Article: Best Practices for Analyzing Fund of Funds (FOF) Factor Changes

February 22, 2022

How to instantly and accurately gain insights on FOF and sub-fund trading decisions

Factor change analysis has become the best practice for identifying relevant shifts in style exposures and their causes. Compared to manual spreadsheet methods, automated tools save a significant amount of time in analyzing and explaining the causes of style drifts and the actions taken on a single fund for specific dates, on the spot.

But there’s one type of investment structure where manual calculation and analysis is nearly impossible: a fund of funds (FOF) or multi-manager investment.

Until now.

Any entity or practitioner involved in FOF construction, monitoring and selection – including asset owners, investment consultants, wealth managers, sovereign wealth funds, and multi-manager teams within asset management firms – can now uncover key insights into FOF investments holistically from the top down, with the click of a button.

The complicated nature of a FOF

A FOF is a complex, pooled investment structure involving multiple layers of funds, sometimes containing thousands of securities (across different geographies, sectors and weights), and many moving parts. This makes it unmanageable to clearly and quickly map market and benchmark movements, identify factor changes in style drifts, or calculate which stocks caused the most change.

In addition, a FOF may hold the same stock across different sub-funds, making it even more difficult to account for. This adds to the complexity of seeing what investments are owned, determining the amount of risk and return they are bringing, and how they affect the overall characteristics of the portfolio.

The impossible is now achievable

At what level have changes occurred in a FOF? What caused the biggest change, or changed the data the most? How do the multiple managers work together? Were a manager’s changes driven by their decision and not external market forces? Did a sub-fund go rogue?

A factor change analysis tool can answer these questions and more, and deliver FOF-specific results immediately and accurately. Unlike “black box” tools that show only what moved, our DeltaZoomTM Fund of Funds tool reveal what has happened to a FOF within a specific timeframe, as well as why a factor exposure has changed.

Using calculations of several different parameters across conceivably tens of thousands of stocks, it also correctly separate trading activity between fund allocation decisions at the fund and specific FOF level, and highlight the differences between them.

The power of DeltaZoomTM Fund of Funds

DeltaZoomTM Fund of Funds designed specifically for FOF makes sub-fund factor analysis more accessible, accurate and scalable. It instantly brings clarity of detail around trading decisions and benchmarks as markets and sectors change – holistically, from the top down.

Sub-fund information is collected across multiple data points for an unlimited number of funds and securities. As a result, fund selectors can quickly and easily defend decisions while reducing complexity.

With an aggregate view across managers with different weights and durations, various intuitive visualizations are available that highlight where the differences lie and explain what caused it, at the FOF and sub fund levels. This provides pinpointed insights and complete awareness into the exact changes occurring and those requiring immediate attention.

DeltaZoomTM Fund of Funds allows fund constructors, monitors and selectors to:

  • Deconstruct all managers and the changes they have made allocating from one date to another
  • Determine how much of the change is caused by markets, factors, benchmarks or trading decisions
  • See the impact a sub-fund traded by a manager is having on the total portfolio
  • Monitor the portfolio activity of a sub-fund manager
  • Prove the decision to buy into a new manager or adjust weights resulting in a specific change in factor exposure or style
  • Ensure you and your managers have made the right decisions across entire plan assets
  • Facilitate internal investment team discussions to drive accountability, and investor communications

Visualizing a complex universe

By simplifying the massive complexity of the FOF environment, easy-to-understand visualizations help facilitate clear communication with clients and investment committees, regardless of their backgrounds. It makes it easier to understand, track, and demonstrate change – and expand the value of the data for full audit trails, reconciliation to the basis point, and other purposes.

FOF factor analysis means no more guessing or spending hours, days or weeks figuring out back-end exposure analysis. All the data, explanations and illustrations are at your fingertips in a user-friendly platform to deliver the what, how, when and why of changes.

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Investment Metrics, a Confluence Company, is a global leading provider of investment analytics, reporting, data and research solutions that help institutional investors and advisors achieve better financial outcomes, grow assets and retain clients with clear investment insights.
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