Morningstar Advisor - Summer 2007 - (Page 19)

wasn’t to create a restrictive “buy list” for the firm’s planners but rather to present a menu of ideas, one that they could confidently select from, knowing the level of research and oversight that went into creating it. Five years later, Reed and research analyst Chris Goff, in consultation with an investment committee, oversee a select list of 89 funds in 13 categories that includes 51 actively managed offerings, 15 index funds, and 23 exchange-traded funds. Building and Maintaining When compiling the original lists for each of the 13 investment categories TrustCore uses, one of Reed’s biggest initial concerns was style purity—and consistency. While a Morningstar category might serve as an initial screen, Reed wants to “set the bar a little bit higher” in terms of investment style. “We have different numbers for different categories,” he says, but to gain consideration as a large-cap fund, for example, an offering must have at least 70% of its assets invested in large-cap stocks, not just a majority. Beyond the portfolio, Reed then looks for funds that have maintained some consistency in style box placement. He allows some freedom for fund managers to move, but is primarily interested in funds with a consistent style profile. Morningstar Advisor Workstation Office Edition, which has replaced the firm’s Principia subscription, is the starting point for the screening process, which will eventually end up in a series of Microsoft Excel spreadsheets. (Subscribers can easily export data from any screen in Office Edition directly to Excel.) In addition to style concerns, other initial screening criteria include risk and return, manager tenure, asset base, relative rankings, up- and down-capture ratios, and consistency over rolling time periods. Eventually, each category is pared down to a more manageable list of 10 to 20 names, at which point Reed and his team hit the phones. Here’s where an advantage of the research team approach becomes apparent. Pooling the assets of the firm results in a total dollar amount that’s more likely to attract the attention of money management firms than are the numbers controlled by the firm’s individual planners. It also makes it more likely for TrustCore to gain access to more favorable share classes for its clients. “We always try to look for opportunities to get into institutional share classes; we really try to leverage,” Reed says. “The one thing you know about investing ahead of time is how much you’re going to pay—and that’s the only thing—so we really work hard on that.” Phone conversations are the first step, but Reed likes to visit the managers in person to “kick the tires” and gain an in-depth understanding of their investment approaches. Finally, the funds that pass muster are voted on by Reed and the investment committee to create the final list of names for each category. Within each, Reed looks for a variety of non-overlapping approaches. As he puts it, “I didn’t want to have numbers just to have numbers. So, for example, within large-cap growth we have a range of different ways to get there—conservative, quantitative, and so on.” The team uses daily data from Office Edition to monitor the lists. In general, Reed isn’t overly patient with underperformers, which are placed on a watch list and given a short leash. The Advantages names at the boutique level: “There are some high-quality managers out there that you’re not going to see in Money magazine or on CNBC.” The research team approach also means greater consistency for TrustCore clients. The higher level of familiarity with each investment manager allows Reed to better analyze performance in context of each manager’s specific style. “Having this research process has allowed us to really get to know the managers and understand what they’re doing.” He gives the example of Jensen I JENIX, one of his large-cap growth picks. He stuck with the fund through a poor showing in 2004 and 2005. He was rewarded for his patience when the fund outperformed in 2006. Another advantage is that the research process is scalable, reducing the cost of research as the firm grows. Finally, Reed thinks the approach could work for other researchintensive tasks, such as model portfolio creation and retirement plan consulting. Buying In Ultimately, the best gauge of the approach is the amount of buy-in it receives from TrustCore’s planners. And by that measure, it’s proving to be a success. TrustCore’s planners are an independent lot— they own their relationships with individual clients and are free to make their own investment decisions. But the planners are using the ideas generated by the research team. Reed estimates that half of the firm’s client assets is invested in the funds on the list. “I think there’s a sense of ownership, not only by the investment committee, but by all our planners, that these are ideas that we have come up with,” Reed says. “That gives us confidence when putting portfolios together for our clients.” K Increased efficiency—Reed’s original inspiration—is the most obvious positive result of the research group approach. But Reed also believes that consolidating his firm’s research for its collective asset base has helped TrustCore gain additional attention from both fund companies and portfolio managers. Some managers have made themselves available to meet with TrustCore’s clients. At the same time, having the luxury of dedicated research time has opened Reed’s eyes to David Harrell is a former Morningstar fund analyst who has had various editorial and product development roles at Morningstar. MorningstarAdvisor.com 19 http://www.morningstaradvisor.com

Table of Contents Feed for the Digital Edition of Morningstar Advisor - Summer 2007

Morningstar Advisor - Summer 2007 Contents Letter from the Publisher Get to Know the Bond “All-Stars” Research Briefs Our Stewardship Test Gets Tougher Save It for Later Too Many Oranges Best of Both Worlds No Two Clients Are Alike When It Comes to VAs, It’s Seller Beware Hands On: Finding the Suitable Fund Share Class for Your Client Fund Style Can Drift Off Course Sticking to Their Style, Through Thick and Thin Marathon Man Growth, With a Chaser A Menu of Ideas to Fill Five Market Baskets Funds: Finding Funds with Conviction Stocks: So You Say You Want Income? All Eyes on China Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities What’s New at Morningstar and on the Web The Advisor’s Economic Moat

Morningstar Advisor - Summer 2007

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