With our expertise in quantitative stock analysis and portfolio profiling, ProThinker is able to complement your manager search process. While we do not replace conventional manager search consultants, we provide the following differentiated services.
Analysis of part performance vs. prediction of future performance
Conventional manager search consultants study the performance of asset managers to see if the Manager has done well in the past. Although this is a necessary process, good performance in the past may not equate to good future performance due to change in portfolio managers or market conditions. Sometimes, “chance” events resulted in good past performance that are not repeatable.
Our value-add comes from being able to study the characteristics of a Manager’s sample portfolio and gauge whether the portfolio is likely to do well in the future. For this purpose, the Manager would be asked to submit a 10-stock sample portfolio of its highest conviction picks for your investment mandate. An analysis similar to the one below would be applied to this 10-stock sample portfolio.
Below is an example of analysis done on the top 24 holdings of a Value Fund to determine the portfolio’s characteristics and its likelihood of appreciating in value. There are only two ways that a portfolio can appreciate in value – either its valuation increases (PE, Price to Sales, Price to Book, etc.) or its fundamentals improve (Earnings, Sales, Book Value, etc.). A portfolio profile similar to the one below helps us to see if the portfolio is likely to appreciate in value from either earnings growth or improvement in PE.
For portfolios that are managed in relation to a benchmark, our analysis compares the portfolio’s profile vs. the benchmark’s profile to determine if the portfolio is likely to outperform the benchmark.
What managers say they do vs. what they actually do
The Manager’s stated investment style may sometimes differ from its actual style. For example, a value Manager may end up picking stocks that are not significantly cheaper than the market or he may pick stocks that are cheap but with poor fundamentals. An analysis of an actual Value Fund (see Chart 1) shows that the portfolio’s valuation is actually on par with the market. Alternative, a value fund may have valuation that are lower than the market but with a flat or declining earnings line (the red line). Therefore, this type of portfolio may also not do well in the future.
Qualification of the portfolio manager vs. how good he actually is
In order to gauge how good the Manager is, it is important to go beyond the Manager’s credentials, his qualifications and his years of experience. There is no substitute for gauging how well the Manager knows his 10 high-conviction stock picks. While it is important to hear the Manager’s qualitative views on the stocks, our Quantitative Stock Reports provide a good basis to test the Manager’s intricate knowledge of the stocks – its valuation history, earnings history, financial condition, quality of earnings, etc.
Please see the sample reports for Apple Inc.