Mutual Fund Due Diligence Presented to FIRMA By R.

Transcript:Mutual Fund Due Diligence Presented to FIRMA By R.:
Mutual Fund Due Diligence Presented to FIRMA By R. James Hrabak, CFA March 28, 2012 About the Presenter R. James “Jim” Hrabak is Chief Investment Officer for MB Financial Bank’s Asset Management & Trust Group, where he is responsible for over $3 billion in assets under administration and nearly $1.8 billion in assets under management. His team of three Portfolio Managers and five Securities Analysts specialize in asset allocation, portfolio construction, and security selection for individual and institutional clients. Jim received a BBA., double majoring in Finance and Economics, from New Mexico State University, an MBA with a concentration in Financial Management from the University of New Mexico, and is also a Chartered Financial Analyst. Jim is a member of the CFA Institute as well as the CFA Society of Chicago. 2 General Items to Consider (Before Designing a Due Diligence Program) What is Our Investment Philosophy? In-House Management vs. Outside Expertise Active vs. Passive Management Mutual Funds vs. ETFs How Much Style Drift is Tolerable? Special Note: All of the above should be greatly influenced by your firm’s investment management resources. 3 The Importance of an Investment Philosophy Is your philosophy a known commodity? Why is philosophy important? Due Diligence Program (and all investment functions) should reflect your firm’s investment philosophy Don’t have a clearly articulated philosophy? The items to consider on the previous slide can serve as a guide for creating one. 4 In-House Management vs. Outside Expertise The 1992 restatement of the Prudent Investor Act: Allows delegation of investment management States that investments should be viewed in the context of the total portfolio Risk/return tradeoff is the central consideration Firms are essentially required to seek out expertise in investment areas that improve the risk/return tradeoff in their client’s portfolios Firms should carefully evaluate what they can do “in-house” versus what they should hire outside expertise to perform Investing in a mutual fund (or an ETF ) is a form of hiring outside expertise Firms should balance what they can competently and effectively perform in-house with using outside managers to complete a diversified portfolio 5 Active vs. Passive Management The decision between active and passive is not a zero-sum game. A combination of the two may be optimal. “Barbell” risk in lower-alpha categories such as LC Equity Using index funds for high-volatility asset classes such as commodities 6 Selecting Types of Management Vehicles Much like the active versus