Adam: As someone who works with multi-manager solutions and helps multi-asset portfolio managers implement their asset allocation views, how would you describe your approach to manager research?
Kat: We use what I refer to as the “three Rs” framework, focusing on 1) the role the manager’s strategy will play in the overall allocation, 2) the risks the manager takes, and 3) the residual alpha potential (i.e., manager skill).
I would highlight a few points about this approach. First, it draws on our Fundamental Factor Team’s factor-based analytical approach; we think factors can be valuable in helping to tease out a manager’s natural style biases and the market environments in which alpha generation may be most or least likely. Second, we find that the significance of “role” is often taken for granted and, in fact, believe it is as important as skill when constructing a multi-manager portfolio.
Finally, we think these dimensions should be assessed on different time horizons. Role and risk are more dynamic, meaning they can be evaluated over a shorter time horizon, while residual alpha potential should rely on a longer-term assessment of a manager’s skill.