Manager Selection

The manager selection initiative forms the bottom-up part of the investment process. Following the identification of suitable potential investments, the Investment Adviser conducts extensive due diligence on each investment opportunity and the manager involved. The goal of its due diligence process is to identify quality investment capacity in commodity-related strategies. All potential investments are incrementally scrutinised and checked against various success criteria. With each step of the due diligence process, the insight into each investment increases while the number of potential investments is reduced.

The due diligence process includes onsite manager visits by the Investment Adviser’s research analysts, reference checks and thorough risk management and legal checks. Due diligence commences with detailed quantitative analysis of each manager’s past performance using a variety of tools and programmes developed by the Investment Adviser. This includes comparative peer group analysis and an examination of performance under conditions of market stress. The Investment Adviser gauges the versatility of managers by simulating their performance impact on various portfolios.

Qualitative considerations include performance sustainability, which involves an assessment of the alpha of each manager’s strategy and whether the manager has the requisite skills to successfully implement the strategy, strong risk management capabilities, alignment of interest and manager experience. A manager has to pass through all the due diligence stages and meet the qualitative and quantitative selection criteria in order to join the approved investment list. Selection also requires independent approval by the operational risk and qualitative risk management teams, and the Investment Adviser’s investment committee must approve each investment dimension, meaning:

• the manager is deemed to possess all the necessary attributes to successfully manage the investment strategy;
• the investment strategy is fundamentally sound and is capable of delivering the required risk/return characteristics; and
• the investment product fulfils all economic, legal and structural requirements.

Once an investment is approved, its continued quality is assessed through the change management (ongoing due diligence and risk management) process.

Risk Management

The Investment Adviser places great emphasis on managing risk in a proactive way throughout the entire investment process. In this sense, risk management is not simply a distinct discipline, but rather an attitude applied to the entire investment process. Fundamental in this regard are the depth of due diligence during the investment selection process and the Investment Adviser’s capabilities in identifying risk-controlled investment strategies. In arriving at the optimal strategy mix, exposures to market, credit and liquidity risk are proactively addressed and, as far as possible, mitigated.

The Investment Adviser also ensures risk is managed independently of the other investment modules at both the investment and portfolio level. At the investment level, operational risks are monitored as part of the change management (ongoing due diligence) process. Strategy risks are also monitored to obtain early warnings of style drift or performance deterioration. This involves the systematic monitoring of risk and return characteristics, including the consistency and distribution of returns, drawdowns and abnormal deviations or return ‘breakouts’. Peer group analysis is also an important tool for risk monitoring.

At the portfolio level, ongoing risk monitoring and management ensure the Investment Adviser adheres to the predetermined investment guidelines for the Company. The risk management activities include asset allocation reviews, VaR (Value at Risk) calculations, stress testing to assess sensitivity to adverse scenarios, and risk attribution analysis. Exposure reports enable the Investment Adviser to quickly identify unfavourable positions that disrupt the target risk profile.