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Most pension fund clients of GSCS review performance against two key benchmarks. First they consider implementation shortfall. This is most commonly measured by considering the execution price compared against the price at the close on the day before trade date (T-1 Close). Given the much improved internal communication within investment managers, this is a reasonable “proxy” for decision time. If pension funds want their managers to provide actual decision time, then the analysis can be adjusted to reflect the more precise information available. This will improve the detail analysis but is unlikely to alter general conclusions about the nature of different managers investment styles and the general level of cost associated with execution in the various cases and its impact on investment performance. The second measure concerns execution performance in the market. Again, in the absence of more precise information GSCS will use the daily volume weighted average price (VWAP) as the performance benchmark. However if managers provide the time of receipt of the order at the trading desk then an available VWAP benchmark can be provided which again offers more precision at the level of individual transactions but will not impact general conclusions about performance. GSCS analysis is based on four different levels, each of which is supported by specific sample reports. These include • Summary Level Pension funds want to be assured, and to be able to assure their trustees that the costs incurred by the fund are at an overall level reasonable in the context of other funds of their size using a similar array of external investment managers. This general level of peer group review is incorporated within the Universe by Country report. • Manager Level It is obviously important for pension funds to be able to compare and contrast the costs of the different investment managers that they use. This can be completed on a quarterly basis and also on a rolling basis to facilitate meaningful trend analysis and confirm consistency of results. This is incorporated within the Manager report. • Manager/Broker Level The performance of each investment manager in terms of execution, and its impact on the pension fund is largely driven by relationships with the main brokers use by the manager. GSCS looks at the performance of more than 10,000 manager/broker “pairs” each quarter. For each pension fund client, the most important manager/broker “pairs” are evaluated within this Universe and those that fall into the Fourth Quartile in terms of execution and commission cost are identified on the Manager Broker Pair report. • Detail Level Where performance is relatively weak, the pension fund will want to engage in a specific and constructive dialogue with the manager in relation to possible causes of underperformance. To facilitate this GSCS provides its pension fund clients with details of the trades completed by the underperforming manager/broker pairs. GSCS is also willing to present general and specific findings to
trustees and other interested parties as well as offering summary
written reports highlighting areas of performance that may merit review
between pension funds and managers. |
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Analysis
