How to Select Investment Managers and Evaluate Performance

G. Timothy Haight, DBA, is the President of Menlo College, Chairman of the Board of Commonwealth Business Bank, and a member of the Board of Advisors of St. Cloud Capital Partners, LLC. He also serves as a member of Southern California Edison's Nuclear Power Decommissioning Fund Committee. Dr. Haight earned a Doctorate in Business Administration (DBA) with a major in business finance and investments from George Washington University. He received his MBA and BS degrees from the University of Dayton.Dr. Stephen O. Morrell is Professor of Economics and Finance in the Andreas School of Business of Barry University. He has been a visiting professor at the Monterey Institute of Technology and the Georg-Simon-Ohm University in Nuremberg, Germany. Dr. Morrell also serves as a consultant specializing in portfolio strategies for endowment funds, and has served as senior vice president and chief economist for Southeast Banking Corporation; as a financial economist for the Federal Reserve System; and as chairman of the Board of Directors of First State Bank of Ft. Lauderdale, Florida. Dr. Morrell received his BS degree from Virginia Commonwealth University, and his MA and PhD degrees in economics from Virginia Polytechnic Institute.Glenn E. Ross serves as a member of Towson University's College of Business and Economics Board, and its Alumni Board, and has been an adjunct professor in Towson University's Finance Department. Mr. Ross is President of the Board of Directors of the Albert P. Close Foundation and is a member of the Board of Directors of the Upper Chesapeake Health System Foundation. Mr. Ross earned his undergraduate degree from Towson University and his MBA at Loyola College in Baltimore. Mr. Ross is a Registered Investment Advisor Representative with the SEC.

• Preface ixAbout the Authors xiCHAPTER 1 Investment Sponsors 1The Investment Committee 4The Variety of Investment Sponsors 7Taxable Investment Sponsors 24Summary 29Chapter 2 Investment Policy Statement 31Investment Philosophy and Goals 31Investment Return Objectives 32Risk Tolerances 32Constraints 33Investment Strategy 33In-House or Outside Manager 34Investment Policy 34Securities Types and Risk Characteristics 35Asset Allocation Guidelines 39Evaluation of Performance 41Benchmark Portfolios 51Periodic Review 52Summary 53Chapter 3 Investment Overview 55Capital Appreciation versus Current Income 55Active versus Passive Investment Approaches 57Investment Styles-Equity Managers 57International Investing 65Investment Styles-Fixed Income Managers 65Summary 68CHAPTER 4 Alternative Investment Vehicles 71Hybrid Securities 72Derivative Contracts 75International Investment Vehicles 81Real Estate Investment Vehicles 91Investment Vehicles for Accredited Investors 93Commodities and Collectibles 102Summary 104Chapter 5 Return Measures and Reporting Techniques 105Dollar-Weighted Rate of Return 105Time-Weighted Rate of Return 108Annualized Rates of Return 110Geometric Mean 111Total Return and its Components 112Compound Growth 115Summary 118Chapter 6 Return-Risk Measurement 119Return Relative 119Standard Deviation 121Portfolio Risk Measure 124Scatter Diagram 127Coefficient of Variation 128Regression Analysis 129Portfolio Size and Diversification Levels 131Regression Analysis of Fund I 132Additional Performance Indexes 133Summary 134Chapter 7 Portfolio Performance Evaluation 137Performance Results 138Composite Index 139Return Risk Analysis 140Universe Comparison 141Evaluating the Asset Allocation Decision 143Summary 155Chapter 8 Equity Performance Evaluation 157Equity Performance Criteria 158Sector Analysis 159Return-Risk Comparison 163Market Characteristics 164Attribution Analysis 169Summary 171Chapter 9 Fixed Income Performance Evaluation 173Asset Allocation Ranges and Anticipated Contributions 174Issuers of Fixed Income Securities 174Bond Indexes 176Bond Prices and Yields 177Term Structure of Interest Rates 180Quality of Fixed Income Securities 181Credit Risk 181Interest Rate Risk 184Duration 186Convexity 189Maturity Characteristics 191Return Analysis 191CFA Institute Standards 195Fixed Income Management Styles 196Passive Fixed Income Management 196Active Fixed Income Management 198Performance Analysis 199Summary 202CHAPTER 10 Investment Companies as Investment Vehicles 203Investment Companies 205Regulation of Investment Companies 207Types of Investment Companies 208Selecting Mutual Funds 215Performance Evaluation 216Summary 217Chapter 11 Investment Manager Search Process 219Search Committee 219Establishing Goals 220Number of Managers 220Candidate Identification 222Management and Related Fees 223Firm Size and Ownership 225Request for Proposals (RFP) 225Screening of Candidates 230Candidates Presentations 234Verification and Reference Checking 236Cost of Switching 239Administration of Change 240Summary 240Chapter 12 Conducting Investment Committee Meetings 243Meeting Preparations 243Agenda and Meeting Materials 245Setting the Agenda 245Responsibilities of the Chairperson 246Investment Consulting Services 246Investment Performance Review and Outlook 247Old Business 250New Business 251Summary 251Index 809

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