This document discusses the benefits of a multi-manager investing approach over relying on a single manager. It argues that combining complementary managers with differing styles can provide market-beating returns while reducing risk, analogous to how a team with different player types is more likely to succeed than relying on a single star player. The document also stresses the importance of ongoing monitoring to ensure the right managers are being utilized depending on changing market conditions.

1. 1Championship Investing |
Introduction
“Talent wins games, but teamwork and intelligence wins
championships.” – Michael Jordan
Championship-winning teams in any sport require a
coordinated effort of strong individual players. The long list of
hall-of-fame caliber stars in any sport with the pejorative label
of “best player to never win a championship” highlights that
a single individual’s effort cannot be relied on to win it all. This
brings to mind individual investment managers in portfolios.
No single manager can be relied upon to lead to consistent
success in any given asset class: it takes a lot of intelligence
to put together a competitive team.
Your favourite hockey team faces many types of opponents
with different playbooks throughout its 82-game season;
similarly, investors face many types of environments over a
market cycle. In the same way a team that is one-dimensional
will not be able to consistently compete, investors should
not expect that a single manager will provide market or
peer-beating results in a given period.
Successful multi-manager investing can overcome the
challenges of different market playbooks with the thoughtful
construction of a team of players that can perform well
through any test. The precepts of modern portfolio theory
provide a good conceptual framework for combining
managers into a competitive team.
INVESTMENT MANAGEMENT RESEARCH
Highlights
• Given the varied types of environments over a
market cycle, investors should not expect that a single
manager will provide market or peer-beating results
in a given period.
• Successful multi-manager investing can overcome
the challenges of different market environments by
thoughtfully constructing a portfolio of complementary
managers. The basis for this framwork is provided by
Modern Portfolio Theory (MPT).
• The task is to find managers with similar levels of expected
outperformance that are not perfectly correlated. This will
result in the same level of excess return at the portfolio
level, but with better risk-adjusted returns.
• Effective monitoring of investment managers involves
interacting with and analyzing hired managers, their
peer groups, and the market environment to truly know
whether a change should be made.
• Proper multi-manager investing should ensure that the
right ‘players’ are available to be perennially competitive.
David Wong, CFA, FRM
CIBC Asset Management Inc.
david.wong@cibc.ca
Championship Investing:
The Balanced Attack of Multi-Manager Portfolios
May 2013

2. 2Championship Investing |
Modern Portfolio Theory: The Sum
of the Whole is Greater than the Parts
Harry Markowitz’s seminal work on combining investments
into an efficient portfolio is collectively known as Modern
Portfolio Theory (“MPT”). His studies highlight that the
performance of individual investments need to be considered
in relation to other assets in a portfolio. For a given level
of return, there is an optimal way of achieving it in relation
to risk.
In a multi-manager context, the benefits of combining
managers rest in the excess, as opposed to the absolute,
return. Once a desired level of excess return is stated, the
task is to find managers with similar levels of expected
outperformance that are not perfectly correlated. This will
result in the same level of excess return at the portfolio level,
but with better risk-adjusted (or more consistent) returns. It
is mathematically true that picking a single manager, even a
highly skilled one with high expected long-term results, will be
inferior on a risk-adjusted basis to an approach that combines
similarly skilled managers with different approaches.
While many investors intuitively understand this concept and
apply it when blending a “value” with a “growth” manager,
a sophisticated multi-manager approach uses the lessons of
MPT with specificity to identify managers with true correlation
benefits regardless of a blanket style. In other words, there
are benefits to not treating the broad styles of value, core,
and growth investing as discrete concepts, but rather to
view them as a continuum, whereby specialists can find
outperforming stocks within their areas of focus. In this way,
stocks do not become ignored simply because they do not fit
an unnecessarily narrow definition of value, core or growth.
An illustration of this value-growth continuum is shown
below in Figure 1.
As an example of the power of combining managers, consider
Sustainable Growth Advisors (“SGA”), which appropriately
enough, adheres to a sustainable growth discipline. SGA will
emphasize quality businesses with stable forecast growth in
earnings within a longer-term expected holding period. It is a
patient approach that largely ignores the daily gyrations of the
stock market. For the six years ended 12/31/2012, its U.S. Large
Cap Growth product produced excess returns of 188 basis
points relative to the Russell 1000 Growth index, which was in
the top 10% of its peer group as represented by eVestment’s
U.S. Large Cap Growth Equity Universe.
Cornerstone Capital Management (“Cornerstone”) similarly
favours quality growth businesses; however, it will pay close
attention to the market’s short-term perception of the growth
of the underlying earnings. When sentiment becomes overly
favourable or unfavourable on fundamentals, Cornerstone
will trade around the volatility of individual stocks. In stylistic
terms, this is categorized as contrarian growth. In this way, the
portfolio dynamically changes its risk profile over a market
cycle. For the six years ended 12/31/2012, its Large Cap Growth
product produced excess returns of 64 basis points relative
to the Russell 1000 Growth index, which was just outside
of the top quartile of eVestment’s U.S. Large Cap Growth
Equity Universe.
What are the benefits of combining two peer-leading
approaches? The six-year excess return, ending 12/31/2012,
of a 50/50 SGA/Cornerstone blend with quarterly re-balancing
was 141 basis points, which would be a top 15% result versus
the peer group. While the mix produced a lower return than
simply picking SGA alone (which would have required one to
have perfect foresight), the give up in return of 47 basis points
is small when compared to the decrease in risk. The tracking
errors (or standard deviation of the excess return) of SGA and
Cornerstone on their own over the six-year period were high
at 716 basis points and 570 basis points, respectively. The blend
of the two portfolios had a tracking error of only 410 basis
points, or an improvement of over 300 basis points versus
SGA alone. Said differently, for every percent of tracking error,
SGA produced 26 basis points of excess return, whereas this
increased to 34 basis points of excess return for the 50/50 mix.
In less layman terms, the information ratio improved from
0.26 to 0.34.
Clearly, even the best players can be made better with the
right teammates, even when they play a similar position
(or in this case, invest in similar market segments).
Improved Risk-Return Characteristics
Using a Multi-Manager Approach
Excess Return Tracking Error Information Ratio
Cornerstone 0.64 5.70 0.11
SGA 1.88 7.16 0.26
SGA Cornerstone 1.41 4.10 0.34
Six year excess return and risk statistics, as at 12/31/2012.
Figure 1: Conceptual Value-Growth Continuum
Deep Value Traditional Value Relative Value Core
Growth at a
Reasonable Price
Sustainable
Growth
Earnings
Momentum
Contrarian Growth
Quality Lowest Low Medium-High High Medium Medium-High Low Varies
Valuation Sensitivity Highest Medium-High Medium Medium Medium Medium Lowest High
Dividend Yield Lowest Medium-High Medium-High High Medium-High Low-Medium Low Low-Medium
Fundamental Growth Lowest Low Medium Medium Medium-High High Highest Medium-High
Momentum Lowest Low Low Low-Medium Medium Medium Highest Lowest

3. 3Championship Investing |
Putting a winner on the ice involves more than just an
understanding of the stats. Hockey scouts cannot rely on
the height, weight, speed, and point statistics of a player to
determine if they will do well in the future. Without observing
players in game action, having conversations with them,
understanding the unobservable drivers of future success,
and having the benefit of decades of experience, scouting
becomes a lower probability endeavour. In that vein, manager
researchers that take comfort in a rudimentary understanding
of the 4 P’s of due diligence (philosophy, people, process and
performance) are less likely to put together a winning team
compared to those that have a forward-looking investment
process in place. As in scouting, the odds favour a predictive,
rather than a descriptive approach.
A good scout understands the nuances of every positional
player; some wingers are Art Ross award candidates, while
others are potential Selke Award winners. A good manager
researcher knows what factors separate one growth manager
from another. These insights – in hockey and in multi-manager
investing – will go a long way in minimizing the flaws of a team
against any type of opponent. Many investors do not realize
that the type of growth manager they have may be as out
of place in a given environment as a wispy finesse player in a
slugfest. This is not the “fault” of the player, but the general
manager for not putting a diverse enough mix of talent on the
team. Proper multi-manager investing should ensure that the
right players are available to be perennially competitive.
Good hockey organizations need to have the pieces for
tomorrow’s team in place well before today’s star players have
hung up their skates, or have otherwise faced the harsh reality
of diminishing skill. Many hockey teams have been accused of
making “panic” trades at the deadline for a playoff run, only
to later realize that they made emotional decisions that are
damaging in the long term. In the same way, investors should
identify good managers before there is an urgent need, and
then monitor them until the time comes to make a substitution.
Careful consideration to structural gaps needs to be made in
order to maintain a balanced attack; finding the next batch of
great players is important, but the usefulness of this is reduced
when they are all shoot-first centremen.
We’ll Keep on Fighting, ‘Til the End:
Champion Investors Never Rest
The benefits of multi-manager investing are clear. Based
on the evidence supporting an approach that combines
complementary managers within an asset class, and perhaps
less obviously within a style in an asset class, investors
should view their managers as positional players on a team.
Underperformance is thus to be expected from a finesse
scorer as the game shifts from fire wagon hockey to a blood
sport. The challenge to maintaining a winning team is in
understanding whether the finesse player is playing to
maximum capability given the circumstances, or if he should
be put out to pasture. Managing, coaching and scouting
for the best investment products are full-time jobs. Fantasy
investing should not be anyone’s hobby.
I Get Knocked Down (But I Get Up Again):
The Benefits of Minimizing Factor Tilts
The challenge with sticking to the game plan is that
confidence can crumble when times get tough; after all,
championship teams do not win every period of play.
While relying on a single strategy – be it growth or value
leaning – can lead to big goal deficits for multiple periods,
successful multi-manager investing minimizes the differential
in any intermission, so that sticking to the strategy becomes
more likely.
However, it takes more than a blind faith in the team to
win. The general manager needs to successfully evaluate the
talent, and with the help of his staff including scouts, coaches,
positional experts, etc., must determine whether a sniper or
a defenseman is in an acceptable slump, or if a change truly
needs to be made. This requires insight beyond that available
to Monday morning quarterbacks; the simple observation of
on-ice statistics is not enough to build a team.
Understanding the player’s mindset, injury reports, recent
matchups that may have led to poor performance, and other
factors will be more predictive than a naïve study of numbers.
There is a good reason that even the most successful fantasy
hockey participant is not a realistic candidate for a professional
hockey management role: the real world is not a linear
addition of simple statistics. This is the difference between
viscerally trading Alexander Ovechkin after a drop in goals,
and having the professional judgment to expect a reversion
to his prolific mean.
In the same way, investors need to understand whether their
hired portfolio managers have truly lost their mojo when
performance turns sour, or if they are performing in line
with expectations given the available opportunities. Past
performance does not tell the story. After all, talented goal
scorers are less likely to be effective in a chippy game. Effective
monitoring of investment managers involves interaction with
and analysis of hired managers, their peer groups, and the
market environment in order to truly know if a trade should
be made.
Scouting for Future Stars
(or Research, Not Search)
Putting together the right team of portfolio managers to beat
a benchmark in the most risk efficient manner requires finding
offerings in the same asset class with similarly strong expected
excess returns. Much like scouting the next top draft picks,
proper identification of great investment managers involves
careful monitoring of hundreds of prospects, watching countless
hours of game tape (or reviewing quarterly investment activity
relative to the peer group), and speaking with players to find
those that will have the best chemistry (or lowest correlation)
with the existing team.

4. 4Championship Investing |
While the precepts of MPT should have changed the investing
landscape for thoughtful portfolio construction, investors
that unintentionally have structural tilts in their portfolios are
behaving like a goalie that is unaware that Jacques Plante
ever existed. Facing slap shots without a mask is not a winning
strategy, and neither is investing without a precise awareness
of factor exposures. Choosing an investment program, like
the Frontiers Pools, that scouts for winning managers early
and designs portfolios with the tools required to maintain a
balanced attack can leave more time for investors to focus
on the more important things, like the playoffs. Game on.
Published in May 2013.This article is provided for general informational purposes only and does not constitute financial, investment, tax, legal or
accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events
are critical to sound investment planning; anyone wishing to act on this article should consult with his or her advisor.The information contained in this
document has been obtained from sources believed to be reliable and is believed to be accurate at the time of publishing, but we do not represent
that it is accurate or complete and it should not be relied upon as such.All opinions and estimates expressed in this document are as of the date of
publication unless otherwise indicated, and are subject to change.The material and/or its contents may not be reproduced without the express written
consent of CIBC Asset Management. CIBC Wood Gundy is responsible for the advice provided to CIBC Wood Gundy Investment Consulting Service
(ICS) clients by any of the ICS investment managers.The ICS program manager, CIBC Asset Management Inc., is a subsidiary of CIBC. CIBC Wood
Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Industry
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