Led by Client Questions

The first foundational principle of the ACT report is that it is designed to help clients understand the particular group of active managers of interest to them. This isn’t a generic report produced in a vacuum, but rather is explicitly designed to be bespoke for each client, driven by the client’s specific holdings and centered around answering specific questions.

Providing Insight, Not Producing Data

The second goal of the ACT report is to provide actionable insights, which we believe are significantly more valuable than simply producing data. Today’s world, with its extraordinary computational capabilities and information availability, allows the generation of significant amounts of raw data with relative ease. The problem is that investors want answers to questions, not laborious tables of mind‑boggling data. How to produce data that provide real insight? At T. Rowe Price, we have sought to address this problem in three distinct ways:

• The ACT report is question‑led, not data‑led. We neither produce reports that are excessively long, nor produce information that isn’t directly connected to answering a particular question. We seek to get the order right: First, clarify what questions are important to the client, then focus on the particular analysis that will best answer those specific questions. To avoid data fatigue, we carefully consider and scrutinize the additional information provided by each bit of analysis included in a report. We try not to answer a question in three different ways when one way will do.
• We focus on data visualization as the means of communication versus generating endless tables of data. This is a key part of our process: Once we know the questions to answer and the specific analyses that address them, we then focus on how to visually present relevant information in an efficient, compelling, and clear way. We believe this lucidity—which is often overlooked in investment reporting—is critical to effectively conveying insight to our clients.
• Finally, the ACT report is a supporting document and not the main event, which is the ongoing conversation between the client and us. These conversations are at the heart of engaging clients. The ACT report is designed to facilitate an interactive and constructive dialogue with clients on their portfolio of active managers, not a standalone document by itself.

Insights

While the ACT report is customized to answer specific client questions, the typical structure is based on three central themes:

• the characteristics of the strategies themselves;
• the relationships between the strategies; and
• the various risk aspects of the strategies.

The first section of the report focuses on the various characteristics of the strategies on a standalone basis. Among other items of interest, we look at performance across different time periods, the statistical distribution of each manager’s returns, the consistency of performance over time, manager behavior in different market regimes, and the factor decompositions of the manager’s performance profile. Figure 1 provides a visual snapshot of how we present some of this information.

The second section of the report looks at the behavior of active managers in relation to each other. The focus is on both the direction and the strength of the relationship between the excess returns of different managers. For instance, a portfolio in which excess returns are all highly correlated is likely to have a more volatile excess return profile than a portfolio where alphas are lowly correlated.

While simple correlations are useful, we augment them both with similarity metrics (such as k‑means clustering) and with conditional performance metrics to provide a different view of how managers are or are not related. Figure 2 is a snapshot of some of the analysis included in this section.

The third and final section of the report explores the various risk aspects of the managers, focusing on both relative and absolute returns. Among other aspects, this section focuses on the relationship between the manager’s volatility and tracking error, between the central part of the risk distribution and the tails of the distribution, and among the various types of drawdowns. Figure 3 provides a snapshot of some of the analytical work in the tracking error section.

Conclusions

The ACT report is designed to provide T. Rowe Price clients with insights into their portfolios of active managers, helping us to have more informed conversations with them. Importantly, the ACT report isn’t linked to any particular product. It is a tool for informed conversations, not a sales aid. The ACT report forms part of a broader process of engagement with our clients undertaken by the multi‑asset solutions team. Our goal is to use the ACT report as part of our toolkit of investment analytics, products, and strategies to help our clients achieve their investment objectives.