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Overview of

Investment Controlling Part 1


Version 2.0
Date: April 2010
Produced by: Dr. Stefan J. Illmer

Agenda

(1/3)

1. Investment controlling and the investment process


1.1. Definition of investment controlling
1.2. Investment controlling: the big picture
1.3. Client's versus asset manager's view
1.4. Integration into the investment process
2. Building blocs and setup of the investment controlling
2.1. Aspects of investment controlling
2.2. Performance monitoring process
2.3. Performance measurement

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 2

Agenda

(2/3)

2.4. Performance administration


2.5. Performance reporting
2.6. Performance analysis
2.7. Performance review
3. Example of a performance review
3.1. Performance review
3.2. Investment controlling and the investment process
3.3. Management effects over time
3.4. Sector weights over time
3.5. Ex-ante risks over time

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 3

Agenda

(3/3)

3.6. Conclusion
3.7. What can investment controlling achieve?
3.8. What can investment controlling not achieve?

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 4

1. Investment controlling and the investment process

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 5

Definition of investment controlling


Investment

controlling is concerned with independently


supervising and monitoring the quality of asset management
accounts with the aim of ensuring performance and quality in
order to provide the required benefit for the client.
Dependent of setup, investment controlling not only encompasses
controlling activities but also can include areas from compliance to
performance review.
Investment controlling aspects can also be taken into
consideration by clients or advisers and consequently it is
possible that they also perform certain investment controlling
activities.

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 6

Investment controlling: the big picture


Risk management
(non-investment)

Compliance
Investment
controlling

Finance
costs/revenues

Performance
monitoring

Reporting
(internal and external)

Forecasts

Processes

Behaviour

Results

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 7

Clients versus asset managers view

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 8

Integration into the investment process


Actual market data and
forcasts

Re-balancing

Asset allocation

Portfolio construction

Investment
guidelines

Investment controlling /
performance monitoring

Investment target, risk profile and benchmark

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 9

2. Building blocs and setup of the investment controlling

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 10

Aspects of investment controlling


Forecast capability

Best practice

Processing

Regulators

Benchmark

Risk profile / risk budget

Best execution
Investment
guidelines

Aspects of
investment
controlling

Costs / revenues

competitors / peers
Return
(absolute and relative)
Risk
(absolute and relative)

General circumstances

Decision making process


Conflicts of interest
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 11

Performance monitoring process


Production / reporting ( quantitative aspect)

Portfolio analytics / risk control (qualitative aspect)

MonitoringMonitoring
of results of
(exresults
-post)
(ex-post)
and of Inputs
snd (ex
of inputs
-ante)(ex-ante)

Performance
measurement

Performance
administration

Performance
reporting

Performance
analysis

Performance
watch list

Portfolio
analytics

Performance
review

Feed
Feed
forward
forward
and
and
feed
feed
back
back

Efficient controlling of forecast and of investment process outcome

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 12

Performance measurement

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 13

Performance administration

A c co

Ac

un t A o u n
c
c
A

nt
cou

tB

Composite 1
Account C
Ac

co

A c cou n
A cc o un

tH

A c cou n

Composite 2
un

tE

Ac

tI

tD

co

Composite 3
un

tF

Composite 4

=> e.g. also in accordance with the GIPS Standards


Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 14

Performance reporting

(1/4)

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 15

Performance reporting

(2/4)

Equities World BM MSCI active Mandates direct


Benchmark
No. of A/Cs
Composite Code

MSCI World (ri) in CHF


5
ZU-COMP250

Series Type
Inception Date
Reporting Date

Asset Weighted Gross Return


01 Jan 1997
31 Dec 2003

Reporting Currency
Market Value (m) End of Period

CHF
84.27

Indexed Cumulative Relative Returns


Periodical Returns in %
Benchmark

1.67
6.60
8.43
17.98
-12.65
-13.77
-13.70
-2.33
4.05

135

Relative

1.69
7.11
9.58
19.64
-10.46
-11.82
-11.83
-2.46
3.93

-0.03
-0.50
-1.15
-1.66
-2.18
-1.96
-1.87
0.13
0.12

130
125
Indexed Returns

Composite
1 Month
3 Months
6 Months
1 Year
2 Years
3 Years
4 Years
5 Years
Since Incep.

Annual Risk Figures in %


Volatility over 1 Year
Volatility Since Inception
Sharpe Ratio over 1 Year
Sharpe Ratio Since Inception
Tracking Error over 1 Year
Tracking Error Since Inception
Information Ratio over 1 Year
Information Ratio Since Inception
Correlation over 1 Year
Correlation Since Inception

17.98
17.98
-35.32
-15.99
-13.46
60.21
21.29
22.50

19.64
19.64
-32.99
-14.47
-11.84
46.07
17.51
26.25
Composite
16.90
22.98
1.06
0.10
2.12
4.69
-0.78
0.03
0.99
0.98

110
105

95

Relative

90

-1.66
-1.66
-2.33
-1.52
-1.62
14.14
3.78
-3.75

Incep

Aug 98

Jun 99

Apr 00

Feb 01

Dec 01

Oct 02

Aug 03

4
3

Benchmark
15.80
20.80
1.24
0.10
N/A
N/A
N/A
N/A
N/A
N/A

Oct 97

Monthly Relative Returns

2
1
in %

YTD
2003
2002
2001
2000
1999
1998
1997

Benchmark

115

100

Calendar Year Returns in %


Composite

120

0
-1
-2
-3
-4
Jan 97

Nov 97

Sep 98

Jul 99

May 00

Mar 01

Jan 02

Nov 02

Sep 03

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 16

Performance reporting

(3/4)

Equities World BM MSCI active Mandates direct


MSCI World (ri) in CHF
<5
ZU-COMP250

60

28

Composite
Benchmark

0
-20

24

5
4
3
2

Se
p0

02

1
0
-1

3
Se
p0

02

01

No
v0

Jan

Ma
r

Jul
99

Ma
y0

8
Se
p9

No
v9

3
Se
p0

No
v0

01

00

02
Jan

Ma
r

Ma
y

99
Jul

Se
p9

-4
No
v9
7

97
Jan

3
Se
p0

02

No
v0

Jan

01
Ma
r

00
Ma
y

99
Jul

-3

0
Se
p9

-2

-10

Jan

Jan
97

-5

No
v0

5
1 Year Information Ratio

1 Year Tracking Error

Ma

r0
1

99

y0
Ma

Jul

Se
p9

No
v9

97
Jan

3
Se
p0

02

No
v0

r0
1

Jan

y0

Ma

Ma

Jul

Se
p9

14
99

-60
7

16

97

Benchmark

20

-40

Jan

Composite

22

18

10

97

1 Year Volatility

20

No
v9

CHF
84.27

Base Currency
Market Value (m)

26

40

15
1 Year Excess Return

Asset Weighted Gross Return


01 Jan 1997
31 Dec 2003
30

20

Jan

Performance Type
Inception Date
Date

80

No
v9

1 Year Total Return

Benchmark
No. of A/Cs
Composite Code

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 17

Performance reporting

(4/4)

Equities World BM MSCI active Mandates direct


Benchmark
No. of A/Cs
Composite Code

MSCI World (ri) in CHF


<5
ZU-COMP250

Performance Type
Inception Date
Date

Asset Weighted Gross Return


01 Jan 1997
31 Dec 2003

25

10

20

Volatility (ann.)

Total Return (ann. if > 1 year)

20

Composite
Benchmark

-10
-20

Composite

15

Benchmark

10
5

-30
-40

0
1 Month 3 Months 6 Months

1 Year

3 Years

2003

2002

1 Year

2 Years

3 Years

-1.5

3
2

1 Year

3 Years

2003

2002

-0.3
-0.4
-0.5
-0.6
-0.7

3
6
Months Months

2001

-0.2

-2

-2.5

2002

Information Ratio (ann.)

-1

2003

-0.1

-0.5
Tracking Error (ann.)

Excess Return (ann. if > 1 year)

CHF
84.27

30

30

1 Month

Base Currency
Market Value (m)

-0.8

-0.9
1 Year

2 Years

3 Years

2003

2002

2001

1 Year

2 Years

3 Years

2003

2002

2001

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 18

Performance analysis

(1/11)

Performance analysis and also performance attribution is the


measurement and quantification of the historical as well as
expected return and risk contributions of the individual steps of
the investment process as well as of the applied financial
instruments.
We distinguish between return and risk contribution and
attribution, whereby performance contribution is a more or less
arbitrary breakdown of the performance using a given breakdown
of the investment universe and performance attribution is a
decision oriented decomposition of the performance.

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 19

Performance analysis

(1/11)
Status quo /
best practice

time

Risk

Derivatives

Benchmark

Factors

"correct" return
methodology

Stocks
From
quarterly to
monthly

Return
Absolute
profit

Portfolio view

Performance measurement

Sectors
Asset classes
/ countries

From monthly
to daily

from ex post to ex ante


Detailed analysis
(Return and risk decomposition)

Performance attribution

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 20

Performance analysis

(2/11)

Performance Attribution

absolute

Portfolio

Sectors / Instruments
e.g. countries, industries,
currencies, stocks

relative
Factors
e.g. fundamental, stock
specific

Benchmark

Decision Makers
e.g. client, consultant,
portfolio manager, research
team

Contributions

Return

Risk

ex post

ex ante

Investment Management
Activities
e.g. benchmark, strategic
and tactical asset allocation

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 21

Performance analysis

(3/11)

Return and risk contribution


Return and risk
attribution

Contribution to portfolio return and portfolio risk


(absolute as well as relative)
Equities

Bonds

etc.

USA

Europe

etc.

Financials

Telecom

etc.

AAA

AA

etc.

Value

Growth

etc.

USD

JPY

etc.

Asset allocation

Stock picking

etc.

Asset allocation process

Benchmark

Benchmark

SAA

SAA

TAA

TAA

Stock picking

Stock picking

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 22

Performance analysis

(4/11)
Performance
attribution

Return attribution

Risk attribution

i.e.
Groups of FT Sector
Basic Industries
Cyclical Consumer Goods
Cyclical Services
Finance
General Industries
Information Tech
Non Cyclical Cons Goods
Non Cyclical Services
Resources
Utilities
Other Assets
Total

Asset
Allocation
0.07%
-0.21%
-0.05%
0.00%
0.10%
0.23%
-0.28%
-0.38%
-0.22%
-0.13%
0.08%
-0.79%

i.e.
Stock
Selection
-0.04%
0.26%
0.00%
0.11%
-0.19%
-0.36%
-0.15%
-0.13%
-0.02%
0.00%
0.00%
-0.52%

Interaction
0.01%
-0.11%
-0.09%
0.00%
-0.14%
0.06%
0.01%
0.00%
0.00%
-0.01%
0.01%
-0.25%

Total

Risk Model : Global

Benchmark

Risk Model : Global

Portfolio

Tracking Error

0.04%
-0.06%
-0.13%
0.11%
-0.22%
-0.07%
-0.41%
-0.51%
-0.24%
-0.14%
0.09%
-1.56%

Number of Securities

99

576

Total Risk (ex-ante)

15.76%

2.35%

Number of Currencies

Factor Specific Risk

15.53%

1.40%

- Region

12.40%

0.19%

Portfolio Value

Portfolio

227'447'728

Total Risk (ex-ante)

15.76%

15.31%

- Country

9.06%

1.13%

- Factor Specific Risk

15.53%

15.20%

- Industry

3.07%

0.72%

- Stock Specific Risk

2.72%

1.83%

- Fundamental

1.10%

0.48%

Tracking Error (ex-ante)

2.35%

- Currency

4.36%

0.52%

- Covariance (+/-)

4.93%

0.60%

Stock Specific Risk

2.72%

1.89%

Relative Value at Risk


R-squared
Beta-adjusted Risk
Predicted Beta

10'878'425
0.98
15.59%

15.31%

1.02

Predicted Dividend Yield

2.22

2.37

P/E Ratio (E: 12 months)

38.19

29.42

5.34

4.68

P/B Ratio (B: year-end)

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 23

Performance analysis

(5/11)

Portfolio

Return

Attribution Effects

Attribution by MSCI
Sector

Attribution by 5 World
Regions

NAME (ID)

Composite World MSCI, active, mandates

Currency

CHF

Asset Allocation

-0.96%

-1.01%

PM

AMPE

Return Portfolio

18.28%

Stock Selection

0.13%

-0.59%

BENCHMARK

MSCI World in CHF

Return Benchmark

19.60%

Interaction

-0.49%

0.28%

PERIOD

31.12.2002 - 31.12.2003

Return Relative

-1.32%

Total

-1.32%

-1.32%

Attribution Analysis - by MSCI Sector

Portfolio

Benchmark

67
8
84'334'091
18.81%
18.66%
2.39%
2.57%
3'570'469
0.98
18.64%
1.02
1.86
28.39
2.58

1'550
0

In
fo
rm

To
ta
l

as
h
C

ie
s
tili
t
U

Te
le

at
io
n

co
m

Se
rv

ic

es

M
at
er
ia
ls

gy
ol
o

ar
e

In
du
st
ria
ls

er
S

ta
pl
e

na
ry
er
D
is
C
on
s

um

C
on
su
m

cr
et
io

tili
t
U

on
su
m
er
C

Risk Analysis (end period)


Number of Securities
Number of Currencies
Portfolio Value
Total Risk (ex-ante)
- Factor Specific Risk
- Stock Specific Risk
Tracking Error (ex-ante)
Value at Risk (at 95%)
R-squared
Beta-adjusted Risk
Predicted Beta
Predicted Dividend Yield
P/E Ratio (E: 12 months)
P/B Ratio (B: year-end)

-1.5%
ia
ls

-1.0%

-1.5%
as
h

-1.0%

ie
s

-0.5%

Di
sc
re
Co
tio
ns
na
um
ry
er
St
ap
le
s
En
er
gy
Fi
na
nc
ia
ls
He
al
th
C
a
In
re
fo
In
rm
du
at
st
io
r
i
n
al
s
Te
ch
no
lo
gy
Te
M
at
le
er
co
ia
m
ls
m
Se
rv
ic
es

0.0%

-0.5%

ea
lth

0.5%

0.0%

Stock Selection

1.0%

0.5%

Fi
na
nc

1.5%

1.0%

En
er
gy

Asset Allocation

1.5%

Te
ch
n

(Average over-/underweight)

Attribution Analysis - by 5 World Regions


Asset Allocation

Stock Selection

0.6%
0.4%

18.21%
18.18%
1.02%

0.2%
0.0%
-0.2%
-0.4%
-0.6%
-0.8%

18.21%

-1.0%
-1.2%
Asia ex Japan

2.01
26.00
2.56

Europe

Japan

North America

Cash

Total

Important Remark: Differences between attribution returns and the returns of the official performance measurement tool are usual. They can be
explained by the two systems using two different methodologies and by intraday trading gains or losses. Above figures are subject to future changes.

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 24

Performance analysis
by MSCI Sector
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecomm Services
Utilities
Cash
Total

Average Average Relative


PF Weight BM Weight Weight
12.03%
12.18%
-0.15%
8.83%
9.26%
-0.43%
8.29%
7.41%
0.88%
21.70%
22.94%
-1.24%
11.73%
12.53%
-0.80%
10.45%
9.71%
0.74%
12.33%
12.49%
-0.16%
4.84%
4.53%
0.31%
6.15%
5.24%
0.91%
2.44%
3.72%
-1.28%
1.21%
0.00%
1.21%
100.00% 100.00%
0.00%

(6/11)
Absolute Absolute
PF Return BM Return
15.58%
23.07%
7.74%
5.09%
13.30%
10.51%
24.94%
23.90%
7.31%
9.60%
24.08%
34.93%
32.79%
25.06%
30.33%
23.11%
12.64%
15.02%
15.45%
34.09%
0.00%
8.94%
19.60%
18.28%

Difference Difference
PF-BM BM-BM Tot
3.47%
-7.49%
-14.51%
2.65%
-6.30%
-2.79%
5.34%
-1.04%
-12.30%
2.29%
4.48%
10.85%
13.19%
-7.73%
10.73%
-7.22%
-6.96%
2.38%
-4.15%
18.64%
-19.60%
8.94%
0.00%
-1.32%

Import remarks:
- The weight numbers gives an overview of the average weight invested in the different groups (e.g. sectors) with daily weights averaged over the chosen period.
- The absolute return numbers give an overview of the group's absolute performance (e.g. sector) within thc chosen time period (portfolio and bechmark)
- The difference PF-BM compares the group's performance of the portfolio to the group's performance in the benchmark within the chosen time period.
- The difference BM-BM Tot compares the group's performance in the benchmark with the performance of the total benchmark within the chosen time period.
Please note that cash is included in the relevant country or regional groups and shown as "other assets" else (e.g. in sectors). Concerning derivatives, only futures are split up at the
moment; derivatives (call or put options) are not yet included. Moreover, illiquid securities as private placements are not yet taken into account.

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 25

Performance analysis
by MSCI Sector
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecomm Services
Utilities
Cash
Total

(7/11)
Asset
Allocation
0.00%
0.05%
0.00%
-0.10%
0.20%
-0.04%
-0.21%
0.01%
-0.11%
0.02%
-0.78%
-0.96%

Stock
Selection
-0.86%
0.28%
-0.19%
-0.21%
0.35%
0.99%
-0.91%
-0.28%
0.21%
0.74%
0.00%
0.13%

Interaction

Total
-0.89%
0.36%
-0.21%
-0.30%
0.52%
1.07%
-1.11%
-0.35%
0.02%
0.35%
-0.78%
-1.32%

-0.03%
0.03%
-0.02%
0.01%
-0.03%
0.12%
0.01%
-0.08%
-0.08%
-0.41%
0.00%
-0.49%

Import remarks:
Asset Allocation Effect is the portion of portfolio excess return that is attributable to taking different group bets from the benchmark. An overweight of a group
(e.g. SPI sector "Chemicals" ) that outperforms the whole benchmark (e.g. SPI) will generate a positive asset allocation effect.
Security Selection Effect is the portion of portfolio excess return attributable to choosing different securities within groups from the benchmark. An overweight
of a well-performing security (e.g. Novartis) in comparison to its group benchmark (e.g. SPI sector "Chemicals") will generate a positive stock selection effect.
Interaction Effect is the portion of the portfolio excess return which is not attributable to asset allocation not stock selection.

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 26

Performance analysis
by 5 World Regions
Asia ex Japan
Europe
Japan
North America
Cash
Total

Average Average Relative


PF Weight BM Weight Weight
1.86%
3.16%
-1.30%
27.62%
28.92%
-1.30%
9.83%
8.74%
1.09%
59.48%
59.17%
0.31%
1.21%
0.00%
1.21%
100.00% 100.00%
0.00%

(8/11)
Absolute Absolute
PF Return BM Return
12.52%
31.51%
25.40%
24.36%
20.16%
21.75%
15.99%
16.38%
8.94%
0.00%
18.28%
19.60%

Difference Difference
PF-BM BM-BM Tot
11.91%
-18.99%
4.76%
1.04%
2.15%
-1.59%
-3.23%
-0.39%
-19.60%
8.94%
0.00%
-1.32%

Import remarks:
- The weight numbers gives an overview of the average weight invested in the different groups (e.g. sectors) with daily weights averaged over the chosen period.
- The absolute return numbers give an overview of the group's absolute performance (e.g. sector) within the chosen time period (portfolio and bechmark)
- The difference PF-BM compares the group's performance of the portfolio to the group's performance in the benchmark within the chosen time period.
- The difference BM-BM Tot compares the group's performance in the benchmark with the performance of the total benchmark within the chosen time period.
Please note that cash is included in the relevant country or regional groups and shown as "other assets" else (e.g. in sectors). Concerning derivatives, only futures are split up at the
moment; derivatives (call or put options) are not yet included. Moreover, illiquid securities as private placements are not yet taken into account.

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 27

Performance analysis
by 5 World Regions
Asia ex Japan
Europe
Japan
North America
Cash
Total

(9/11)
Asset
Allocation
-0.10%
-0.04%
-0.09%
0.01%
-0.78%
-1.01%

Stock
Selection
-0.56%
0.34%
-0.16%
-0.20%
0.00%
-0.59%

Interaction
0.30%
-0.07%
-0.08%
0.14%
0.00%
0.28%

Total
-0.36%
0.23%
-0.33%
-0.05%
-0.78%
-1.32%

Import remarks:
Asset Allocation Effect is the portion of portfolio excess return that is attributable to taking different group bets from the benchmark. An overweight of a group
(e.g. SPI sector "Chemicals" ) that outperforms the whole benchmark (e.g. SPI) will generate a positive asset allocation effect.
Security Selection Effect is the portion of portfolio excess return attributable to choosing different securities within groups from the benchmark. An overweight
of a well-performing security (e.g. Novartis) in comparison to its group benchmark (e.g. SPI sector "Chemicals") will generate a positive stock selection effect.
Interaction Effect is the portion of the portfolio excess return which is not attributable to asset allocation not stock selection.

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 28

Performance analysis

(10/11)

Portfolio

Benchmark

Risk Model: Global

Portfolio

Tracking Error

Number of Securities

67

1'550

Total Risk (ex-ante)

18.81%

2.57%

Number of Currencies

Factor Specific Risk

18.66%

1.50%

- Region

11.50%

0.18%

Risk Model: Global

Portfolio Value

84'334'091

Total Risk (ex-ante)

18.81%

18.21%

- Country

6.98%

0.83%

- Factor Specific Risk

18.66%

18.18%

- Industry

2.64%

0.77%

- Stock Specific Risk

2.39%

1.02%

- Fundamental

1.44%

0.78%

Tracking Error (ex-ante)

2.57%

- Currency

8.42%

0.27%

- Covariance (+/-)

9.35%

0.52%

Stock Specific Risk

2.39%

2.08%

Relative Value at Risk


R-squared
Beta-adjusted Risk

3'570'469
0.98
18.64%

18.21%

Predicted Beta

1.02

Predicted Dividend Yield

1.86

2.01

P/E Ratio (E: 12 months)

28.39

26.00

P/B Ratio (B: year-end)

2.58

2.56

Explication of risk model: Factor risk is a standard deviation that is


measured by multiplying the 5-year exposure of the components of a portfolio
to each risk factor and by multiplying these figures by the externally determined
risk of each factor. The Tracking Error is measured similarly except that it is the
difference between portfolio and benchmark exposure that is multiplied.
Specific Risk is the standard deviation that measures the volatility of the risk not
captured by the factor model. The model consists of 3 regional, 21 country, 38
industry and 8 fundamental factors (market cap, 4-year E/P growth, E/P, B/P, 5year yield, long term debt, 5-year ROE variablity and 5-year earnings variability).

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 29

Performance review

Product

Accounts

Relative
return

Riskadjusted
return

Client

Risk
Ex-ante
risk limits

Clients at
risk

Investment controlling committee

Performance review meeting

Escalation process

decides on the accounts that


appear on the watch list

decides on corrective
measures

escalates serious performance


problem to the senior management

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 30

3. Example of a performance review

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 31

Performance review
Where does the return come from or from which decision does

the return originate?


What risks have been taken (relative / absolute)?
Is the choice of the benchmark sensible? Are the general
circumstances still valid or reasonable?
Are the investment guidelines still reasonable and have they been
respected?
What was the impact of the costs on the overall return?
Is the risk profile and risk budget still appropriate?
What was the performance of the competitors or the peers?
Etc.

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 32

Investment controlling and the investment process


Actual market data and
forcasts

Re-balancing

Asset allocation

Portfolio construction

Investment
guidelines

Investment controlling /
performance monitoring

Investment target, risk profile and benchmark

6
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 33

Management effects over time


2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%

-1.0%

-1.5%

31.01.2003 28.02.2003 31.03.2003 30.04.2003 31.05.2003 30.06.2003 31.07.2003 31.08.2003 30.09.2003 31.10.2003 30.11.2003 31.12.2003

Total Monthly

0.04%

0.53%

-0.57%

0.49%

-0.99%

-0.08%

0.49%

-0.06%

-0.83%

-0.15%

-0.14%

Asset Allocation Monthly

-0.12%

0.02%

-0.11%

-0.63%

-0.12%

0.01%

0.05%

-0.15%

-0.17%

-0.07%

-0.02%

-0.14%
0.08%

Stock Picking Monthly

0.47%

0.47%

-0.51%

1.23%

-1.00%

-0.05%

0.41%

0.03%

-0.67%

0.04%

-0.05%

-0.18%

Interaction Monthly

-0.31%

0.04%

0.05%

-0.11%

0.13%

-0.04%

0.03%

0.06%

0.01%

-0.12%

-0.07%

-0.04%

Total Cummulated

0.04%

0.53%

-0.04%

0.49%

-0.17%

-0.25%

0.26%

0.21%

-0.80%

-0.98%

-1.12%

-1.32%

Asset Allocation Cummulated

-0.12%

-0.10%

-0.21%

-0.80%

-0.52%

-0.54%

-0.51%

-0.70%

-0.90%

-1.03%

-1.05%

-0.96%

Stock Picking Cummulated

0.47%

0.91%

0.40%

1.66%

0.63%

0.62%

1.08%

1.16%

0.32%

0.41%

0.36%

0.13%

Interaction Cummulated

-0.31%

-0.28%

-0.23%

-0.37%

-0.28%

-0.33%

-0.31%

-0.25%

-0.22%

-0.36%

-0.43%

-0.49%

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 34

Sector weights over time


25%

20%

15%

10%

5%

0%
Jan 03

Feb 03

Mrz 03

Apr 03

Mai 03

Jun 03

Jul 03

Aug 03

Sep 03

Okt 03

Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

Information Technology

Materials

Telecomm Services

Utilities

Other Assets

Nov 03

Dez 03

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 35

Ex-ante risks over time


3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%
Jan 03

Feb 03

Mrz 03

Apr 03

Mai 03

Jun 03

Jul 03

Aug 03

Sep 03

Total Tracking Error

Factor Specific

a) Region

b) Country

d) Fundamental

e) Currency

f) Covariance

Stock Specific

Okt 03

Nov 03

Dez 03

c) Industry

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 36

Conclusion

(1/2)

No big sector bets


Maximum underweight 1.28%
No big country Bets
Maximum underweight 1.30%
Big security specific-bets
67 versus 1550 securities in the benchmark
Big security specific-risk
Stock specific risk 2.08% versus factor specific risk 1.50%
=>The asset manager pursued a stock picking approach with neutral
sector and country bets!

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 37

Conclusion
Biggest return contributions
Overweight cash
Stock selection
Consumer discretionary
Information technology
Industrials
Utilities
Interaction utilities
Biggest relative risk contribution
Stock specific risk

(2/2)
=> - 0.78%
=>
=>
=>
=>
=>

- 0.86%
- 0.91%
+ 0.99%
+ 0.74%
- 0.41%

=>

2.08%

=> Stock picking effect that did not pay out!


Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 38

What can investment controlling achieve?

Realistic discussion of performance.


Reduction of undesired or unintended risks.
Performing an independent review.
Focusing on ex-ante risk and decision making process.
Early awareness of potential problems.
Supervision of correct implementation of investment decisions.

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 39

What can investment controlling NOT achieve?

That what the professional may not be able to achieve!

Produced by: Dr. Stefan J. Illmer


Date: April 2010 Slide 40