Conceptual Foundation

The officers and directors of an investment management program need different kinds of performance reports than do portfolio managers and analysts. The function of the Asset Allocation Audit is to reorganize the presentation of investment results to serve the needs of those lead fiduciaries.

The Audit arranges results into a value added format similar to the reports executives use to manage a corporation's assets. This puts fiduciaries, especially those who are not securities markets professionals, into a stronger position to fulfill their oversight responsibilities. It allows them to close the communication gaps that so often frustrate their search for accountability.

The Audit separates a plan sponsor's responsibilities into two areas: the Management of Policy and the Management of Managers. The first deals with the asset classes and sub-classes authorized for investment purposes. The primary policy is a percentage mix of major classes that reflects the sponsor's long-term investment return expectations. Other policy allocations can be made at several levels when strategic and tactical departures are allowed.

The second area of responsibility is the Management of Managers. One of its key components is the process of choosing the portfolio managers who are to invest the fund's assets. The other is the allocation of assets among the selected managers.

The Audit also calculates the values added and lost by portfolio managers. These managers are viewed as quasi employees hired to enhance the returns provided for by the sponsor's policy decisions. Their aggregate results approximate the total value added from manager selection and allocation decisions made by the sponsor. Several charts and tables for each portfolio facilitate an examination of its manager's value to the sponsor. These supplemental records separate each manager's total impact into its primary components: market timing, security selection and fees.

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