InvestWorks Pro

by Kirk E. Loury

The newly released InvestWorks Pro uniquely combines the broadest database of investment products, benchmarks, and standard peer groups with the most complete and integrated analytical and graphical software available. InvestWorks Pro comes with a built-in "coach" that leads you step-by-step through each and every function, helping you to do everything from viewing risk and return characteristics to analyzing product and benchmark correlations.

This article describes two broad-based uses of InvestWorks Pro from the perspective of two important actors in modern finance—investment management professionals and institutional investors. With these case studies we will step you through this product's unique benefits.

I. Investment Manager Competitive Analysis

If you are an investment manager who has experienced top decile returns, your marketing task is clearly easier than for most of your peers. But what if you are just beginning a fund or your style has been out of favor? How can you position your firm's products to clearly illustrate that return is only one dimension that distinguishes a "good" from a "bad" product?

InvestWorks Pro offers a single environment in which you can tell a multidimensional story that clearly contrasts your product with your competitors' and matches product attributes to an investor's needs. For example, did you know that as of the last quarter of 1996:

• Only 35 out of over 11,100 products (including separate accounts, commingled funds, and mutual funds) were in the top rate-of-return decile for 1-year, 2-year, 3-year, 5-year, and 10-year time periods?
• Only 108 were in the top two deciles?
• Only 32 were in the bottom decile?

The clear message is that with over 11,000 products, each will possess some strengths and weaknesses. For the portfolio managers and sales and marketing people at an investment management firm, the challenge is: "How can we position our product to the best advantage vis-a-vis our competition?"

An Analytical Approach

There are four phases to conducting an effective competitive analysis program:

1. Identify competing products and firms.
2. Assess strengths and weaknesses.
3. Present the key differences.
4. Keep your analysis updated.

InvestWorks Pro facilitates this process and delivers important insights which support the two most important goals of any investment management organization: keeping and growing clients' assets under management, and acquiring new clients. In the following analysis, imagine yourself to be an investment management firm marketer attempting to build up the assets of a small yet successful fund.

Step 1. Identify Competing Products and Firms

You are probably familiar with the top competitors for each of your firm's products—from finals presentations, client and prospect feedback, and press reports. Typically, these names correspond to the products with the best returns over five or ten years, although we know these lists change frequently.

An important first step is to take control of the process of identifying competing firms—which means knowing your past, present, and possible future competitors. InvestWorks Pro lets you see the movements of particular peer groups through time, both in absolute terms and relative decile rank. Figure 1 below shows a list of the International Equity peer group for separate accounts, commingled funds, and mutual funds (selected from over 11,100 products) sorted by 5-year rate of return.

Figure 1: InvestWorks Pro Quick View—Return & Risk Deciles, International Equity peer group, ranked by 5-year rate of return

In this view, you can easily see those Firms with strong performance, and you can also see that many of those products fall short on important risk factors or style purity. For example, in Figure 1 it is clear that none of the top-rated International Equity Firms is in the highest decile for the Consistency risk ranking, an important insight if an investor's goal is predictability.

Step 2. Assess Strengths and Weaknesses

Once you have identified your likely competitors, InvestWorks Pro allows you to save any number of competing product groupings for your use throughout its other extensive analysis and graph functions. For example, from the sorted answer given by the International Equity search, you can highlight the products you want to track and move them as a set to Super Browse. Here you can set up a monitor to record competing products' absolute and relative performance, risk, assets, or any number of factors you want to follow.

If the standard peer groups available do not capture the full breadth of competition you face, InvestWorks Pro's Peer Group Wizard lets you create your own peer group (see Figure 2). The performance and risk rankings within this customized group will be readily available, and comparative strengths and weaknesses will show in sharp relief.

Figure 2: Peer Group Wizard—allows you to build your own peer groups

What if you wish to present a fund which is not present in the pre-loaded database? The User Product Wizard (see Figure 3) allows you to enter any return series, either stand-alone or linked to an existing composite. It also lets you specify the fund style and assign it to any peer group.

Figure 3: User Product Wizard—lets you enter your own products or return series as full participating members of the database

Step 3. Present the Key Differences

Once you have positioned your firm's products relative to competitors', InvestWorks Pro's graphing and reporting tools support your need to communicate this position to clients and prospects. You can show a full complement of style graphs, from style drift to average style exposure to cumulative selection return (see Figure 4). Or you can illustrate your positioning insights using a wide variety of return, risk, and risk/reward graphical comparisons.

Figure 4: Style Analyzer, Bank of Ireland Asset Management (U.S.) Ltd.

For example, if your product has relative strength in downside risk, you can directly show how it compares to its competitors. In fact, you can show any return or risk factor in a floating bar (see Figure 5). InvestWorks Pro allows you to change almost anything on a graph, and you can even add your logo. Finally, to facilitate a seamless presentation of your analysis and other important elements, you can export all of InvestWorks' answers, graphs, or supporting data to other Windows applications, including Excel.

Figure 5: Floating Bars, Sharpe Ratio—International Equity. Any return or risk factor can be shown in a floating bar.

Step 4. Keep Your Analysis Updated

Keeping your analysis updated is simple in InvestWorks Pro because everything you do can be saved for future use. When you receive your update—either electronically or via CD—you need only open your files to view the updated performance, statistics, and relative rankings. As you think of new questions or gather different positioning ideas, you can run a new search or modify an existing one.

II. Searching, Comparing, and Monitoring Investments

In the following analysis, imagine yourself to be a small pension fund administrator charged with a manager search and rebalancing task. As an investor, your challenge is to match your investment needs with the attributes of a small set of products. InvestWorks Pro puts you in control, because you are the one who has to feel comfortable with the investment choices irrespective of an expert's recommendation.

Manager Search Beginnings

Every investor comes to the investing arena with an existing portfolio of products, which is essentially a portfolio of previous decisions. InvestWorks Pro supports you in understanding how these decisions have played out in the past and may play out in the future. Let's look at three key areas:

1. Evaluating your current investment products
2. Modifying your investment product mix
3. Monitoring your decisions

1. Evaluating Your Current Investment Products

In every investment portfolio there are products that meet, exceed, or underperform your expectations. Except for those few products which have consistently been in the top decile for many time periods, every product has performance cycles. The place to start is to understand how each product stacks up to your expectations.

Begin by selecting the investment products of interest from the database so you can view them side-by-side. Now you'll be able to see every return and risk aspect to be compared—both in absolute and relative terms. As an example of a quick graphical comparison, see Figure 6.

Figure 6: Graph Wizard—comparison of International Equity funds

What can you do to decide which products to keep and which to replace?

• You can take any of the standard benchmarks in the database and add them to your comparison; and you can also create your own benchmark reflective of the market weights most representative of your investing environment.
• You can run searches of the database to find peer products that exceed the performance and risk characteristics of your existing selections.
• You can create your own allocation with InvestWorks' Fund-of-Funds Wizard (see Figure 7). This powerful feature gives you the ability to assemble a set of products with particular weights (for example, your current asset allocation) and enter this new "product" into the database. From here, historical performance and risk factors will be calculated, giving you a deeper understanding of the interrelationships of your current portfolio.

Figure 7: Allocation created with Fund-of-Funds Wizard

Armed with a complete understanding of your current portfolio, you are ready to perform "what-if" analyzes as you search for new investment vehicles.

2. Modifying Your Investment Product Mix

What is the impact on historical performance and risk of replacing a product or adding an entirely new one? This kind of value-added assessment is important in deciding whether you should move forward in the investigation, decisionmaking, and implementation process involved with replacing or adding managers.

A first step is to search the database for products similar to the ones you may replace and to place them in the fund-of-funds product you created. Simply by adding or swapping new products of interest to you, you can see the historical impact on performance and risk of these changes to your fund-of-funds allocation.

A second level of analysis is available with InvestWorks Pro's Correlation Wizard (see Figure 8). As you seek to replace a manager it is good to know how correlated the returns of a potential replacement are to both the fund as a whole as well as to individual managers.

Figure 8: Correlation Wizard

3. Monitoring Your Decisions

All of your InvestWorks analysis can be saved, thereby avoiding time-consuming recreations of past work. For each month or quarter you want an updated assessment, all you need to do is re-load and run.

A key element of investment monitoring is communication—using graphs, tables, and reports to show trustees, vendors, participants, and others how the portfolio has performed. InvestWorks Pro's graphic capability sends clear and high-impact illustrations of the various comparisons. Figure 9 shows several examples.

Figure 9: InvestWorks Pro sample reports—a growth of $1 for selected products in the International Equity peer group; a 4 x 1 shot of the growth of $1, quarterly returns, rolling period, and risk/reward; and a full product report for Harding Lovenor's international equity product (Preview mode)

Finally, with each quarter of new information, you can assess the effectiveness of past decisions and, if necessary, rebalance. New investment products are continually added to the database so you can be sure not to miss attractive new funds.

Summary

Whether you're an investment manager, consultant, or investor, the consequences of not understanding your particular investing environment can be great—both in losses or missed opportunities. For the first time, InvestWorks Pro packages the product and benchmark breadth, analytical tools, graphing and reporting capability, and ease-of-use together so that clear and insightful investment product evaluations and comparisons are available to all segments.