Manager Skill Analytics

Compass offers users the ability to evaluate manager performance on a risk-adjusted basis, including the ability to determine with certain levels of confidence whether a managers excess performance is a result of their process (i.e. the manager is skillful) rather than chance.

As with all manager performance analysis, it is important to evaluate the manager relative to an appropriate benchmark. Compass provides a Benchmark Fit Analytic to assist in identifying the most appropriate benchmark for a manager. The Benchmark Fit Analytic calculates and plots the excess risk and return of the manager vs. multiple user selected indexes. Excess risk is a measure of how closely the manager tracks each index, as a result, the index with which the manager has the lowest level of excess risk represents the benchmark that the manager most closely tracks. The results in the example below, indicate that the "best fit" benchmark, or the benchmark with the lowest excess risk, is the Wilshire Small Value Index.

The manager's return relative to the Wilshire Small Value Index can then be plotted to evaluate their performance over time. In the Combination graph shown below, the bars represent the quarterly excess return of the manager relative to the benchmark (with the corresponding scale on the left axis) and the red line represents the cumulative value-added (with the scale on the right axis).

While this product has outperformed its benchmark over the trailing 5 year period, the quarter-by-quarter results show fairly large dispersions. This result prompts the question, Is the excess return adequate compensation for the level of risk being taken? Stated another way, given the amount of risk taken, is the excess return a result of the managers process (i.e. skill) or is it simply a random outcome (i.e. luck)? Compass allows the user to address this question by evaluating the results statistically.

The cumulative skill graph below plots the manager's cumulative excess return (the blue line) relative to the Wilshire Small Value Index. The red confidence bands above and below the 0.00 axis represent the levels of excess return required to make a determination, with 80% confidence, that the manager is skillful or unskillful, given their unique level of active management risk.

Since the cumulative excess return for the manager plots just above the upper confidence bands over this time period, one would have 80% confidence that the firm's excess return results from their investment process (i.e. skill) as opposed to simply chance. Summary measures of excess return and risk are shown in the lower right-hand corner of the graph.

The Rolling Skill graph in Compass allows the user to analyze trends in excess returns over time. The specific calculations for the Rolling Skill graph are similar to those used in the Cumulative Skill graph above, except that the blue line represents the rolling three-year excess return and the upper and lower confidence bands are a function of the rolling tracking error of the product.

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