Example Investment Results

This section displays graphs and charts that represent a few of those created for Asset Allocation Audit reports. The fictitious XYZ Corporation is the retirement fund sponsor. ABC Advisors is a fictitious portfolio manager.

Total Fund | Portfolios

Total Fund

The first two charts in this section provide the context in which this analysis can best be interpreted. The Investment Environment chart presents wealth indices for each asset class included in the XYZ Retirement Fund's policy allocation.

The similar Fund Policy and Performance chart plots two related indices. The hybrid Policy Index represents the performance of the Fund's policy mix of asset classes. The Performance Index presents the Fund's actual performance, treating it as one aggregate portfolio. Its persistent shortfall from the policy index reflects negative influences from policy implementation and portfolio management.

Total Fund Value Added Summary

This chart summarizes the value added or diminished by each of the primary groups of investment decisions described in the report. It illustrates the relative significance of these influences over the nine years included in this analysis and provides a visual measure of the effectiveness of the investment management process.

Levels 3-6, combined, account for the gap between policy and performance in the graph above. Although the rate of return shortfall averaged less than 1% per year, the value impact was $42 million.

Level 1 - Risk Free Return

The entire XYZ Retirement Fund theoretically could have been invested only in U.S. Treasury bills for the entire period. Assets would have increased by $102 million, risk free, if such a policy had been applied.

Level 2 - Primary Policy

If these same available assets had been invested in the primary policy mix of benchmark funds for the entire nine years, this basic policy would have returned $148 million in addition to its risk free component.

Level 3 - Tactical Policy

XYZ's directors authorized management and staff to temporarily weight the policy mix differently to address changing market conditions. They also allowed staff to divide the primary policy into sub-classes and emphasize certain investment management styles to take advantage of particular securities markets segments. These choices reduced the fund's potential value by $12 million during this nine-year period.

Level 4 - Implemented Policy

This level of the Audit examines departures of the actual mix of asset sub-classes from the tactical policy mix evaluated previously. Asset values from the previous level serve as the basis for measuring the effect of these departures. In this example, the effect was positive by $3 million.

Level 5 - Selection of Managers

For this time period, the team of managers selected to add value to the XYZ Retirement Fund was not able to do so. The shortfall resulting from their involvement was $38 million.

Level 6 - Allocation among Managers

Potential value is lost when under-weighted managers produce above-average returns and when over-weighted managers fall short. The allocation among the XYZ Retirement Fund portfolios was beneficial during this period. The affect was a net value gain of over $5 million.

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Portfolios

The values presented at Levels 5 and 6 in the Total Fund Value Added Summary account for the aggregate results from all portfolio managers' efforts to exceed their respective benchmark returns. Each manager's portion of the total impact is presented in a similar summary. An example, ABC Advisors, follows.

Portfolio Value Added Summary

This Value Added Summary chart separates the values added or diminished by the four major determinants of the ABC portfolio return. It first isolates the value attributable to the sponsor's policy, then presents the incremental values added or lost by the manager in its effort to outperform the policy benchmark.

Sponsor's Benchmark

The benchmark against which this example ABC portfolio is measured is the S&P 500 Index. It's impact is separated because it represents the value a benchmark portfolio would have added without the manager's involvement. During this nine-year period, the benchmark contributed $36 million of XYZ's policy return.

Manager's Market Timing

ABC's timely changes in cash reserves added $3 million to the portfolio's value over the 9-year period.

Manager's Security Selection

The selection and weighting of a narrower group of securities than are included in the benchmark index caused the portfolio to loose
$7 million of potential value.

Management Fees

Fees paid to ABC Advisors further reduced the portfolio's value by
$2 million.

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