Page 76 - NovDefComp

Scorecard System Methodology™
Scorecard System Methodology™

Passive Strategies
Passive Strategies

Passive strategies are investment strategies where the fund manager is trying to track or replicate some area of the market. These types of strategies
may be broad-based in nature (e.g., the fund manager is trying to track/replicate the entire U.S. equity market like the S&P 500) or may be more
specific to a particular area of the market (e.g., the fund manager may be trying to track/replicate the technology sector). These investment strategies
typically have lower fees than active investment strategies due to their passive nature of investing and are commonly referred to as index funds. For
this type of investment strategy, the Scorecard System is focused on how well these managers track and/or replicate a particular area of the market
with an emphasis on how they compare against their peers.

Maximum
Weightings Passive Strategies
Points

Style Analysis: Returns-based analysis to determine the style characteristics of a fund over a period of time. Fund passes 1
if it reflects the appropriate style characteristics. Style analysis helps ensure proper diversification in the Plan.

Style Drift: Returns-based analysis to determine the behavior of the fund/manager over multiple (rolling) time periods. Fund
Style & passes if the fund exhibits a consistent style pattern. Style consistency is desired so that funds can be effectively monitored 1
Tracking within their designated asset class.
Factors
40% R-Squared: Measures the percentage of a fund’s returns that are explained by the benchmark. Fund passes with an R- 1
squared greater than 95 percent. This statistic measures whether the benchmark used in the analysis is appropriate.

Tracking Error: Measures the percentage of a fund’s excess return volatility relative to the benchmark. Fund passes with a 1
tracking error less than 4. This statistic measures how well the fund tracks the benchmark.

Tracking Error Peer Group Ranking: Fund passes if its median rank is above the 75 percentile. 1
th

Peer Group Expense Ratio Peer Group Ranking: Fund passes if its median rank is above the 75 percentile. 1
th
Rankings
40% Returns Peer Group Ranking: Fund passes if its median rank is above the 75 percentile. 1
th
th
Sharpe Ratio Peer Group Ranking: Fund passes if its median rank is above the 75 percentile. 1

Qualitative Two points may be awarded based on qualitative characteristics of the fund. Primary considerations are given to fund
Factors expenses and strength of statistics, however, other significant factors may be considered. 2
20% It is important to take into account nonquantitative factors, which may impact future performance.

Total 10

16