FIS Group: ForesIghtS - Beyond the “Mirage” to a Predictive Investment Manager Ranking System

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FIS Group uses quantitative screening method to more accurately predict top quintile managers

FIS Group, a manager of U.S. and global developed, emerging and frontier markets equity portfolio strategies, today published its latest version of their opinion series, ForesIghtS, which discusses how its predictive quantitative screening methods improve selection of investment managers in the top quintile by a significant factor.

Recently, The Wall Street Journal questioned Morningstar’s efficacy of its mutual fund rating system after continued poor performance from fund managers. Morningstar rebutted this statement, saying that their rating system is not predictive of future performance. In this edition of ForesIghtS, FIS Group outlines its own predictive quantitative screening method, which it finds to be more accurate than third-party ratings.

“As a fund-of-funds, our job is to pick managers whom we expect to provide excess return relative to the passive alternative to their strategy,” says Tina Byles Williams, CEO and CIO of FIS Group.

According to FIS Group, while commonly-used quantitative methods such as information ratios and peer group rankings are useful for prescriptive analyses of a manager’s prior performance, they are less useful for predicting which managers will outperform in the future. Active Share, a holdings-based measure of a manager’s active bets, is another often-used criterion for manager selection. The report finds it can provide a distorted picture of a manager’s process as a result of poor benchmark specification or by not accounting for managers that primarily express their active bets through factor rotation, as opposed to picking stocks that are different from the market benchmark. Moreover, like information ratio, while Active Share is useful for weeding out so-called “closet indexers” who are most likely to disappoint on a net-of-fee basis; it cannot estimate performance persistence. “The primary problem with these measures is that they don’t account for the cyclicality of manager styles and pure luck,” adds Byles Williams.

FIS Group believes it has uncovered a more predictive quantitative screening method, following five years of investment and research. By creating a “clone” portfolio that represents a manager’s style, and dissecting the resulting excess return into components that prescribe the performance derived from either or both stock selection and factor timing, FIS Group is able to better understand the drivers of performance. The FIS methodology also incorporates a proprietary “Active Opportunity Score” which addresses some of the drawbacks of Active Share. This method has proven to be more predictive of managers who are likely to provide true excess returns in future; FIS Group has successfully predicted close to 50 percent of the managers that ranked in the top quintile over three years.

Adds Byles Williams: “These results represent a dramatic improvement over commonly used screening criteria. By utilizing a front-end quantitative screening process, we can identify a subset of managers who have a higher probability of relative outperformance and weed out managers whose previous performance is really based on style effects or luck.”

In addition to its ForesIghtS, which examines global economic themes and are published throughout the year, Byles Williams contributes to FIS Group’s Market Outlook series on a quarterly basis. The last Market Outlook was published in November 2017.

About FIS Group

FIS Group is an investment management firm that provides customized manager of managers investment solutions for institutional investors. For 20 years, we have delivered risk-adjusted returns by conquering the complexity of identifying high skill, high active share entrepreneurial managers that have gone largely undiscovered by the institutional investor community. Unique among our peers, FIS Group enhances risk-adjusted returns by using macro strategy insights to allocate capital among the managers and/or through a global macro tactical completion strategy. Our culture is a fusion of relentless curiosity and a scientific, disciplined process.

For more information please visit us at http://www.fisgroup.com.

Investment professionals can look forward to future editions of ForesIghtS, published every two weeks, which will explore high-level strategic topics on the evolution of the investment management industry, the markets, economics and geopolitics. The series conveys FIS Group’s thought leadership on the markets, analysis tools, geopolitics, and other topics of interest within investment management. It provides investment professionals with a concise reflection on articles, papers or presentations that FIS Group finds relevant and interesting.

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Siaolan Albigese
FIS Group Inc
+1 (215) 567-1100
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Zarna Patel
Montieth & Co.
646 864 3253
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@FISGroup
since: 09/2016
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