Manager Search and Selection Flashcards

In the context of manager search, what does 'portable alpha' refer to?

Answer: Alpha generated by a manager that can be transferred to different asset class exposures using derivatives

Portable alpha involves separating alpha generation from beta exposure, using derivatives to overlay market exposure while investing the underlying assets with an active manager in a different asset class.

A plan sponsor terminates a manager due to persistent style drift. Which of the following best describes the appropriate next step?

Answer: Conduct a targeted manager search focused on managers with documented style consistency

After terminating a manager for style drift, the plan sponsor should conduct a new search emphasizing candidates with a disciplined, documented process that demonstrates style consistency.

Which of the following is the most significant concern when a large institutional plan allocates a major portion of assets to a manager with a small total AUM?

Answer: The plan's allocation could significantly influence the manager's portfolio construction decisions

If a plan's allocation represents a disproportionately large share of the manager's total AUM, it can create capacity constraints and force the manager to make suboptimal investment decisions.

What is a 'watchlist' in the context of investment manager monitoring?

Answer: A formal list of managers flagged for heightened scrutiny due to performance or organizational concerns

A watchlist identifies managers under heightened review due to issues such as performance deterioration, personnel changes, or operational concerns, triggering closer monitoring before a termination decision.

Which of the following scenarios would most likely lead a consultant to recommend terminating a current manager rather than placing them on a watchlist?

Answer: The entire senior investment team resigns and joins a competing firm

A full departure of the senior investment team fundamentally disrupts the investment process, representing a change severe enough to warrant immediate termination rather than simply heightened monitoring.

When reviewing a manager's GIPS-compliant composite, an investor notices the dispersion of returns across accounts is unusually high. What does this most likely indicate?

Answer: Accounts within the composite are being managed inconsistently, suggesting guideline differences or execution issues

High internal dispersion within a composite suggests accounts are not being managed consistently, which may indicate differing investment guidelines, poor trade allocation practices, or operational issues.

A consultant is evaluating a manager who claims to use a 'bottom-up' investment process. Which portfolio characteristic would be most consistent with this claim?

Answer: Individual security weights driven by fundamental research rather than top-down sector views

A bottom-up manager builds the portfolio based on individual security analysis, resulting in sector weights that are a residual of security selection rather than a deliberate top-down decision.