Fund Evaluation Group, LLC (“FEG”) presentation to: State ... · PDF...

November30,2016

Fund Evaluation Group, LLC (“FEG”) presentation to:State of Utah, School and Institutional Trust Funds Office (“SITFO”)

Confidential– NotforRedistribution1©2016FundEvaluationGroup,LLC

RELATIONSHIPSUPPORTSTRUCTURE

InvestmentPolicyStatementRefinement

GovernanceSupport

PortfolioModeling

PortfolioConstruction

OngoingAnalysis

KnowledgeSharing

CONSULTINGTEAMDavidCenter&RebeccaWood

ManagerResearch

ManagerVetting

AlternativesExpertise

OngoingDueDiligence

CapitalMarketResearch

RESEARCHTEAM&INVESTMENTPOLICYCOMMITTEE

GregoryDowling

TransitionManagement

PerformanceReporting

AnalyticalSupport

RegionalSupport&Education

BackOfficeSupport*

CLIENTSERVICE&ADMINISTRATIONTEAM

KevinKersting

* Available to SITFO through FEG’s Consulting Implementation Services solution.

FEG serves as a full-service consultant and expert research provider. The diagram below illustrates how FEG supports SITFO

OLEMISS’PARTNERSHIPWITHFEGWHYOUTSOURCE?UNDERSTANDINGOURFIDUCIARYDUTIESFEGFUNCTIONSASASINGLECONSULTANTSOLUTION

State of Utah, School and Institutional Trust Funds Office

SITFO’SLEADCONSULTANTDavidD.Center,CFA


FEGINVESTMENTPROCESS

1

4

3

2

Step1:

OBJECTIVES

Step2:

STRATEGY

Step3:

IMPLEMENTATION

Step4:

ONGOINGMANAGEMENT

FEGwillinitiatetherelationshipwithadeepdiveintoyourorganization’suniquemission,governance,needs,

goalsandobjectives

Oncegoalsaresolidified,wewillleverageourexpertiseinstrategicassetallocationtodefineacustomstrategyandcreateanInvestment

PolicyStatement(IPS)

FEGwillworkwithyoutodelivertheinvestmentstrategy,including

positioningportfoliostomeetgoalsandconstraints,andprovidethe

rightlevelofservice

Asmarketschangeovertime,FEGwillcontinuallymonitoryourportfoliotoensureitremains

withinpolicyranges


DIVERSIFICATIONBYGLOBALRISKFACTORSFEG’sindustry-leadingresearchoncapitalmarketsandassetallocationstrivestoprovideportfoliodiversificationwithoutsacrificingperformance.Webelieveportfoliosshouldbeconstructedtoachievediversificationbyglobalriskfactors.Todo so werecommenddiversificationbytheassetcategorieslistedbelow,aswellaswithineachcategory.

ASSETCATEGORIES ROLE RISK

GLOBALEQUITYStocks,PrivateEquity,Long/ShortHedgeFunds TotalReturn StockMarketDeclines

GLOBALFIXEDINCOMEANDCREDITBonds,BankLoans,CreditHedgeFunds

EquityRiskMitigationandTotalReturn

Rising Ratesand/orCreditDowngrades

REALASSETSRealEstate,NaturalResources,Infrastructure

InflationProtectionandTotalReturn Deflation

DIVERSIFYING STRATEGIESEventDriven,RelativeValue,Macro

Diversification andTotalReturn ActiveManagement

“Alternative” investments can span every asset class and should be categorized by underlying risk factors, rather than by legal structure.


RESEARCHTEAM

Gregory M. Dowling, CFA, CAIA / Managing Principal / CIO & Head of ResearchMichael J. Oyster, CFA / Managing Principal / Chief Investment Strategist

Nolan M. Bean, CFA, CAIA / Managing Principal / Head of Institutional Investments

INVESTMENTPOLICYCOMMITTEE(IPC)Avg.IndustryExperience:17years

Gregory D. Houser, CFA, CAIA / Senior Vice PresidentMark A. Koenig, CFA / Director of Quantitative Analysis

As of September 27, 2016 there are 22 members on our Research Team. Members include all individual names listed above, exempting the consulting liaisons,as well as two addition team members dedicated to Research Services. See Appendix for CFA and CAIA definitions.

CIO,HEADOFRESEARCHGregoryM.Dowling,CFA,CAIA

GlobalEquity– PublicAvg. IndustryExperience:8years

GlobalEquity – PrivateAvg. IndustryExperience:15years

GlobalFixedIncome&CreditAvg. IndustryExperience:13years

RealAssetsAvg. IndustryExperience:8years

DiversifyingStrategiesAvg. IndustryExperience:10years

BrianA.Hooper/VicePresidentCherylA.Barker /SeniorResearchAnalystStevenG.Thieme,CFA /SeniorResearchAnalystSamuelA.Ragan/ResearchAnalyst

NathanC.Werner,CFA,CAIA/SeniorVicePresident/DirectorofPrivateEquityG.ScottTabor,CAIA /VicePresidentSkyeBarry/ ResearchAnalyst

KeithM.Berlin/SeniorVicePresident/DirectorofGlobalFixedIncomeandCreditJeremyM.Albers,CFA,CAIA/ResearchAnalystKevinC. Dee /ResearchAnalyst

ChristianS.Busken/SeniorVicePresident /DirectorofRealAssetsJay R.Johnston /SeniorResearchAnalyst

KevinJ.Conroy, CFA,CAIA /VicePresidentSeanP.McChesney /VicePresidentMichaelB.Franke,CFA /ResearchAnalyst

StephenM.Hodson,CFA,CAIA/SeniorVicePresident

MatthewR.Veith/SeniorVicePresident

DouglasW.Walouke,CFA/VicePresident

BruceA.Benjamin,CFA/ManagingPrincipal

DavidD.Center,CFA/SeniorVicePresident

Research Team

Consultant Liaisons

ENTERPRISERISKCOMMITTEE

Supporting Committees

CAPITALMARKETS&RISK

ASSET&RISKALLOCATIONTEAM


MANAGERSELECTION

FEGseekstoidentifymanagerswith:• Experiencedpersonnel• Soundinvestmentphilosophy• Demonstratedabilitytooutperform

Six-TenetManagerReviewProcess

CONVICTION strongbeliefintheinvestmentphilosophy;willingtoputinvestmentdecisionsaheadofbusinessdecisions; investsalongsideofclients,aligninginterests

CONSISTENCY stabilityoforganizationalstructure,compositionoftheinvestmentprofessionals,andtheinvestmentphilosophyandprocess

PRAGMATISM understandcore strengthsandhavetheabilitytocapitalizeandsustaintheircompetitive edge

INVESTMENTCULTURE

strong ethicalfoundation,passionateaboutinvesting;properorganizationalandcompensationstructure;culturepervadesacross organization

RISKCONTROL notblindrisktakers,butriskconscious; acknowledgemistakes;robustandeffectiveriskmitigation

ACTIVERETURN abilitytoidentifyandprofitfrominvestmentopportunities;successfultrackrecord

1432

Confidential – Not for Redistribution6©2016 Fund Evaluation Group, LLC

Source1 Fund/StrategyCombinationsDow Jones Private Equity Analyst 300+eVestment Alliance 17,300+HedgeFund.Net 7,100+Lipper, Inc. 23,500+Morningstar DirectSM 350,000+Morningstar® Principia® 27,600+PerTrac Analytics 30,400+Preqin Real Estate Online 3,700+Preqin Private Equity 17,000+Thomson Reuters 5,800+

In addition to identifying managers through industry relationships, FEG tracks a universe of hundreds of thousands of investment managers and strategies through several external databases.

The table to the right details the number of funds/strategies within each external database.

FEG’S PROPRIETARY DATABASEThrough a combination of quantitative and qualitative review factors, FEG narrows the universe down to a list of 5,000+ strategies to add to our proprietary, internal database.

These 5,000 strategies are further refined to a list of 500+ that adhere to FEG’s strict criteria for approval to be included into FEG’s clients’ portfolios.

1 As FEG subscribes to various data sources, the fund / strategy combinations listed above potentially include strategies that could be found in more than one data source.

MANAGERSOURCING 14

3


0.8 0.9 0.9 1.2 1.5 1.9 2.03.8

5.2

12.4

15.0

17.3

02468101214161820

Percen

tagePoints

CoreFixedIncome

HighYield

U.S.LargeCap

U.S.SmallCap

EmergingMarketsGlobal

DiversifyingStrategies

Int’lDeveloped

BuyoutAll

PrivateEquity

VentureCapital

U.S.MicroCap

• Indexinefficientassetclasses,whetherbymarketcapitalization-weightedindexingorfundamentalindexing

• Focusactivemanagereffortsinlessefficientassetclasses• Managerselectionisimportantduetothewidevarianceofreturnsbetweentopandbottomquartile

performance

ACTIVEIMPLEMENTATION

Data Sources: Lipper, HFRI, Preqin, PerTrac. Private Equity Data for vintage years 2002 through 2011, performance available through June 30, 2015. WhatInvestors Can Learn From Successful Endowment Strategies, 2008 Annual CFA Conference, Bob Boldt. Returns are in U.S. dollars net of fees.

PERFORMANCEDIFFERENCEBETWEENTOPANDBOTTOMQUARTILE10YearsEndingDecember31,2015

432


Inadditiontoportfolio-levelreporting,detailedinformationonmanagersisproactivelymadeavailabletoclients,including:• QuarterlyDueDiligence• RiskExposureSummary• ComprehensiveResearchReports

MANAGERMONITORING

QUARTERLY DUE DILIGENCE RESEARCH REPORT


RISKMODELUPDATERESPONSIBILITIESWHYOUTSOURCE?UNDERSTANDINGOURFIDUCIARYDUTIESPORTFOLIOPERFORMANCE&RISKMONITORING

• FEG’s proprietary portfolio management tools are customizable and afford deeper understanding and interactive views into portfolio risk and return across the total portfolio

• VIGILANCESM, FEG’s risk management tool, evaluates risk across all asset classes and risk factors, unlike many off-the-shelf solutions

• TRIBUTESM, FEG’s performance attribution tool, uncovers the impact of asset allocation decisions and manager selection

SampleVIGILANCESM Report SampleTRIBUTESM Report

MarketUpdate:Consequencesof“ZIRP”

11©2016FundEvaluationGroup,LLC Confidential– NotforRedistribution

ECONOMIC&POLICYCONSEQUENCES

• Asyieldsarepushedintonegativeterritory,holdingbondstomaturityrepresentsalossofpurchasingpower;someinvestorsmaytakemorerisktocompensate

• Conversely,negativeandlowrateshurtsavers,who,whenfacedwithlowrate,maybeforcedtoincreasesavings,furtherconstraininggrowth

0%

5%

10%

15%

20%

0

500

1000

1500

2000

2500

1979 1983 1987 1991 1995 1999 2003 2007 2011 2015

RisingStocksandFallingYields

S&P500Index(LHS) 10-YearTreasuryYield(RHS)

Datasources:Standard&Poor'sandBloombergLP


-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

6 9 9 10 11 11 12 12 13 14 15 16 17 18 18 19 20 21 22 23 24 26 29 41

3-yearSu

bseq

uentReturn

Price/Earnings(Real10-YearNormalized)Data source: Robert Shiller and Standard & Poor’s

HISTORICALVALUATIONS:U.S.PRICE/10-YEARNORMALIZEDEARNINGSS&P500,1926- Present

ExpensiveCheap

CurrentMeasure:26.5x

Rank:90%

ALLOCATIONIMPLICATIONS

U.S. equities are priced for lower returns, although some periods (thetechnology bubble) provided strong 3-year returns following prices at theselevels, the market also has a history price corrections from these levels

Strong Market Momentum (Tech & Housing Bubbles)Muddle Along

Price Correction


0

5

10

15

20

25

1994 1998 2002 2006 2011 2015

HighDividendStockValuations

MSCIHighDividendYieldIndexP/E Average

Datasource:MSCI


Investors pursuit of yield has led to strongperformance and high valuations amongthe highest dividend paying stocks

High dividend stocks areas expensive as they haveever been, equaled onlyduring the 1990s bubble


ALLOCATIONIMPLICATIONS

• Investorscannolongerrelyonfixedincomeallocationstoprovidemuchbeyondnominalpreservationofcapitalandastoreofvalue



Investors globally have pursued yield to achieve return goals against low andnegative rates

Foreign Demand for U.S. Treasuries(Indirect Bidding for 10-year Treasury Note)

Foreign demand for U.S. Treasuries, which have a higher yield than that of many other nations, is increasing amid NIRP

AllocationImplications



Lower rates, which result in lower investor discount rates (the rate at whichinvestors discount expected future cash flows), have led to strong recentperformance in bonds, real estate, and stocks, but have dampened expectedreturns

2.0%

5.0%

0%

2%

4%

6%

8%

10%

12%

14%

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

ExpectedRealReturnofaHypotheticalU.S.60/40Stock/BondPortfolio

ExpectedRealReturn Long-termAverage

Datasource:RobertShillerandStandard& Poor's,adaptedfromAQR.U.S.stocksexpectedrealreturncalculatedfrom50%oftheearningsyield*1.0107plus50%dividendyield+1.5%toaccountforrealearningsgrowth.U.S.bondyieldisthegovernmentrate- FEG's10-yearinflationforecast.Pleaseseeappendixforfulldisclosure.


POTENTIALACTIONS

• Despitesomeassetclassespresentinghistoricallylowexpectedreturns,therearesomeopportunitiestoearnincrementalreturn,andnotallrequireafullshifttohigherrisk

U.S.Equity

EmergingMarkets

PrivateEquity

Core(InvestmentGrade)

MLPs

DiversifyingStrategies

0%

2%

4%

6%

8%

10%

12%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Expe

cted

Return

ExpectedStandardDeviation

FEG10-yearCapitalMarketAssumptions

Source:FundEvaluationGroup,LLC


Some solutions to NIRP are untenable, such as taking more risk or broadly applyingleverage to traditional asset classes. Investors should, however, understand the roleof each allocation in the portfolio and ensure alignment with near-term risks andlong-term return potential.

Viable Options:• Provide Liquidity- Invest where compensated by expected return that is commensurate with the risk- Courage is required to invest in areas of market stress instead of the recent hot areas

• Find Unique Opportunities- Pursue alpha by finding opportunities in MLPs, emerging markets, metals & mining, direct lending,

macro strategies, and other private capital strategies

Poor Options:• Broad Use of Leverage- Not a recommended course of action, often a poorly managed means of increasing risk without

understanding the degree of risk taken; targeted leverage in specific strategies can be a viable option

• Blanket Increase to Risk Profile- Difficult to do when primary investment assets are expensive

POTENTIALACTIONS

Appendix:TheImportanceofDueDiligence


KEYRISKFACTORS

KEYRISKFACTORSTOBEAWAREOFWHENINVESTING:• Leverage• Operational

• Fraud• Liquidity

Amaranthgiftfrom2006


IMPORTANCEOFMANAGERMONITORING

THREEYEAREXCESSRETURNBeforeandAfterManagerTerminationandHiring

Data Sources: Goyal, Amit and Wahal, Sunil, The Selection and Termination of Investment Managers By Plan Sponsors. Journal of Finance, August2008 & Heisler, Knittel, Neumann, Stewart,Why Do Institutional Plan Sponsors Fire Their Investment Managers?, 2004.

16

12

8

4

0

-4

-6

Percen

tagePoints

PRE-FIRING

PRE-HIRING

POST-HIRING

POST-FIRING

QualitativeEvaluation


MANAGERSELECTION

FEGSEEKSTOIDENTIFYMANAGERSWITH:• Experiencedpersonnel

• Soundinvestmentphilosophy

• Demonstratedabilitytooutperform


SIXTENETS:CONVICTION

TRAITSWELOOKFOR:• Strongbeliefintheinvestmentphilosophy

• Willingtoputinvestmentdecisionsaheadofbusinessdecisions

• Investsalongsideofclients

• Aligninginterests

Strongconvictionishelpfultoavoidthosethatsayonethingbutdoanother.


SIXTENETS:CONSISTENCY

INVESTMENTPERSONNELCHANGES(ANALYSTORHIGHER)

2013 2012 2011 2010 2009 2008

+ - + - + - + - + - + -

ManagerA 3 1 4 3

ManagerB 0 0 2 1

ManagerC 3 0 4 0 4 2 14 13 10 17 16 23

ManagerD 0 0 1 3 0 0 1 3 1 9 14 7

ManagerE 0 0 6 1 0 2 1 8 3 2 0 7

ManagerF 4 4 6 1 0 1 0 1 1 5 3 5

ManagerG 0 1 3 4

ManagerH 3 1 6 2 3-6 3-6 3-6 3-6 3-6 3-6 3-6 3-6

Source:FundEvaluationGroup.ForIllustrativePurposesOnly.

TRAITSWELOOKFOR:• Stabilityoforganizationalstructure

• Compositionoftheinvestmentprofessionals

• Theinvestmentphilosophyandprocess


SIXTENETS:PRAGMATISM

TRAITSWELOOKFOR:• Understandcorestrengths

• Havetheabilitytocapitalizeandsustaintheircompetitiveedge

FEGlooksformanagersthatcanclearlyarticulatetheirstrengthsandstayfocusedontheirstrengths.


SIXTENETS:INVESTMENTCULTURE

TRAITSWELOOKFOR:• Strongethicalfoundation

• Passionateaboutinvesting

• Properorganizationalandcompensationstructure

• Culturepervadesacrossorganization


SIXTENETS:RISKCONTROL


TRAITSWELOOKFOR:• Notblindrisktakers,butriskconscious

• Acknowledgemistakes

• Robustandeffectiveriskmitigation

• Propercounterpartymanagement

FEGDIVERSIFYINGSTRATEGIESCOUNTERPARTYEXPOSUREManager Auditor Administrator Legal PrimeBroker

Manager1 PricewaterhouseCoopers InternationalFundServices Ropes&GrayLLP GoldmanSachsandCreditSuisse

Manager2 PricewaterhouseCoopers SEIInvestments Akin,Gump,Strauss,Hauer&Feld,LLP JPM,DB,BNP,CreditSuisse

Manager3 PricewaterhouseCoopers InternationalFundServices(AStateStreetCompany)

U.S.:Seward&KisselLLP(onshore)/Ogier(offshore) GS,MS,DB,JPM,Citigroup,Pershing,RBS

Manager4 Deloitte&Touche,LLP InternationalFundServices SidleyAustin,LLP CreditSuisse,DeutscheBank,JPMorgan,BofAMerrillLynch,NorthernTrust

Manager5 KPMG Maples Onshore-Skadden,Arps/OffshoreMaples&Calder MorganStanley

Manager6 PricewaterhouseCoopers GlobeOpFinancialServices,LLC

Seward&Kissel,LLP(U.S.),Maples&Calder(Cayman)

GoldmanSachs&Co.,JPMorgan,BNPParibas,TotalReturnSwapCounterparty:BarclaysBank(retainedJanuary2007),JPMorgan(retainedJune2007)

Manager7 PricewaterhouseCoopers Onshore-SelfAdministers/Offshore-BNY SchulteRoth&Zabel MerrillLynch,MorganStanley,Citigroup,DeutscheBank,

UBS,Goldman,JPMorgan,RBC


SIXTENETS:ACTIVERETURN

TRAITSWELOOKFOR:• Abilitytoidentifyandprofitfrominvestmentopportunities

• Strongriskadjustedreturn

• Proofofstrategy

• Successfultrackrecord

Thechartisaprobabilityanalysistounderstandthefrequencyandmagnitudeofmanageralphas(excessreturn)versustheirbenchmarkoverthree,five,andtenyearsbasedonmanageralphaandtrackingerrorassumptions.

Thealphaineachcolumnisassumedtobewhatthemanagerswillrealizeoverthelong-term.

Source:FundEvaluationGroup.

TrackingError 6% 12% 6% 12% 6% 12% 6% 12%

Probabilityof3yearalpha<-2% 25% 39% 21% 36% 13% 31% 5% 21%Probabilityof3yearalpha>0% 54% 50% 60% 53% 71% 58% 87% 70%Probabilityof3yearalpha>2% 32% 39% 37% 42% 48% 47% 70% 59%



Alpha=0.5% Alpha=1.0% Alpha=2.0% Alpha=4.0%

62%

EVENTHEBESTMANAGERSUNDERPERFORM


QUALITATIVEEVALUATIONRATING

FEG’sSYSTEMATICRESEARCH(QER)• BasedonFEG’ssixattributesofsuccessful

managers1. Conviction2. Consistency3. Pragmatism4. InvestmentCulture5. Riskcontrol6. ActiveReturn

• Aonetofournumericalrankingisgiventomanagersforeachattributebasedonfindingsfromallaspectsoftheduediligenceprocess

• Multipleanalystsscoreeachmanager• Initialscoringperformed,thenupdatedannually• Allprospectivefundsareincluded

TheQualitativeEvaluationRating(QER)processprovidesasystematicframeworkforanotherwisesubjectiveandesotericaspectofmanageranalysis.


QERSCORECARD

FEGHEDGEFUNDREVIEWQualitativeQuestionnaire Date: Dec-14

Conviction Consistency Pragmatism InvestmentCulture RiskControl ActiveReturn Total15% 15% 15% 20% 15% 20% 100%

1 2 Avg 1 2 Avg 1 2 Avg 1 2 Avg 1 2 Avg 1 2 Avg 1 2 AvgManager A 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.5 3.3 3.5 3.5 3.5 3.0 3.0 3.0 3.5 3.0 3.3 3.2 3.2 3.2

Manager B 2.5 2.5 2.5 3.0 3.0 3.0 3.5 3.5 3.5 3.0 3.5 3.3 3.0 3.5 3.3 2.5 2.5 2.5 2.9 3.1 3.0

Manager C 3.0 3.5 3.3 3.0 3.0 3.0 3.5 3.0 3.3 3.5 3.5 3.5 3.5 3.5 3.5 3.0 3.0 3.0 3.3 3.3 3.3

Manager D 3.0 2.5 2.8 3.0 3.0 3.0 3.5 3.0 3.3 3.0 3.5 3.3 3.0 3.0 3.0 3.5 3.5 3.5 3.2 3.1 3.1

Manager E 2.5 2.5 2.5 2.0 2.5 2.3 3.0 3.0 3.0 2.5 2.0 2.3 2.5 3.0 2.8 4.0 4.0 4.0 2.8 2.8 2.8


0.00.51.01.52.02.53.03.54.0

ManagerA ManagerB ManagerC ManagerD ManagerE

Analyst1 Analyst2

2014QERAVERAGES 2013QERAVERAGEvs.2014QERAVERAGE

0.00.51.01.52.02.53.03.54.0

ManagerA ManagerB ManagerC ManagerD ManagerE

2013Average 2014Average

ManagerSelectionProcess


THEIMPORTANCEOFDUEDILIGENCE


Investment

SourceManagers

IntroductoryMeeting

ReviewDueDiligenceQuestionnaireandRequestedDocuments

PerformanceEvaluationandVerification

ReferenceChecks- KeyRelationships

On-siteDueDiligence

ResearchReportand(QER)

IPCReviewandApproval

Themanagerselectioncriteriaanddetailedprocessmayvarybetweenassetclasses,strategies,andaccessvehicles.ThefollowingoutlinesthetypicalduediligencestagesandprocessforamanagertoreachFEG’srecommendedcoveragestatus.

MANAGERSELECTIONPROCESS


SOURCEMANAGERSPrimarilythrough:• IndustryNetwork• Fund-of-fundManagers• SelectPlacementAgents• DirectSolicitations• Duetoourclientbase,FEGseekstogainaccessandcapacitywithsome

premierfundsthatmaybeclosedtootherinvestors

INTRODUCTORYMEETINGORCALL• ManageroverviewusedtoinitiallygaugethemanagersfitwithinFEG’s

sixtenetinvestmentphilosophy• Verifystrategicfitofstrategywithcurrentmacroanalysisandportfolio

needs

• OtherManagers• Clients• OtherLimitedPartners• Conferences RECOMMENDED

MANAGER

ReviewDocuments

SourceManagersIntroductoryMeeting

PerformanceEvaluationReferenceChecksDueDiligence

ReviewIPC



Emerging

Growth Maturity

0

20

40

60

80

100

120

140

IllustrativeHedgeFundLifeCycle

ExcessReturnPotential BusinessRisk

Revitalization

MANAGERLIFECYCLE

Long/ShortEquityFIRMSIZE INFRASTRUCTURE PROCESSAssetsUnderAdvisement NumberofFunds/Products NumberofKeyDecisionMakersTotalNumberofEmployees NumberofDistributionChannels NumberofDirectReportstoPMNumberofInvestmentProfessionals NumberofOffices CompensationStructureRateofGrowth OwnershipStructure ChangeinVolatilityProfileStrategyDriftAGE UNIQUENESS INVESTORBASEFundAge CorrelationScore InvestorBaseStabilityAgeofKeydecisionMakers HoldingsOverlap InternalCapitalAlignmentAspirations Concentration

Source:FundEvaluationGroup.Forillustrativepurposesonly.


REVIEWQUESTIONNAIREANDREQUESTEDDOCUMENTS• Comprehensiveduediligencequestionnairesspecializedforeachasset

strategy• Reviewkeydocuments:Offeringdocuments(notalegalreview),

auditedfinancials,ADV(ifapplicable),ComplianceManual

RECOMMENDEDMANAGER

SourceManagersIntroductoryMeetingReviewDocuments


ReviewIPC


COMPLIANCEQUESTIONNAIRE


RECOMMENDEDMANAGER



ReviewIPC


PERFORMANCEEVALUATIONANDVERIFICATION• Comprehensivestatisticalreview• Focusonperformanceversusobjectivesandmarketconditions• Comparisontorelevantpeergroup• Trackrecordverification

MULTI-FACTORREGRESSIONMODEL

STRATEGYEXPOSURESEventDriven Macro

RelativeValue

Manager A 67% 33% 0%ManagerB 33% 46% 21%ManagerC 17% 68% 15%Manager D 22% 35% 43%ManagerE 26% 36% 39%ManagerF 10% 1% 89%Manager G 12% 12% 76%ManagerH 99% 0% 0%Current 32% 28% 40%Proposed 20% 34% 46%



RECOMMENDEDMANAGER



ReviewIPC


REFERENCECHECKSANDVERIFICATIONOFKEYRELATIONSHIPS• Favorindustrynetworkratherthanmanagerprovidedreferences• Documentedconversationswithsignificantclients• Verificationoftenureandqualityofrelationshipswithadministrator,

auditor,accountant,legalcounsel


RECOMMENDEDMANAGER



ReviewIPC


DUEDILIGENCE– PORTFOLIOMANAGEMENT• Reviewofinvestmentphilosophyandprocesswithkeydecisionmakers• Observesystemsusedinportfolioconstructionandoverallmanagement• Discussionofinvestmentpolicieswithafocusonriskmanagement• Discusspersonnelinvolvedinthisprocessandspecificroles• Evaluateinvestmentculture

DUEDILIGENCE– BACKOFFICE• Discussvaluationandverificationtechniques• Reviewtreasurymanagementandwiringpolicies• Examinetechnologyrequirementsandcapacity• Detaildisasterrecoveryplansandback-upsystems


RESEARCHREPORT• Afterasatisfactoryoperationalreview,acomprehensiveresearchreport

ispreparedandsubmittedtotheInvestmentPolicyCommittee(IPC)

RECOMMENDEDMANAGER


PerformanceEvaluationReferenceChecksDue Diligence

ReviewIPC


MANAGERRESEARCHREPORT


RECOMMENDEDMANAGER


PerformanceEvaluationReferenceChecksDue Diligence

ReviewIPC


INVESTMENTPOLICYCOMMITTEE(IPC)REVIEWANDAPPROVAL• ManagerisvettedbyInvestmentPolicyCommitteeandthefullResearch

team• Followuponquestionsandissues• IPCvotesonapproval• RecommendedmanagersareaddedtotheResearchteam’s

recommendedlistofmanagersforconsultantuse

SAMPLERECOMMENDEDMANAGERLIST

OngoingManagement


ONGOINGMONITORING

MONTHLYUPDATES• Contactwithmanagerifperformanceoutside

expectations

QUARTERLYCONFERENCECALL• Qualitativeandquantitativeinformationrequest

• Formalcallwithportfoliomanager

• One-pagereportonqualitativeandquantitative

ANNUALREVIEW• ReviewquantitativeandqualitativeQERscoring

• Formalauditreview

• Attendannualmeetings

MonthlyUpdates

QuarterlyConference

Call

AnnualReview

Ongoingmanagementiskeytoperformingduediligence.FEGfollowsthecyclebelow:


ONGOINGMANAGEMENT– MANAGERFLOWS

20132Q 20131Q 20124Q 20123Q 20122Q 20121Q Date PeakAUM CurrentAUM

Manager1 7.0% 0.0% -5.9% 2.0% 2.7% 3.2% $2,686

Manager2 9.0% 4.4% -0.1% 20.2% 16.3% - 6/2013 $5,500 $5,500

Manager3 8.4% 8.8% 10.9% 21.1% 2.4% 22.1% 6/2013 $3,900 $3,900

Manager4 3.5% -2.1% -14.0% -3.6% -0.4% -6.1% 12/2007 $3,042 $2,497

Manager5 1.8% -5.8% -2.6% 4.6% 2.2% 15.9% 6/2013 $5,960 $5,960

Manager6 -17.1% -15.0% -12.1% -14.1% -7.1% 14.9% 3/2011 $8,800 $4,800

Manager7 5.4% 1.5% -2.0% 2.8% 3.0% 0.6% 6/2013 $3,235 $3,235

Manager8 0.1% -4.4% 1.5% -2.2% 2.2% -3.4% 6/2013 $7,723 $7,723

Manager9 -9.7% -7.7% -7.6% -4.0% -5.6% -4.9% 10/2010 $4,790 $2,945

Manager10 -1.0% -9.9% -1.1% -2.4% 1.4% -8.5% 6/2008 $8,588 $4,034

Manager11 -3.5% -3.2% 2.5% 20.1% 9.6% 6.0% 6/2013 $1,600 $1,600

Manager12 0.5% 3.7% 2.0% -5.1% 3.7% 24.1% 5/2011 $1,056 $1,027

Manager13 0.6% -21.5% -5.4% -2.1% -5.9% 6.1% 9/2008 $1,987 $1,656

Manager14 23.2% 15.1% -1.6% -2.5% 0.8% 9.5% 6/2013 $1,407 $1,407

Manager15 0.4% -8.2% 0.5% 1.4% -0.2% -4.9% 6/2008 $3,317 $3,208

Manager16 7.8% 3.7% 23.1% 18.4% 25.0% 15.9% 6/2013 $4,404 $4,404

Manager17 5.5% -15.3% -11.7% -6.8% -8.5% 06/2011 $1,661 $1,218

Manager18 -4.0% -6.1% -2.2% -11.3% -5.4% 1.7% 1/2008 $3,600 $1,700

Manager19 2.7% 1.9% -1.7% -5.3% -5.1% -13.4% 6/2013 $2,941 $2,941

QUARTERLYFLOWS(%OFAUM)



ONGOINGMANAGEMENT– AUDITEDFINANCIALSSUMMARY

AnnualAuditReview Manager1

Manager2

Manager3

Manager4

Manager5

Manager6

Manager7

Manager8

Manager9

Manager10

Manager11

Manager12

AUDITPERIODCOVERED 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012

DATEAUDITISSUED Feb-13 Mar-13 Mar-13 Apr-13 Apr-13 Feb-13 Mar-13 Mar-13 Apr-13 Apr-13 Apr-13 Mar-13

RECOGNIZEDAUDITOR Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

UNQUALIFIEDOPINION Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

EXPENSERATIO

Total 2.4% 4.5% 4.8% 4.9% 2.8% 9.8% 3.8% 6.6% 6.7% 2.4% 7.0% 3.3%

Incentive 0.0% 2.7% 0.0% 3.1% 0.0% 0.4% 2.0% 0.0% 1.0% 1.0% 3.2% 1.0%

OperatingExpenses 2.4% 1.7% 4.8% 1.7% 2.8% 2.1% 1.8% 6.6% 5.7% 1.3% 3.8% 2.3%InterestDividendsStockLoanFees 0.0% 0.2% 0.0% 0.0% 0.0% 7.3% 0.0% 0.0% 0.0% 0.1% 0.0% 0.0%

RETURNRECONCILIATIONAuditedReturnsReconcileWithReported Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

VALUATION

LevelIAssets 91% 22% 76% 5% 1% 10% 47% 39% 40% 55% 23% 6%

LevelIIAssets 9% 55% 23% 61% 36% 90% 41% 33% 50% 30% 77% 94%

LevelIIIAssets 0% 24% 1% 34% 63% 0% 12% 28% 10% 14% 0% 0%


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