Money Manager Selection

Money Manager Selection

Prepared by:

Aaron Duda, CFA Director, Asset Management

Robert Whitehead, CFA Director, Asset Management

Douglas W. Evans, CFA, CIMA Senior Managing Director, Asset Management

In This Special Report:

Traditional Manager Research Process: A Rearview Mirror Approach 1

The Importance of Manager Selection 1

Abbot Downing Manager Research Team 2

Strategic Partnerships 2

Abbot Downing Manager Research Process 3

Process Flow: Monitoring to Removing an Investment Manager 4

RiskOptics®: Our Approach to Risk Management 4

A Tradition of Trust 5

Money Manager Selection 1

Money Manager SelectionThe mission of Abbot Downing manager research is to increase the probability of a better investment outcome for our clients, one which is consistent with their unique objectives and circumstances. We deliver customized research, objective advice and access to managers whom we believe have the greatest potential to outperform.

Abbot Downing is dedicated to serving the unique family and financial needs of multigenerational wealth. Working together with our clients, we help responsibly steward the full impact of wealth now and for successive genera-tions. At Abbot Downing, we are committed to finding or presenting the best resources for our clients. In addition to understanding their needs, we rigorously examine our solutions to help ensure that clients are receiving high-quality, relevant advice.

Abbot Downing aims to provide ultra-high-net-worth investors, families of wealth and family foundations with institutional-quality investment services across a full spec-trum of asset classes. We have a dedicated manager research team and robust process to source, vet and monitor both traditional and complementary investments. Internal and external research resources are always available to assist in providing top investment solutions to Abbot Downing clients.

Traditional Manager Research Process: A Rearview Mirror ApproachThe traditional approach to manager selection for retail and fiduciary clients is to utilize relatively simple quantitative screens for a broad universe of managers. In our view, an overemphasis on historical performance often leads to unexpected results, typically disappointing.

Managers who have the highest relative performance over the short-term are often unable to sustain such outperfor-mance over subsequent periods for a number of reasons. For example, a manager may take undue risks that ultimately impact performance negatively. Furthermore, returns may be generated by accessing unique opportunities that are neither sustainable nor repeatable. Finally, a manager’s particular investment style may be out of favor during certain time periods, sometimes lengthy in duration. As a result of these factors, we do not believe that past perfor-mance is always a good measure of what can be expected for future results.

Yet, many financial institutions and advisors select money managers based solely on short-term performance as measured against a specific benchmark. It has been stated before, but it bears repeating: “Past performance is not a guarantee of future results.” Performance chasing often leads to long periods of underperformance. Moreover, short-term returns can distort a fund’s long-term perfor-mance profile. For example, a money manager who excels during a recent period could lift the averages of a fund’s 3-, 5- and 10-year return profile, potentially “hiding” medio-cre returns in previous years. This raises the question of whether there is a better way to choose money managers than past performance.

The Importance of Manager SelectionEvaluating investment managers can be challenging because a good process does not always lead to a good outcome, and, similarly, a good outcome does not always mean that decisions were driven by a good process. Abbot Downing manager research is focused on long-term success. Our approach to manager evaluation is designed to separate skill from luck, assess the risks a manager assumes, and help determine if their strategy is sustainable. Through this process, we identify a group of investment managers who we believe have the greatest potential to meet or exceed our expectations.

2 Money Manager Selection

Abbot Downing Manager Research TeamOur Abbot Downing manager research team specializes in sourcing unique and difficult-to-access investment op-portunities compatible with ultra-high-net-worth client objectives. The team focuses on providing access to qualified complementary solutions, which range from hedge funds and private equity to real estate. In conjunction with our Investment Policy Committee, Abbot Downing oversees an investment process for portfolios of $100 million or greater. Nearly 40 percent of these client portfolios are invested in complementary strategies and real assets.

A systematic approach to the manager research and selec-tion process helps us to assess objectively each investment solution across the spectrum of asset classes. Our analysts’ judgment and experience evaluates the quality of multiple factors and the potential for a strategy’s future success.

The Abbot Downing manager research team is an accomplished group of investment professionals with extensive industry experience in manager evaluation, portfolio management, risk management, and sophisticated investment solutions. Their objective is to identify high-quality managers and unique investment opportunities, and provide customized solutions for each of our client families.

Figure 1: Abbot Downing Manager Research Team Structure

Source: Abbot Downing, January 2012

Strategic Partnerships

Internal

Abbot Downing manager research draws on the extensive network of internal due diligence partners, notably Wells Fargo’s Wealth Management Group Manager Research and Alternative Strategies Group.

External

Abbot Downing’s manager research team also partners with three independent external research groups. Our strategic relationships with these consultants expand our coverage of the investment universe and increase the capabilities of our Abbot Downing manager research team. These partnerships allow our manager research team to leverage each firm’s in-depth proprietary information, and more importantly, to reconcile and cross-reference the findings of our manager research evaluation.

Rogerscasey has a highly disciplined process to evaluate and select managers. The firm applies a rigorous quantita-tive and qualitative assessment of managers, both new and existing, to measure and monitor its value-added capabilities. Rogerscasey’s proprietary database is one of the largest and most comprehensive in the industry, covering in excess of 1,600 investment management firms that offer more than 29,000 investment solutions. This database is comprised of information compiled through on-site manager research and in-house interviews.

Callan Associates also conducts manager due diligence through data collection and interviews, covering roughly 1,200 organizations that offer more than 6,000 distinct products.

Hedge Fund Research is a strategic partner and a leader in its field. It provides comprehensive due diligence and sophisticated portfolio management reporting on individual hedge fund managers and each of their funds.

Along with these strategic partners, Abbot Downing has comprehensive resources to ensure that our decisions are based on the most current and accurate information available.

7 dedicated manager research analysts50+ available Wells Fargo research analysts

50+ independent research analysts collaborating with Abbot Downing

Abbot Downing Manager Research Team

Performs original research, monitoring and partner oversight

Wells Fargo Internal PartnersWealth Management Group Manager Research

Alternative Strategies Group (ASGI)WF Advantage Funds

External Strategic Partners

RogerscaseyCallan Associates

Hedge Fund Research



Abbot Downing Manager Research ProcessThe Abbot Downing manager research process begins with a comprehensive examination of the manager’s organization and its investment process. Following an intensive evalu-ation of the firm, the Manager Research Group examines and assigns a priority to the project, and collaborates with the most appropriate research partners to conduct further analysis.

Following a complete evaluation, personal interviews are conducted with key members of the investment team and senior management to evaluate the company’s resources, technology, business model, and client service capabilities. The goal is to select best-in-class managers with a sound and repeatable investment process, adequate portfolio risk control measures, and the potential to meet or exceed objectives.

Once the Manager Research Group and the underlying research partner have completed the screening process, the team renders its conclusion. If a money manager is recommended for approval, a full due diligence report is presented to the Investment Policy Committee for a final decision. These reports are accompanied by independent risk and operational assessments. Each investment solu-tion must be approved by the Manager Research Group, Investment Policy Committee, and the research partner before qualifying for the platform and coverage list.

Our aggregate resources provide unparalleled strength■■ 3,000+ face-to-face visits each year

■■ 5,000+ managers under constant surveillance

■■ 35,000+ manager universe

■■ 1,000+ standing solutions available

■■ 100+ analysts deployed

Figure 2: Abbot Downing Manager Research Process


1. Monitor

3. AD Investment Policy Committee

Decisions

Approved

Watchlist

Terminate

Legacy

Appropriate for new client assets

Halt new client assets

Liquidate client assets

Client assets sunset over time

Research Partner & AD Manager Research Group

Research Partner/Manager Research Group

2. Recommend

Status

4 Money Manager Selection

Figure 3: Qualitative Metrics for Manager Evaluation


Process Flow: Monitoring to Removing an Investment ManagerThe Abbot Downing manager research team, in collabo-ration with its strategic research partnerships, conducts ongoing monitoring of existing managers. Depending on the due diligence findings, each manager is assigned one of four ratings:

■■ Approved reflects the team’s collective judgment that a manager’s offerings are suitable for investment.

■■ Watch List is warranted when conditions, (performance or personnel issues, as examples) call for additional review and a temporary suspension of activity with a particular manager.

■■ Terminate is justified when a manager fails to meet the mandates required by the team.

■■ Legacy, however, is used for funds that will sunset over a specified time frame.

A change in rating, or status, may be invoked by the Manager Research Group at any time and is communicated elec-tronically to all interested parties. In addition, the Manager Research Group produces and receives detailed analytical reports on a quarterly basis for the majority of managers. (Certain product types, such as private placements, and structured products, usually require only annual reports.) The Manager Research Group and its strategic partner also conduct in-house meetings with approved managers at least every 18 months.

RiskOptics®: Our Approach to Risk ManagementIn addition to an extensive research process, Abbot Down-ing takes a measured approach toward risk analysis by encompassing the multiple risk factors present beyond the statistical measure of standard deviation. These include transparency, market and concentration risks. Abbot Down-ing has developed a process called RiskOptics to consider risk sources with the potential to cause permanent loss of investor capital. This approach to risk analysis enables Abbot Downing to provide a more holistic picture of risk exposures associated with a particular investment, and to comprehend client suitability in a more complete manner. In particular, it allows us to build portfolios that are bet-ter aligned to each investor’s risk profile by integrating an optimal mix of investment solutions, including complex and sophisticated instruments customized to meet unique objectives and constraints.

Figure 4: Risk Factors Come in Many Forms


Investment Process CategoriesOrganizational Categories

Business Management

Legal/Tax Structure

Stability

Business–Risk Management

Organizational Structure/Culture

Investment Philosophy

People

Portfolio Construction

Trading

Risk/Return Results

Collecting & Re�ning Information

STYLE/STRATEGY RISKS SYSTEMIC RISKS

STRUCTURAL RISKS

Risk Factors

Performance Volatility Fixed Income Market Risk

Transparency

Leverage

Concentration

Capital Control

Equity Market RiskEvent Risk

Standard DeviationPolitical Risk

Credit Risk

Beta

Style Drift

Single Manager Risk

Common Holder RiskCounterparty Risk


A Tradition of TrustWorking with our strategic partners, Abbot Downing conducts a comprehensive review of potential and current managers through an objective process that encompasses:

■■ Capital Q qualitative factors important to investment success

■■ Quantitative factors to verify and monitor our qualitative findings

■■ Transparency around changes in recommendations

■■ Recommendations across all asset classes

■■ Ongoing monitoring of investment managers

■■ Risk analysis to help the portfolio stay in-line with its objectives

Our ultimate goal is to provide timely, ongoing, actionable advice for the benefit of our clients. Each recommenda-tion draws on the broad experience of a team of dedicated professionals whose job is to evaluate and continually monitor investment managers. Even for the highly regarded firms that pass our rigorous screening, managers must be held accountable quarter by quarter and year by year. We believe that clients can feel confident that these manag-ers are held to uncompromising standards and that our process is likely to increase the probability of a favorable investment outcome.

Disclosures

Abbot Downing, a Wells Fargo business, provides products and services through Wells Fargo Bank, N.A., and its various affiliates and subsidiaries.

Some alternative investments may be available to pre-qualified investors only. Hedging strategies and private investments may be speculative and involve a high degree of risk. Hedging strategies and private investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. There is no secondary market for the investor’s interest in hedging or private equity investment and none is expected to develop. There may be restrictions on transferring interests in a hedge fund or private equity investment.

The information and opinions in this report were prepared by Abbot Downing. Information and opinions have been obtained or derived from sources we consider reliable, but we cannot guarantee their accuracy or completeness. Opinions represent Abbot Downing’s opinion as of the date of this report and are for general information purposes only. Abbot Downing does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

Wells Fargo & Company and its affiliates do not provide legal advice. Please consult your legal advisors to determine how this infor-mation may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.

Additional information is available upon request.

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Money Manager Selection