Manager Performance Evaluation at JANA

Part 1: What Is a Fund Manager?

A fund manager is defined as a professional investment firm tasked with investing money on behalf of clients. This can involve a variety of management types, including, but not limited to:

Australian equity managers
Global bond managers
Private equity managers
Property and infrastructure managers

Large institutional clients, such as superannuation funds, insurance companies, and not-for-profits (NFPs), typically hire multiple specialist managers. The role of JANA is pivotal in researching, selecting, monitoring, and sometimes replacing these managers.

Part 2: Why Manager Performance Matters at JANA

At JANA, the focus is not on direct stock or asset selection. Rather, the emphasis is placed on identifying the top fund managers across each asset class and ensuring their continued performance. JANA evaluates these managers based on:

Performance - This encompasses returns, risk, and consistency.
Process and People - The evaluation of how returns were achieved is also critical.

Recent graduates support these evaluations by preparing performance reports and raising issues when any manager is identified as underperforming.

Part 3: Two Ways to Judge Manager Performance

The assessment of manager performance involves two primary questions:

Did the manager deliver good returns? This aspect is quantitative and focuses on numerical performance.
Did the manager deliver those returns in a reliable, repeatable way? This qualitative analysis of process and personnel is equally important. JANA maintains that both elements are essential—relying solely on numerical data is never sufficient.

Part 4: Quantitative Analysis (Performance Numbers)

Quantitative analysis addresses the question: “what happened?” It evaluates the performance of a fund manager in comparison to:

Benchmark
Target return
Peers

Key Terms

Benchmark
- Defined as a market index utilized for measurement and comparison. Examples include:
- ASX 200 for Australian equities
- MSCI World for global equities
- Bloomberg AusBond Composite for bonds
- Outcomes are assessed as follows:
- If the manager outperforms the benchmark → this is termed outperformance (positive alpha).
- If the manager underperforms the benchmark → this is termed underperformance (negative alpha).
Absolute Return vs Relative Return
- Absolute return refers to the total return produced by the manager, e.g., “8% last year.”
- Relative return gauges how much the manager exceeded or fell short of the benchmark, e.g., “+1.3% above the benchmark.”
- JANA prioritizes relative performance in order to judge the value added by the manager.
Risk-adjusted Return (Sharpe Ratio)
- This measures whether good returns were produced relative to the level of risk undertaken. For instance:
- Manager A: 8% return, high risk.
- Manager B: 8% return, low risk.
- In this comparison, Manager B is deemed superior due to lower risk.
Consistency
- Consistency evaluates whether a manager can outperform regularly or if their success is merely a result of luck. JANA considers:
- Performance over varied timeframes such as 1, 3, 5, 7, and 10 years.
- Performance across different market environments.
- Patterns or streaks of outperformance signify genuine skill.
Drawdowns
- This term refers to the magnitude of losses sustained by the manager during adverse market conditions and is particularly relevant for:
- Insurance portfolios
- Conservative financial options
- Charities requiring stability.
Tracking Error
- This is defined as the level of divergence of the manager’s returns from the benchmark. A high tracking error indicates active risk-taking (active bets), while a low tracking error shows alignment with index benchmarks. JANA uses this indicator to discern whether managers are genuinely active or merely adhering closely to benchmark indices.

Part 5: Qualitative Analysis (The Story Behind the Numbers)

Qualitative analysis seeks to understand the rationale behind performance outcomes. A manager may have a standout year while still representing a poor long-term decision, or conversely, a poor year may not be indicative of their overall potential. Thus, JANA investigates various qualitative factors:

People (Team)
- Inquiry into the core portfolio managers:
  - Are the key managers experienced?
  - Is there a high turnover within the team?
  - Is sufficient succession planning in place?
- If significant staff departures occur, JANA may downgrade or terminate a manager’s contract.
Investment Process
- This is deemed the most critical qualitative aspect. Managers must uphold:
  - A defined and repeatable investment approach.
  - Structured methodologies for decision-making.
  - Rigorous risk management controls.
  - Evidence supporting the effectiveness of their investment process across different market cycles.
- JANA seeks investment processes that mitigate the influence of luck.
Philosophy
- This encapsulates the manager's beliefs regarding financial markets, including:
  - Value investing
  - Growth investing
  - Quantitative factor-based approaches
  - High conviction strategies
- It is essential that the documented investment philosophy is both consistent and coherent.
Capacity
- An excessive amount of capital can impair a manager’s ability to deliver optimal performance. For example, a small-cap stock picker managing $20 billion may no longer effectively fulfill their role. JANA assesses whether managers are appropriately “closing funds” at suitable intervals.
Fees
- JANA ensures that higher fees are justified by a corresponding level of skill. As such, negotiations regarding fees are undertaken to protect clients from potential overpayment.

Part 6: How JANA Monitors Managers (What Graduates Actually Do)

JANA employs several methods to keep track of fund managers, which includes:

Monthly and quarterly performance reports
- Tasks involve data extraction, return calculations, and trend graphing.
Identifying red flags
- These might include signs of underperformance, staff changes, or deviations from style.
- Graduates are responsible for flagging these concerns to senior consultants.
Attending manager meetings
- Graduates take notes during meetings with fund managers to capture essential discussions and insights.
Supporting ratings decisions
- Each manager is evaluated and rated by JANA, categorizing them as Approved, Watchlist, or Terminate.
Tracking Tactical Asset Allocation (TAA) impact
- Awareness of different manager behaviors under tactical positions is necessary for comprehensive analysis.

Part 7: What JANA Does When a Manager Underperforms

Not every instance of underperformance results in immediate dismissal. JANA engages in a thorough evaluation process:

Assess if underperformance aligns with the manager’s investment strategy.
Determine whether the underperformance is of a temporary nature or if it reflects a structural issue.
Verify adherence to established processes by the manager.
Identify if there have been significant staff changes.
Evaluate any increases in risk.

If concerns persist, the manager is placed on a Watchlist, which involves more stringent monitoring, and JANA may proceed towards ultimately replacing the manager if necessary.

Part 8: Why This Matters for the Interview

Having an understanding of manager performance evaluation enhances your ability to respond effectively to potential interview questions such as:

“How does JANA assess a fund manager’s efficacy?”
“What factors would you consider when evaluating performance?”
“What methods would you use to identify underperformance?”

Part 9: Simple Summary (Learning-Level)

In essence, assessing manager performance necessitates measuring returns while simultaneously understanding the reasoning behind those returns. JANA employs a dual approach of evaluating both quantitative (the numerical results) and qualitative (the rationale behind the results) components. Graduates contribute to this assessment by analyzing returns, identifying risks, and supporting decision-making processes related to hiring, rating, and monitoring fund managers.