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2007
2007
Hedge Fund Replication
July / August 2007
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Morningstar's style-box method of classification may have a competitor on the horizon. AthenaInvest Inc. has been beta testing a new strategy-based system that aims to categorize asset managers, not by their size/style exposure, but by their stated approach to the market. Firm co-founder Craig Callahan said that active managers sacrifice, on average, 300 basis points of performance in their efforts to remain true to their style/size category. "When managers are forced to stay in a box, it forces them to underperform because it restricts the choices they can make and it forces them to create sub-optimal portfolios," says AthenaInvest president Wes Schrader. "We believe that active managers should be allowed to do what they do best, which is pursue alpha. And to do that they need the entire universe." AthenaInvest's Schrader says the style boxes were a good idea originally and that they brought some much-needed organization to the mutual fund industry, providing financial advisors a way to sort through funds when developing their asset allocation models. However, over time, the style boxes evolved into something more constricting; AthenaInvest is seeking to reverse this trend. Morningstar's vice president of research, John Rekenthaler, disagrees. "That's really the heart of a fundamental disagreement between Athena and Morningstar—that they say that portfolio managers are kind of terrified of Morningstar's or someone else's style boxes and are running portfolios in response to it. We feel that the vast majority of financial advisors understand the notion of the style box as a tool, that they're not just dumping funds if they switch style boxes." The result of AthenaInvest's efforts is a strategy-based system that was arrived at through analysis of fund managers' publicly stated objectives as found in compliance-approved documents like prospectuses and marketing materials. AthenaInvest ultimately uncovered 10 strategy types. Because of pending patents, Schrader could not comment extensively on the selected strategies, but he offered an example. In the competitive position strategy category, a fund manager selects stocks based on factors such as strong fundamentals, quality management and brand strength—all managers using this as their primary strategy are put into this peer group. AthenaInvest plans to launch its platform in July. Interestingly, index funds fall outside AthenaInvest's classification system; the strategy designations are for the active portion of a portfolio only. Of course, the strategy represents a new challenge to indexes, as they could be used to create alternative performance benchmarks for active managers. |
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