_133-154.qxd 6/2/04 4:09 PM Page 143
16. Provide the following summary data for the portfolio in percentage of total assets:
144 EQUITY AND FIXED INCOME MANAGER ANALYSIS
12/03 12/02 12/01
# Industry Weight # Industry Weight # Industry Weight
8 8 8
9 9 9
10 10 10
11 11 11
12 12 12
13 13 13
14 14 14
15 15 15
16 16 16
17 17 17
18 18 18
19 19 19
20 20 20
12/03 12/02 12/01 12/00 12/99
Fundamental Characteristics P/E (historical—last 12 months) P/E (forward 12 months) Earnings growth (1 year) Earnings growth (3 years) ROE
Dividend yield Portfolio turnover
ccc_travers_ch07_133-154.qxd 6/2/04 4:09 PM Page 144
Dedicated Product Investment Professionals
17. Include the names of all investment professionals (portfolio managers, ana- lysts, traders, etc.) who work directly on the product under review.
Information Gathering 145
12/03 12/02 12/01 12/00 12/99
Market Capitalization Weighted market cap Average market cap
% market cap < $100M
% market cap from $100M to $500M
% market cap from $500M to $1B
% market cap from $1B to $2B
% market cap from $2B to $3B
% market cap from $3B to $5B
% market cap from $5B to $10B
% market cap > $10B
Years Other Years Working Products
Product Working on Individual Other
Name Responsibility at Firm Product Works On Responsibilities ccc_travers_ch07_133-154.qxd 6/2/04 4:09 PM Page 145
18. Provide the names of all investment professionals who have worked on the product and have resigned, been terminated, or transferred/rotated to an- other department within the past five years. Provide a brief explanation for each departure. List any replacements for these vacancies.
19. Describe the structure of the investment management team. Include the fol- lowing information:
a. Name(s) of key decision maker(s). Be specific—identify the individual(s) who actually make(s) buy and sell decisions.
b. Lead portfolio manager.
c. Portfolio manager’s backup.
Investment Philosophy and Process 20. Define your investment philosophy.
21. Define your investment style.
22. Describe in detail the investment process employed by the investment team in the management of the product. Include a description of how individual research and ideas make it (or don’t make it) into the portfolio.
23. Buy/sell discipline:
a. Market-cap restrictions.
b. Geographical restrictions.
c. Percent ownership of underlying companies.
d. Fundamental characteristics.
e. Liquidity constraints.
24. Do you have stop-loss procedures in place? If yes, describe the details. If no, explain your methodology regarding stocks that drop significantly in price. Please list the three largest percentage losers currently in the portfolio and explain the investment thesis for each.
146 EQUITY AND FIXED INCOME MANAGER ANALYSIS
Resignation/
Termination/
Employee Name/Title Rotation Reason(s) Name of Replacement ccc_travers_ch07_133-154.qxd 6/2/04 4:09 PM Page 146
25. Do you set price targets for all purchases? If yes, do you ever hold a security beyond the initial price target? Explain.
26. Describe your portfolio construction procedures. Include detail on each of the following:
a. What types of securities are considered for purchase?
b. What is the universe of possible investments?
c. Do you have a minimum number of holdings?
d. What were the fewest and most holdings ever held in the portfolio? Indi- cate the appropriate dates.
e. How are individual position weights determined?
f. What is the maximum position size at cost and at market value for any in- dividual position? Have you ever violated this constraint?
g. List any portfolio constraints regarding geography, sector, industry, mar- ket cap, and liquidity.
27. What is your investment edge? What differentiates you from your competi- tion? Include a list of the firms/products that you consider to be your biggest competitors.
28. Is there a sector or industry in which you believe your firm has a particular edge? If yes, please elaborate.
Risk Controls
29. Describe your firm’s risk management controls and procedures.
30. Who is responsible for the product’s risk management?
31. With what frequency are risk management reports created and evaluated by the appropriate personnel?
32. What (if any) systems do you have in place to help manage risk?
33. Do you employ any third parties to conduct regular or periodic risk analysis or generate risk reports? If yes, please provide a list of the firms’ names and their specific functions.
34. What is the 1-day, 10-day, and 30-day VaR for the current portfolio?
35. Do you perform scenario analysis or stress testing of the portfolio? If yes, provide the most recent results. If no, please explain why not.
Fees/Minimum
36. What is the product’s fee schedule?
37. Do you currently offer the same product to any entity based on a reduced fee scale? If yes, explain.
38. Has the fee schedule changed in the past three years?
39. What is the product’s minimum account size?
Information Gathering 147
ccc_travers_ch07_133-154.qxd 6/2/04 4:09 PM Page 147
FORM ADV
This form is a requirement for any investment adviser that registers with the SEC and/or the individual states. It contains a great deal of data and must be periodically updated by the underlying investment manage- ment firms.
The ADV filing consists of three main sections:
1. Part IA: This part of the ADV provides a wealth of information re- garding the underlying investment firm, the people who own and con- trol the firm, and the people or entities that work for or are affiliated with the firm. Part IA also has additional “Schedules” that supplement the data in the main body of text.
2. Part IB: This part of the ADV asks questions that are required by state securities authorities.
3. Part II: This is basically the underlying investment firm’s brochure.
This section must be continuously amended and offered to all of the firm’s current clients annually.
The filings require the investment management firm to complete a set of fixed questions under the following headings:
Item 1: Identifying Information Item 2: SEC Registration Item 3: Form of Organization Item 4: Successions
Item 5: Information about the Advisory Business Item 6: Other Business Activities
Item 7: Financial Industry Affiliations
Item 8: Participation or Interest in Client Transactions Item 9: Custody
Item 10: Control Persons
Item 11: Disciplinary Information Item 12: Small Business Determination Schedule A: Owners and Officers
Schedule B: Indirect Owners
Schedule D: Detailed explanation of answers to questions asked in Part IA
You can request a copy of the Form ADV from the investment man- agement company that you are analyzing or you can simply log on to the SEC’s web site and download the information yourself. These forms have been available via the SEC’s web site (for no charge) since 2001.
148 EQUITY AND FIXED INCOME MANAGER ANALYSIS
ccc_travers_ch07_133-154.qxd 6/2/04 4:09 PM Page 148
According to the SEC’s web site, there are currently (December 2003) more than 7,500 investment management firms that have registered their ADVs electronically, and thus these ADVs are available via the SEC’s web site (www.sec.gov).
As you can see from the screenshot in Exhibit 7.1, the SEC has made it very easy to find an investment management firm. You can search for the investment firm even if you do not know its full name simply by selecting that search option and typing in part of the firm’s name.