Your Aug. 9 ranking of global money managers listed United Asset Management's assets under management at $146 billion as of the end of last year. In fact, UAM's client assets totaled $201 billion at that time.
The difference in the figures is primarily attributable to UAM affiliates that were not in P&I's database. Also, Heitman Capital Management was included in the ranking under its own name, whereas it is part of the UAM family.
Jonathan V. Hubbard
United Asset Management
Bruce Kelly's "Active international firms pull ahead of indexes" article, in the Aug. 23 issue of P&I, is so titled because the PIPER median international manager returned 4.8% vs. 2.5% for the Morgan Stanley Capital International Europe Australasia Far East index. The article goes on to attribute much of this outperformance to emerging market exposure, since emerging markets returned 24.4% in the quarter and the EAFE index does not include emerging markets.
What the article misses is two important facts that almost all international performance evaluations miss. Style matters in international investing, just as it does in domestic, and international peer groups are totally worthless, since they're more likely to mislead than to help. My international style analysis for the second quarter shows large companies up 2.4%, in line with EAFE, while midcap firms earned 7.2% and small-cap, 11.4%. In other words, you didn't have to be in emerging markets to beat the mighty EAFE, you just needed to have some non-large-cap exposure. This is analogous to domestic managers beating the Standard & Poor's 500 index, which generally happens when smaller companies do better. To round out the international style picture for the quarter, my value outperformed growth. Most U.S managers have a value tilt in their international investing, as generally manifested in their Asia underweightings, which is another reason why the benchmark was easy to beat in the quarter.
But the style problem is much less serious than the peer group problem, which is more complicated to solve. Even huge domestic peer groups are loaded with survivor, composition and classification biases. To appreciate this problem internationally, recognize that even the largest international peer groups comprise less than $40 billion, while the international market exceeds $15 trillion. That is, international peer groups represent less than 0.2% of their market. It's like using two stocks from the Russell 1000 to evaluate domestic large-cap managers. In other words, the observation that active managers beat the benchmark is based on a very puny sample, which exacerbates the problem of mis-specifying the benchmark for most managers.
Like the benchmark problem, the peer group problem also has a solution. With today's computer technology, any manager can be cyber-cloned over and over again to create opportunity distributions that capture the full range of performance available to any style of management in any geographic region. Savvy purveyors of peer groups should use this approach to calibrate their puny samples. Unfortunately, this technology hasn't yet gained the acceptance that style analysis has, but this doesn't change the fact that it is indeed a superior approach. Its time will come. I'm PODsitive.
Roxbury Capital Management
Santa Monica, Calif.