The In-Depth Story of our Research Process: FolioDynamixFebruary 22, 2016
FolioDynamix was recently featured in a 5-part FundFire series, “How to Get on the Recommended List”.
The series provided a broad overview of each firm’s research process. There were similarities across firms: the size of the approved lists were quite close, and every firm studied mentioned qualitative aspects in choosing managers, such as philosophy and process as well as portfolio managers and team.
There were, of course, differences as well– broadly speaking, these differences were in the focus, whether on qualitative elements, quantitative elements or a balance of those factors. Some firms referenced performance specifically; others either did not mention it, or referenced other metrics tied to performance.
From our perspective, the article did a good job of providing a high-level look at how we, at Folio, make selections for our approved manager list. But of course, there is so much more to the story, and we thought we’d provide a bit more detail here on how we select the managers we invest with.
Backing up the story:
The article referenced our emphasis on qualitative analysis—which includes many elements and the important aspect of finding the story behind a strategy.
Equally important is the quantitative analysis; the “test” against the story with the use of holdings based, and returns based, attribution analysis, with more emphasis on holdings. We have seen managers with great stories that fail the test.
Balancing qualitative vs. quantitative:
A research process should represent a balance between qualitative and quantitative analysis. When the process is tilted, style or other types of bias can be created in the roster…or a roster with a lack of skill can result.
Great performance does not equal a great story and a great story does not result in great performance.
How we think of “performance”:
To be a truly valued product, “performance” has to back up that great story. In this context, performance does not mean absolute, or just relative to a market benchmark. We consider performance as a skill metric; what remains from the absolute return after adjusting for the elements of the story. We place very little–if any—focus on absolute performance. Instead, we use sophisticated tools to tear it apart—to understand why the performance was what it was, the components of the performance, and matching those components to the story.
It always comes back to the story.
Folio’s research process really examines a product, and the firm, from every angle. We use the adage “no stone unturned”. When we’ve fully vetted each product, we are proactive in sharing our findings and communicating with our clients. From our perspective, that communication is as important as the research itself. Without sharing your findings, research becomes the tree that fell in the woods; with no one to hear it did it make a sound? And along those lines—we know that there is a lot of “noise” in the marketplace. We take very seriously our responsibility to be a trusted source of information to our clients.
There’s no such thing as “over-sharing”.
We believe in full transparency, and share with clients who subscribe information such as:
• Research updates providing timely news around changing conditions with a product or firm
• Site visit reports, to give clients a window into the meetings we conduct with the firm, operations staff, sales, analysts and portfolio managers
• Quarterly reviews, that provide advisors with bullet points to use when discussing the performance or merits of product with their clients
• Various topical white papers.
Our analysts are always available to advisors to discuss the products we research should an advisor prefer a deeper discussion or want some portfolio construction advice.
Sharing these resources gives advisors confidence in the research services being provided, arms them with the most important key points they need when working with their clients and gives them back some time to spend with their clients that they might otherwise be spending on doing the research themselves.
Folio’s research process is based on a philosophy of transparency, objectivity and thoroughness. Our goal is to protect advisor’s client relationship, improve risk-adjusted performance and client retention and reduce risk, while avoiding the pitfalls associated with managers that are not what they seem.