A Multicriteria Approach for Selecting a Portfolio Manager

This paper introduces the application of the multicriteria method Promethee II to the selection of a portfolio manager. Such application involves four main steps: (1) defining the list of potential actions or solutions to the problem; (2) defining the list of relevant criteria; (3) evaluating the performance of each action based on each criterion; and (4) aggregating these performances with the multicriteria method Promethee II. The use of a multicriteria approach to this problem is appropriate, as multiple criteria seem to be used by decision-makers in the selection of a portfolio manager. Criteria applied to this model are derived from a set of depth interviews with managers of the 12 major pension funds in the Province of Quebec. We ended up with nine criteria that turned out to be heterogeneous and conflicting in their nature. These criteria were then grouped into four groups: (1) past performance, (2) investment philosophy, (3) staff criteria, and (4) organizational criteria. The richness of data collected through the interviews allowed us to specify accurately the decision-makers' preference functions. It was thus possible to choose an outranking technique as a multicriteria aggregating procedure. The choice was limited to one technique of the ELECTRE family and one of the PROMETHEE family of methods. The Promethee II was thus used because the interviews revealed that no veto thresholds were applicable to the model. Furthermore, the application is a ranking problem where it is necessary to prioritize a set portfolio managers of from “best” to “worst”. Finally, the analysis is concluded by an application of the paper to the selection of a small capitalization stock portfolio manager.