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Constructing a Diverse Portfolio Tuesday, April 25, 2006

Constructing a Diverse Portfolio Tuesday, April 25, 2006. Clayton C. Jue, CFA President & Chief Investment Officer LEADING EDGE INVESTMENT ADVISORS, LLC. Table of Contents. Defining the Program Mandate & Objectives Understanding the Benchmark Measuring the Investment Opportunity Set

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Constructing a Diverse Portfolio Tuesday, April 25, 2006

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  1. Constructing a Diverse Portfolio Tuesday, April 25, 2006 Clayton C. Jue, CFA President & Chief Investment Officer LEADING EDGE INVESTMENT ADVISORS, LLC

  2. Table of Contents • Defining the Program Mandate & Objectives • Understanding the Benchmark • Measuring the Investment Opportunity Set • Crafting an Optimal Solution • Evaluating the Results

  3. Defining Program Mandate/ Portfolio Objectives/ Guidelines • Asset allocation targets • Cash flows and liquidity • Performance (excess return) target • Risk tolerance (tracking error) • Other (local, geographic representation, length of track record, minimum AUM)

  4. Understanding the Benchmark Russell 2000 Value Index Russell Top 200 Value Index Russell Top 200 Growth Index Russell 2000 Growth Index

  5. Understanding the Benchmark (U.S. Equity) Benchmark Decomposition (% wt. in the Russell 3000 Index)

  6. Measuring the Opportunity Set (Manager Universe) Total Universe: 2007 Firms • Minority/Women-owned Firms 1 12% • Minority/Women-owned Firms (240 Firms) • 88% < $2 Billion in AUM • 88% > 5 Years in Business • 76%  4 Investment Professionals • Large Firms >$2B AUM* 31% 57% 57% • Emerging Firms <$2B AUM* Note: * Non-minority and non-women-owned firms. 19% of the total database consists of <50% minority/women-owned firms.

  7. Understanding the Manager Universe Minority / Women-owned Firms Only

  8. Specialty Specialty Quantitative Quantitative Large Equity Large Equity Small Equity Small Equity Global / Int.l Global / Int.l Fixed Income Fixed Income Mid Equity Mid Equity Understanding the Manager Universe Risk and Performance Contribution (Tracking vs. Alpha)

  9. Constructing a Portfolio Combining Capabilities - Dynamic Customized Optimization Process (“DCOP”) Individual Manager Portfolios Aggregate Fund Guidelines and Constraints Portfolio Monitoring Performance Attribution Quality / Risk Control Optimized Fund

  10. Constructing a Portfolio Multi-Manager Portfolio Benchmark Target

  11. Optimal Result 1 Account with longest performance history in product to 5/05. 2 Largest minority/women-owned account for structure: Composite performance record (through 6/04).

  12. Portfolio Diversity 1 Account with longest performance history in product to 5/05. 2 Largest minority/women-owned account for structure: Composite performance record (through 6/04). *Women-owned firms that are also minority-owned are included under minority classification.

  13. Evaluating the Results • Allocation targets met • Performance targets met • Managers becoming eligible for graduation • Established open channel for new managers and new investment approach • Enhanced information flow and enhanced relationships

  14. Leading Edge Announces 2005 Updated Results of its Emerging Managers Performance Study • Emerging managers continue to demonstrate a performance advantage over larger firms • Amount of risk taken by emerging managers is comparable to larger firms • Emerging managers outperformed in both up and down markets “Performance Characteristics of Emerging Managers” reviews the recent period performance and risk characteristics of smaller versus larger firms. Firms are compared based on assets under management (AUM), product market cap, and investment style. In addition, we also examined product focus (number of products), employee ownership, portfolio size and portfolio team size as possible influencing factors.

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