Rationale of Style Based on Return Analysis

Major Techniques

1.	Portfolio characteristics

a.	Investment approach and point-in-time characteristics of the securities within the portfolio

b.	Characteristics include price/earnings, price/book, earnings growth, market capitalization, etc.

c.	Labor intensive and judgmental

d.	May result in significant style drift

2.	Return based style analysis

(Theory developed by William F. Sharpe)

a.	Relies on investment managers' historical returns to determine the appropriate style classification

b.	Similar to regression analysis but technically is a quadratic optimization program

c.	Manager's historical returns are regressed upon various chosen indexes

d.	Resultant style is the mixture of indexes returns that match the portfolio's returns the closest

Return-Based Style Analysis Fundamentals

1.	Return-based style analysis inputs

a.	Selection of Indexes -- very important

b.	Appropriate Time-Period -- Minimal information is added beyond five years of returns for most manager styles

c.	Effects of using monthly or quarterly data -- monthly data is preferred for style analysis

2.	Styles and total allocation

-- After determining each manager's style, the styles are weighted by the dollar amount invested within the fund sponsor's portfolio to determine the fund's asset allocation

3.	Cautions/Caveats

a.	Based on historic returns and any information on the manager's current portfolio needs to be obtained using another technique

b.	May not be applicable to all managers. This would be apparent when the R-Squared is low (below 60%)

c.	Need to account for non-style related relationships between managers. May need to use other data in addition to "Style Advisor"