[MUSIC] There is a vast choice when it comes to who to invest your money with. So how do I find the right investment manager. To identify the right one, we need to start with ourselves. By knowing our objectives, plan the search steps and analyze the right criteria. This selection process is in particular important and structured for large institutions, sometimes also defined by law. They will carefully translate their objectives into the right selection criteria and define the necessary steps for a selection process. In doing so they often collaborate with investment consultants and issue a request for proposal which is a detailed questionnaire to be answered by candidate investment managers. The right choice can have a very significant monetary impact over the long run. Criteria, other than the more obvious performance and risk ratios, that we have been discussed before in the previous video, also include team stability, experience, assets under management, process and philosophy, the degree of customization, the quality and reactivity of client services and reporting and local aspects such as knowledge about the regulatory environment. So if we look at the quantitative criteria, the first thing that comes to our minds is to analyze performance and the different ways to do this. As it has been explained before, by including excess return, alpha, performance in down-markets, and absolute performance. Apart from these, other factors that directly influence performance are the manager fees. So we're looking at the cost of our investment as well as the persistence and the timing of returns over time, or the behavior of the investment in stressed markets. Some clients have in addition to all of these above specific accounting constraints. And therefore, they will also then realize gains and losses and other accounting elements. Risk, as you know, is another central component of an investor's analysis before an investment. Hand in hand with performance, the ratios discussed before need to be taken into account, which includes volatility, correlation, Beta, tracking error, value at risk. This should also include the horizon of our investment. In addition to the standard risk ratios, risk analysis can include more complex risk modeling such as stress tests and simulations, typically Monte Carlo and historical simulations. So now how can I actually be sure that the performance that I see and analyze is really representative of a manager's skills? Well, for performance and risk analysis, global standards have been adopted by most asset management firms. They're called the Global Investment Performance Standards. The main idea is to bundle all the portfolios that are managed in a certain strategy and therefore the results will be representative. And so that no single portfolio will be picked for performance reasons, which is called cherry picking. These bundled portfolios are called composites. The standards provide rules when it comes to composition of benchmark, its evaluation. And so on and only comprise accounts that are, in fact, managed on a discretionary basis. This means that the manager will actually be granted a very high degree of freedom within the investment guidelines. So, in other words, what and when an investment on behalf of the client is to be carried out. Another advantage from an investors point of view is that the production of the composite data is reviewed by an external independent auditor. When it comes to distinguishing luck from skills. There are also several methods to analyze portfolio management performance. That range is from simple indicators to very technically involve methodologies. Those simple indicators included just counting months of under and out performance. The consistency of positive returns in different markets and looking at the performance attribution which basically shows where performance stems from. Is it sector allocation or is it picking the right stock, the right bond, and so on? And to see whether these sources are consistent over time. Fees, as I mentioned before, of course have a very important impact on performance. To compare two portfolio managers on a fair basis, we need to analyze the growth performance before fees that is given that the fees vary depending on the provider and they're not linked to the manager's investment skills. However, ultimately an investor will relieve the return after fees. So the expected historical net return will be among the most important information we want to retrieve. In order to get there the management fees and other fees such as custody and administrative fees will need to be subtracted on a yearly basis if we analyze gross performance. Now having analyzed all this how should we balance all the criteria? This will depend on different factors including the type of investor, our investment horizon, the type of solution and product, the risk return objectives, the regulatory requirements, discretion given to the asset manager and possibly accounting objectives. A well prepared selection process might use, this is just an example, 25% of the risk adjusted performance, 25% on fees, 15% on team stability, 15 on experience and assets under management, 10% on the investment process and the philosophy. And approximately another 10% to the local know-how. Now this other criteria would typically be reporting, client service, regulatory knowledge, and others. To choose the right asset manager is a process that involves translating your objectives and preferences into several sub-criteria. This is, however, not limited to risk and return. By adding a weight to each criterion, the investor can prioritize each of them. Through a well planned process we then analyze all the information and can retrieve from the request for proposal paper and manager meetings, the information we need to gather. At the end, we hopefully have it very detailed pictures and are in good shape to make a right choice. To see whether all that I said had been understood, one question. How do you call the internationally accepted performance standards? Is that a) Agreed Performance Measurement Level. B, international investment performance standards. C, global standards risk and performance. Or is it d, the global investment performance standards. The answer is d, global investment performance standards or GIPS. Thank you for watching. And now, let's move to the next video, which will talk about formalizing investment objectives.