03 NutzungVonGIPSdurchConsultants Eggerstedt

Towers Watson Manager Research
How we use fund performance data

Harald Eggerstedt
13. Mrz 2012
2012 Towers Watson. All rights reserved.
Manager selection at Towers Watson

The goal is to find managers that exhibit a sustainable competitive advantage We believe that successful managers exhibit certain repeating patterns or success factors Qualitative manager research is key there is a high luck to skill ratio in performance Quantitative research helps to provide challenge
Our Philosophy
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2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
TW manager research: highly concentrated coverage

Managers Products
5,612
24,218
2,298
7,681
664
2,340
We carry out over 2,000 research meetings per year and have met over 2,500 different managers
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Alignment supports long-term performance focus

What we look for: Client interests
Performance fees Alignment of interests
Co-investment
Asset management company interests Employee ownership
Portfolio manager interests
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Typical process for rating products

Universe of managers Desk-based research Market knowledge, contacts, publications, databases Experience/stability of team, fees, process/philosophy, quant analysis Meet key people, detail on process, independent thoughts emails Review managers research & quant output, further quant analysis Sit in on internal meetings & investment discussions, meet more people
Initial research meetings Follow-up desk-based research & conf calls Follow-up meetings Engagement Devils advocate Skill 1 considerations ASK signs off
Fees, capacity framework, vehicles One ASK member makes case against rating manager highly Key points to cover before moving to a FREX 1 skill rating ASK debates all key issues & decides whether to assign a FREX 1 skill rating
Head of stream signs off

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Key differentiators of our manager research

One of the worlds largest independent teams
Experienced and stable team Ability to leverage one of the largest teams of independent manager researchers globally and our team of analysts Local on-the-ground presence in every major market Globally integrated, substantial resource Asset class focus, including global and regional exposure Experienced in working alongside clients research teams Fewer conflicts of interest than our competitors No asset management or banking operation No fund of funds operation Focus on the traits of the great investors Past performance useless for providing answers, great for providing more questions Qualitative research is key: Business, People and Process Bottom-up idea generation We are close to the best fixed income managers Manager Research feeds ideas and innovations into top-down asset research teams Significant investment in proprietary tools analysis tailored to your needs Ex ante risk assessment Trade analysis and capacity analysis
Research-driven
Independent
Well defined research investment philosophy Asset experts to enrich strategic thinking Quant analysis tailored to client needs
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Research group structure
Strong commitment to research with 199 researchers globally
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Manager research locations
European Research Team

71 researchers
Americas Research Team

31 researchers
Global Research Team

132 researchers (90 full-time equivalents)
Asia Pacific Research Team 30 researchers
Small decision making groups with an asset class focus - Area of Specialist Knowledge (ASK) teams
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TW and eVestment relationship

How does eVestment link to Dream?
eVestment Alliance (eVestment) provides investment data and analytic technology to the institutional marketplace, and was founded in 2000 by former Watson Wyatt associates.
Investment Managers D A T A D A T A
The Dream database is TWs central repository for manager research. Prior to 2009, the database was maintained internally and focused on qualitative manager research. In January 2009, Towers Watson and eVestment signed a partnership agreement to jointly develop a global manager research platform. This agreement extended our long-standing relationship with eVestment in the US and Canada to a fully global relationship.
Under this agreement, eVestment serves as TWs data collection engine for investment manager quantitative data. The information is captured through eVestments Global Database, which is an online questionnaire portal.
Manager discovery & due diligence
Manager selection exercises
Manager monitoring reports
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Users of eVestment database

Fundof Foundation 1% Financial Fund 3% Advisor 3% Invst. Bank 1%
Over 1,100 clients firm-wide 38 of the Top 50 global consultants (76%) are clients 150+ consulting clients overall representing US$10.6 trillion in Assets Under Advisement Clients currently in 20 countries around the world Averaging 900+ new products added to the database per quarter Data currently submitted in 16 unique base currencies
PublicFund/ Government 3% Corporate Pension 5% Other 6%
Consultant 21% Investment Manager 57%
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eV: the largest institutional fund database
Dataset United States Canada United Kingdom Europe Australia Japan Asia-Pacific ex-Japan Global/EAFE/Emg Mkts Totals
Equity 6,794 398 182 479 267 226 457 3,016 11,941
Fixed Income 3,174 304 200 253 96 7 33 882 4,982
Balanced 424 165 3 8 6 0 7 955 1,582
Alts & Hedge Funds 321 14 5 54 5 11 47 849 1,365
Real Estate 139 13 35 41 12 1 13 63 324
Total 10,852 894 425 835 386 245 557 5,765 20,194
with overall database covering 95% of global institutional marketplace
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Introduction Towers Watson Number Monkey
The Number Monkey is a tool that analyses the performance of the manager and summarizes key statistics. In particular for active managers achieved alpha versus a target. The tool analyses the return series characteristics and estimates the possible performance attribution factors. The tool allows us to graphically display, maximum drawdown, CUSUM analysis and various tests analysing the managers outperformance significance. The tool also evaluates several key statistics such as rolling IR's, tracking errors, Sharpe ratios, Value At Risk, market timing skills and other metrics that reveal more about the managers investment strategy. Our long-term clients make us ponder the managers ability to add value over the entire market cycle. The Number Monkey allows us to view the managers performance under several economic environments and judge their ability to generate alpha over different macro and micro economic environments.
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Relative return analysis (manager alpha)
Things to look for 1. Any trends or cycles in the managers alpha over rolling 1, 3 and 5 year periods? 2. Did the managers ability to generate alpha differ depending on whether the market was in an up or a down cycle? 3. Does most of the alpha come from just a few months or is it fairly consistent over time?
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Expected Alpha Analysis (1)

On the first chart, the Cum Alpha line represents the compounded cumulative geometric monthly alpha achieved from the beginning to the end of the period. The Cum Alpha is compared against the Target Alpha which is a straight line that plots the cumulative return of an assumed constant annual alpha. The St.Dev and 2 St.Dev bands plot the hypothetical cumulative standard deviation (tracking error) defined by the user. The expected alpha and annual standard deviation are assumed to be constant from the beginning to the end of the period.
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Expected Alpha Analysis (2)

This chart shows the simple average alpha (i.e. no geometric compounding), as well as a 95% confidence interval that represents the area where the alpha is not statistically different from zero. The confidence intervals are calculated using the realised standard deviation up to the relevant date and the first 24 data points are ignored where standard error is very high. A positive alpha should be considered as an indication of the managers skills only if it statistically significant.
Things to look for 1. How does the realised performance compare to our prior expectations? 2. Is the performance outside our confidence bands, and should we be looking at changing our target risk and returns? 3. If the manager is currently below their target alpha, how extreme is the required return over the next year (in terms of number of std deviations) that will bring the managers performance back on track?
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Summary Statistics
The table summarises the values of various statistics over 1, 3, and 5 year periods as well as since inception (shown as Total). The statistics are: Relative return (Alpha pa) ; Tracking Error, (i.e. the standard deviation of the Alpha); IR (Information Ratio=Alpha/TE); Best monthly alpha during the period; Worst monthly alpha during the period; Regressed Alpha (value of the intercept calculated by regressing the managers performance against the benchmark); Regressed Beta (value of the slope calculated regressing the managers performance against the benchmark); Absolute return of the managers portfolio; Absolute Volatility (standard deviation of the absolute performance); Sharpe ratio = (Abs return - Risk free rate) / Abs volatility; Sortino ratio = (Abs return - Risk free rate) / Abs downside-semi-deviation). Numbers are all annualised with the exception of best and worst monthly returns.
Things to look for 1. Any shifts relative to the longer term statistics? 2. How do these statistics compare with those of other funds? 3. What are the confidence intervals for the main statistics over the whole history?
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Market Timing
Market timing analysis can help to understand better some characteristics of portfolio returns relative to benchmark and to provide different views on the embedded investment philosophy. An outstanding manager will demonstrate significant stock selection capabilities and successful market timing skills at all market phases. The quadratic parameter (gamma) measures timing capabilities: a positive gamma will indicate that timing activities have added value to portfolio performance. Comparing the gammas of different funds will indicate the relative importance of timing activities in their investment policies. As usual, we have to be sure that the model we use fits our data. To trust any outcome of a regression model we have to justify that R-square is high. The capture ratio is an indicator of portfolio performance relative to benchmark at different market phases. It measures compound return of a portfolio over compound return of its benchmark when the benchmark is up (upside capture ratio) or down (downside capture ratio). If the upside ratio is greater than 1 (downside ratio less than 1), this means that the portfolio beat the benchmark in upmarket (downmarket).
Things to look for 1. Is manager able to assess the direction of the market and position the portfolio accordingly? 2. Did portfolio outperform the market when the index went up (down)?
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Drawdown Analysis
The drawdown chart highlights periods when a manager produced negative returns, how big was the subsequent drop in performance, and how long did it take the manager to fully recover from this period of negative performance. This is particularly useful for accessing funds that claim to preserve capital or funds with high water marks in their fee structures.
Things to look for 1. How frequently does the manager produce negative returns? 2. How long does it take the manager to make back the money he lost? 3. When would have been the worst possible time for a new investor to invest in the fund and how much would he have lost?
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3 Year Rolling Analysis

Average 3 Year relative returns (pa) Chart The chart plots the rolling 3 years monthly Alpha (or relative return) with the 95% confidence intervals, which represent the area where the alpha is not statistically different from zero. If the alpha is outside the bands, then the managers performance is statistically different to the benchmark. Normality of returns is assumed to plot the confidence interval. Ann Regressed alpha (36 obs) Chart The black line represents the value of the intercept calculated by regressing rolling 36 months of returns against the benchmark. As in the previous chart, the bands represent the interval where the alpha is not statistically significant. The light orange line is the R squared of the regression: the higher the R squared value the higher the reliability of the regression. Since this is a linear regression, the value of the R squared varies between 0 (the regression is not saying anything) and 1 (all the variance is explained by the model). Regressed Beta (36 obs) Chart The calculations for this chart are the same as for the regressed alpha chart but the value of the slope (beta) is plotted instead of the intercept (alpha). If the black line is between the confidence intervals, then the beta of the manager is not statistically different from 1.
Things to look for 1. Look for when relative returns, regressed alpha and beta became statistically significant, and if it was persistent or only temporary. 2. If the rolling 3 year statistics never fall outside the confidence bands, then the manager is statistically the same as the benchmark on that particular measure
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Corporate - Bond Fund vs UK Credit

Relative return analysis
25 20 25 15 10 5 0 -5 -10 -15 -20 20 15 10 5 0 -5 -10 -15 -20 -25
Since Inception till Dec-11

Geometric
Achieved Alpha vs. Target Alpha
Target (%) Achieved (%)
Alpha TrackErr
0.9 1.5
-0.2 4.0
31/01/02
30/11/02
30/09/03
31/07/04
31/05/05
31/03/06
31/01/07
30/11/07
30/09/08
31/07/09
31/05/10
Monthly
in rising market in falling market
Roll 1Y %pa
Roll 3Y %pa
Roll 5Y %pa
Target Alpha 2 St.Dev
St.Dev Cum Alpha
Market Timing
8% Manager return 6% 4% y = -12.561x2 + 1.3809x + 0.0011 R = 0.7964 2% 0% -6% -4% -2% -2% -4% -6% -8% -10% -12% Benchmark return 0% 2% 4% 6%
Summary statistics
Quadratic parameter 0.00
Total 10Ys 0Ms Conf Interval -0.22 [-0.2, 1.2] 4.00 [3.6, 4.4] -0.06 4.16 n/a -5.93 n/a -0.14 [-0.2, 0.3] 1.30 [0.85, 1.16] 5.22 [2.8, 5.6] 7.51 [6.7, 8.3] 0.16 0.18 5Y 3Y 1Y
Description
Relative Return (%) Tracking error (%) IR Best monthly outp (%) Worst monthly outp (%) Regr Alpha (%) Regr Beta Absolute Return (%) Absolute volatility (%) Sharpe ratio Sortino ratio
Upside 1.27 Capture Beat the benchmark in upmarket Downside 1.28 Capture Not beat the benchmark in downmarket
-1.3 5.6 -0.2 4.2 -5.9 -0.2 1.4 3.4 9.8 -0.1 -0.1
3.0 5.4 0.6 4.2 -4.4 0.0 1.4 11.7 9.6 0.8 1.0
1.9 1.0 2.0 0.6 -0.3 0.2 0.9 8.9 4.5 1.1 3.6
Towers Watson Limited - Performance Wizard
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31/03/11
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-02
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
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DrawDown (absolute returns)
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
60

Relative Return Distribution Analysis
95% c.l. VaR Modified VaR CVaR Active VaR Modified Active VaR Active CVaR Fund -3.2% -3.7% -6.0% -2.0% -2.2% -4.0% Benchmark -1.9% -2.0% -2.9%
0
50
-5
40
-10
30
-15
20
-20
10
-25
0
Moments of the distribution Mean Standard Deviation Skewness Kurtosis (excess)

-5.7 -4.5 -3.3 -2.1 -0.9 0.3 1.5 2.7 3.9 5.1
0.0% 1.2% -1.4 8.9
-30
Distribution does NOT look normal Distribution DOES exhibit serial correlation
CUSUM and Likelihood

May-04 Dec-04 Aug-02 Feb-06 Mar-03 Jan-02 Oct-03 Jul-05
IR CUSUM
Nov-07 Sep-06 Jun-08 Apr-07
Likelihood
Aug-09 Mar-10 Jan-09 Oct-10
Alarm
Jan-04 Jan-05
Average Relative Return Analysis (first 2Y ignored)

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
0 5 10
6 4 2 0
0.4
8Y 0Qs
0.3 0.2 0.1 0
0.524345 1.027035 0.7747 -1.4457 0.065957 1.003272 4.203027 4.169984 0.094058
1.4659661 1.0005124 0.7747 -0.3372 0.1292659 0.8966393 2.5394264 3.2951314 -1.086729
15 20 25
-2 -4
-0.1
-6 -8
30 35
-0.2 -0.3 -0.4
-10 -12
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GBP Corporate - Bond Fund ! vs UK Credit

DrawDown (absolute returns)
8 9 l u J 9 9 l u J 0 0 l u J 1 0 l u J 2 0 l u J 3 0 l u J 4 0 l u J 5 0 l u J 6 0 l u J 7 0 l u J 8 0 l u J 9 0 l u J 0 1 l u J 1 1 l u J

Relative Return Distribution Analysis
80 70 60
0 -1
50
-2 -3 -4 -5 -6
40 30 20 10 0 -10 9 . 2 3 . 2 7 . 1 1 . 1 5 . 0 2 . 0 8 . 0 4 . 1 0 . 2 6 . 2
95% c.l. VaR Modified VaR CVaR Active VaR Modified Active VaR Active CVaR
Fund -1.8% -1.8% -2.6% -0.8% -0.7% -1.4%
Benchmark -1.8% -1.8% -2.7%
Moments of the distribution Mean Standard Deviation Skewness Kurtosis (excess)
0.0% 0.5% 0.0 6.2
-7
Distribution does NOT look normal Distribution does not exhibit serial correlation
CUSUM and Likelihood

8 9 l u J 9 9 b e F 9 9 p e S 0 0 r p A 0 0 v o N 1 0 n u J 2 0 n a J 2 0 g u A 3 0 r a M 3 0 t c O 4 0 y a M
IR CUSUM
4 0 c e D 5 0 l u J 6 0 b e F 6 0 p e S 7 0 r p A
Likelihood
7 0 v o N 8 0 n u J 9 0 n a J 9 0 g u A 0 1 r a M
Alarm
0 1 t c O
Average Relative Return Analysis (first 2Y ignored)

0 0 l u J 1 0 l u J 2 0 l u J 3 0 l u J 4 0 l u J 5 0 l u J 6 0 l u J 7 0 l u J 8 0 l u J 9 0 l u J 0 1 l u J 1 1 l u J
5 4
0.6
8Y 0Qs
5
0.4
3
10
0.094838 1.908117 2.165 -2.2179 0.043769 0.926853 6.045654 4.371293 1.019432
0.3057571 0.2032056 0.1311 -0.0875 0.0234697 1.0206767 1.3792173 3.6028612 -3.609606
2
15
0.2
1
0
0
20
-1
25
-0.2
-2
30
-0.4
-3
-0.6
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Market cycle analysis
Benchmark 50 40 30 20 10 0 -10 -20 -30 -40 50 40 30 20 10 0 -10 -20 -30 -40 Maturity spread: Long - Short 50 40 30 20 10 0 -10 -20 -30 -40 Quality spread: BBB - AAA
Bull market Pos Neg 43 33
Bear Market 22 22 Pos Neg
15+ 38 34
0-5 27 21 Pos Neg
BBB 45 27
AAA 20 28
Maturity Factors: 3Y Rolling Performance

Long Short 3 Year Relative Return
Quality Factors: 3Y Rolling Performance

BBB AAA 3 Year Relative Return
25 20
0 15 5 10 5 0 -5 -5 0 Dez 04 Aug 06 Dez 09 Feb 09 Jun 07 Aug 11 Okt 05 Apr 08 Okt 10 -10 Dez 04 Aug 06 Dez 09 Jun 07 Apr 08 Aug 11 Feb 09 Okt 05 Okt 10
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GBP Corporate - Bond Fund ! vs UK Credit

Market cycle analysis
Benchmark 80 60 40 20 0 -20 -40 -60 -20 -40 20 0 60 40 Maturity spread: Long - Short 80 60 40 20 0 -20 -40 -60 Quality spread: BBB - AAA
Bull market Pos Neg 59 46
Bear Market 36 21 Pos Neg
15+ 52 35
0-5 43 32 Pos Neg
BBB 57 37
AAA 38 30
Maturity Factors: 3Y Rolling Performance

Long Short 3 Year Relative Return
Quality Factors: 3Y Rolling Performance

BBB AAA 3 Year Relative Return
20 15 10 5 0 -5 -10 Dez 03 Dez 08 Jun 06 Feb 03 Aug 05 Feb 08 Jun 01 Aug 10 Jun 11 Okt 04 Apr 07 Apr 02 Okt 09 Dez 03 Dez 08 Jun 06 Feb 03 Aug 05 Feb 08 Aug 10 Jun 11 Jun 01 Okt 04 Apr 07 Apr 02 Okt 09
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Towers Watson Manager Research Model Portfolios

What are they? How are they run?
A theoretical multimanager portfolio Investment decisions are proposed and tracked on a quarterly basis
Model portfolios are run by the Towers Watson manager research team in the same way as if they were given delegate responsibility for client assets in a particular asset class Each model assumes an initial account size (typically 500m or 100m), benchmark, base currency and makes assumptions for transaction costs The manager research team discusses changes to model portfolios and portfolio construction before officially proposing changes to be implemented from the start of the next quarter Performance is sourced each quarter and a management fee for a typical Towers Watson client is removed to generate realistic net return numbers
What are they used for?
To demonstrate Towers Watsons skill in manager research
The models aim to demonstrate Towers Watsons skill in manager research, in particular the ability to select managers and structure portfolios They replicate, as accurately as possible, how Towers Watson would run a similar client mandate The aim is to maximise the net information ratio whilst also delivering an attractive level of return
What else should I note?
The models cannot fully replicate the complexities of the real world
Fee structures are becoming increasingly complex, hence some simplifying assumptions are necessary to allow us to proxy the exact fees on a quarterly basis The transaction cost applied for transitioning between products is an approximation Model portfolios generally ignore practical implementation costs, which may be incurred outside of the vehicle, such as tax, legal and custody The model portfolios may not be investible by a client at a point in time as some of the products may currently be closed to new business Towers Watson never rely solely on performance when assessing managers. Clients, too, should not just rely on the model performance numbers when assessing Towers Watson, but develop an understanding of the Towers Watson philosophy and process Towers Watson believes that short-term performance contains very limited information on skill, hence the model portfolio track records are only displayed once they have at least a three-year track record and there is a preference to focus on since inception returns Despite potentially having more than a ten-year track record, one model on its own does not demonstrate skill with much statistical significance
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Towers Watson model portfolios All (EUR)

Track record since inception to 31 December 2011
%
7
1
n/a n/a n/a n/a
GrossRelativeReturn(annualised)
NetRelativeReturn(annualised)
All figures are annualised since inception and are expressed in Euro terms. Please note that inception dates vary, but all the models above have been running for at least three years. Past performance is not necessarily a guide to future investment performance.
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Towers Watson model portfolios Over ten-year track records (EUR)

Track record since inception to 31 December 2011
%
7
GrossRelativeReturn(annualised)
NetRelativeReturn(annualised)
All figures are annualised since inception and are expressed in Euro terms. Please note that inception dates vary, but all the models above have been running for at least ten years. Past performance is not necessarily a guide to future investment performance.
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Model inception dates and benchmarks

Model Global equities EAFE equities US equities US small-cap equities European equities Europe ex UK equities UK equities UK small-cap equities Asia ex Japan equities Japanese equities Hong Kong equities Australian equities Emerging market equities Unconstrained equities Global aggregate bonds Global government bonds Global credit bonds Global high yield bonds US fixed income bonds Euro aggregate bonds Euro credit bonds UK aggregate bonds UK government bonds UK credit bonds Australian fixed income bonds Emerging market debt Global listed property securities UK property Long-short equities Broad hedge funds Core fund of hedge funds Niche fund of hedge funds Inception Date 01/01/2000 01/01/2003 01/01/2000 01/01/2006 01/01/2000 01/01/2000 01/01/2000 01/01/2000 01/10/2002 01/01/2000 01/07/2005 01/04/2003 01/01/2000 01/01/2005 01/10/2001 01/01/2000 01/01/2004 01/07/2006 01/01/2003 01/10/2002 01/01/2007 01/04/2002 01/01/2000 01/01/2003 01/04/2003 01/04/2002 01/01/2007 01/01/2000 01/01/2005 01/01/2008 01/04/2007 01/04/2007 Benchmark MSCI World (ND) MSCI EAFE (ND) S&P 5001 Russell 2500 FTSE W Europe FTSE W Europe ex UK FTSE All-Share FTSE Small-Cap ex IT MSCI AC Asia ex Japan (GD)2 Topix FTSE MPF Hong Kong3 ASX/S&P 300 MSCI EM (GD) MSCI World (ND) 4 Composite of manager benchmarks5 Composite of manager benchmarks
6
Notes 1. Model portfolio was measured against the FTSE AW USA, until 31 March 2002, when the benchmark was changed to the S&P 500 MSCI Far East ex Japan since inception until 30/06/2006 when it changed to MSCI AC Asia ex Japan 90% FTSE HK + 10% HSBC since inception until 30/09/2009 when it changed to FTSE MPF HK Model was measured against MSCI World until 30 September 2011 after which the benchmark changed to MSCI AC World Benchmark is a composite of the hedged and un-hedged Barclays Capital Global Aggregate Index Benchmark is Citigroup WGBI or similar Benchmark is Barclays Global Aggregate Credit or similar The Global High Yield model includes European, US and Global high yield strategies all measured against the managers respective benchmarks Composite of Barclays Capital Euro Aggregate and iBoxx Euro BIG Index Composite of Barclays Capital Euro Aggregate Credit and Corporate and iBoxx Euro Corporates Benchmark is Merill Lynch Sterling Broad or similar Benchmark is FTSE Gilts All Stocks or similar Benchmark is Merill Lynch Sterling Non-Gilts or similar Benchmark was JP EMBI+ since inception to 31/03/2006 when it changed to the JP EMBI Global Diversified, until 31/12/2006. Now measured against a Composite of the JPM EMBI Global Diversified and the JPM GBI-EM
2. 3. 4.
5. 6. 7. 8.
9. 10. 11. 12. 13. 14.
Composite of manager benchmarks7 Composite of manager benchmarks8 Barclays US Universal Composite of manager benchmarks9 Composite of manager benchmarks10 Composite of manager benchmarks11 Composite of manager benchmarks12 Composite of manager benchmarks13 UB SA Composite Composite of manager benchmarks14 FTSE EPRA/NAREIT Global Developed HSBC All Balanced Funds Index HFRI Equity Hedge (Total) Index HFRI Fund of Funds Composite Index HFRI Fund of Funds Composite Index HFRI Fund of Funds Composite Index
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Summary
TW has an extensive global research infrastructure designed to assist clients in their strategy formulation, risk management and manager selection needs Our manager valuation is not quant-driven, but based on a qualitative analysis (business, people, process). Performance data are used to check whether product strategies are implemented successfully and consistently over time. We look for sustainable outperformance after fees over 3 or (better) 5 years eVestment Alliance allows us easy access to performance data, however, we depend on the managers willingness to feed high-quality data into the database Our systems allow us to run detailed relative return analyses, which help us to assess a managers style and his ability to adjust to changes in market conditions Quantitative data play an important role in our Manager Watch process (for top-rated managers) and in fiduciary mandates We run model portfolios across a wide range of products in order to monitor our own success in selecting best in class managers
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Disclaimer
Towers Watson has prepared this document for marketing purposes only. No action should be taken based on this document as it does not include any detailed analysis into your own scheme specifics. In preparing this document we have relied upon data supplied to us by third parties. Whilst reasonable care has been taken to gauge the reliability of this data, we provide no guarantee as to the accuracy or completeness of this data and Towers Watson cannot be held accountable for any errors or misrepresentations in the data made by any third party. This document is provided to the recipients solely for their use, for the purpose indicated. This document is based on information available to Towers Watson at the date of the document and takes no account of subsequent developments after that date. It may not be modified or provided by the recipients to any other party without Towers Watsons prior written permission, except as may be required by law. In the absence of our express written agreement to the contrary, Towers Watson and its directors, officers and employees accept no responsibility and will not be liable for any consequences howsoever arising from any third party's use of or reliance on this document or the opinions we have expressed. The terms Towers Watson, we, our or us above mean Towers Watson Limited and Towers Watson Investment Services, Inc, both Towers Watson companies, as well as all other entities directly or indirectly owned or controlled by Towers Watson & Co. Towers Watson Limited is authorised and regulated by the Financial Services Authority. Towers Watson Investment Services, Inc., is a registered investment adviser with the Securities and Exchange Commission.
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Towers Watson Manager Research

How we use fund performance data

2012 Towers Watson. All rights reserved.

Manager selection at Towers Watson

TW manager research: highly concentrated coverage

Alignment supports long-term performance focus

Performance fees Alignment of interests

Asset management company interests Employee ownership

Portfolio manager interests

Typical process for rating products

Head of stream signs off

Key differentiators of our manager research

Research group structure

Strong commitment to research with 199 researchers globally

Manager research locations

European Research Team

Americas Research Team

Global Research Team

Asia Pacific Research Team 30 researchers

TW and eVestment relationship

Manager discovery & due diligence

Manager selection exercises

Manager monitoring reports

Users of eVestment database

Consultant 21% Investment Manager 57%

eV: the largest institutional fund database

Fixed Income 3,174 304 200 253 96 7 33 882 4,982

Balanced 424 165 3 8 6 0 7 955 1,582

Alts & Hedge Funds 321 14 5 54 5 11 47 849 1,365

Real Estate 139 13 35 41 12 1 13 63 324

with overall database covering 95% of global institutional marketplace

Introduction Towers Watson Number Monkey

Relative return analysis (manager alpha)

Expected Alpha Analysis (1)

Expected Alpha Analysis (2)

3 Year Rolling Analysis

Corporate - Bond Fund vs UK Credit

Since Inception till Dec-11

Achieved Alpha vs. Target Alpha

Target (%) Achieved (%)

in rising market in falling market

Target Alpha 2 St.Dev

St.Dev Cum Alpha

Towers Watson Limited - Performance Wizard

Corporate - Bond Fund vs UK Credit

Since Inception till Dec-11

Moments of the distribution Mean Standard Deviation Skewness Kurtosis (excess)

0.0% 1.2% -1.4 8.9

CUSUM and Likelihood

Average Relative Return Analysis (first 2Y ignored)

0.524345 1.027035 0.7747 -1.4457 0.065957 1.003272 4.203027 4.169984 0.094058

1.4659661 1.0005124 0.7747 -0.3372 0.1292659 0.8966393 2.5394264 3.2951314 -1.086729

Towers Watson Limited - Performance Wizard

GBP Corporate - Bond Fund ! vs UK Credit

Since Inception till Dec-11

Fund -1.8% -1.8% -2.6% -0.8% -0.7% -1.4%

Benchmark -1.8% -1.8% -2.7%

Moments of the distribution Mean Standard Deviation Skewness Kurtosis (excess)

0.0% 0.5% 0.0 6.2

CUSUM and Likelihood

Average Relative Return Analysis (first 2Y ignored)

0.094838 1.908117 2.165 -2.2179 0.043769 0.926853 6.045654 4.371293 1.019432