Wednesday, March 05, 2008

International Equity Managers: The Data

This is a synopsis of the key data I received on the three potential international equity managers. In a "wrap account" of this type we pay the same fees irrespective of the manager we choose. We pay less percentagewise as our account gets bigger. From this data it is a pretty clearcut case, in my opinion. Thomas White is the best manager. Though McKinley did very well in 2007 their longer term performance is less attractive. My main question is: "If Thomas White are so good, why are they so small?" (being small probably helps them be good). The portfolio was founded in 1991, so they have had time to grow. However, the firm also has other assets under management including two mutual funds - total assets are on the order of $1 billion. The figures for the other two managers are total assets under management, not just in the program in question (Neuberger-Berman is a division of Lehman Brothers while the other two firms are employee-owned).

From the blurb:

"All of the company's portfolios share a common value-oriented
investment philosophy and process. The basis of its investment process
is in-house stock research produced by the company's research division,
the Global Capital Institute. The Institute is recognized worldwide for its
expertise in valuing domestic and international companies. Initially
designed for Sir John Templeton in 1976 by Tom White and his
associates, the firm sells this research to several of the world's largest
investment managers."

Thomas White's international mutual fund. TWWDX has lost 9.4% YTD, so their down capture ratio in this period has been much worse. Portfolio turnover for this fund is 46% which is acceptable.

Neuberger-Neuman's blurb would describe the process of most mutual funds. The managed account only invests in ADRs. Their international mutual fund's performance bears no relation to that of the managed account, so no insight is possible there.

McKinley uses a quantitative growth approach - they claim to apply "modern portfolio theory" to finding inefficiently priced securities. I wonder whether this puts too tight of a straightjacket on their ability to find value? Digging into McKinley's website, I found that the portfolio in question is also in fact a growth oriented ADR portfolio. As you can see from the pdf it is rather volatile. Since inception the fund outperformed the market strongly- 11.26% p.a. vs. 8.4% p.a. and had an alpha of about 3.3% and beta just above one. But this result is largely due to the first two strong years when the fund was probably much smaller than today. Performance has declined despite 2007's excellent results.

I'd like to be able to see results for January for McKinley and Neuberger-Neuman before making a decision but that would mean waiting another couple of months to invest as data is released quarterly. Given the information available, I'm deciding to invest with Thomas White.

2 comments: said...

Looking at actively managed funds I think a key factor would be who were the key managers during the period of performance you're looking at, and if they are likely to stay on in the future. And if their outperformance was statistically significant that establishes it was due to skill rather than luck. Personally, if I wasn't sure which of the two you fancy is "the best" then I'd just put half the amount in each - especially since they'd be no fee difference using the wrap account?

mOOm said...

Good point, but I don't have easy access to that information on how personnel has changed. There is a minimum $100k investment in each manager. We have $100k to invest right now and so can only choose one manager at the moment.

BTW - thanks for coming out to meet us in Sydney last week. It was fun!