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Noël Amenc, Lionel Martellini and Daphne SfeirEDHEC Risk And Asset Management Research Centre
Date:
February 2002
Abstract:
In this paper, we propose an integrated framework for assessing the risk-adjusted performance of mutual fund managers. The methodology is designed so as to be consistent not only with modern portfolio theory but also with constraints imposed by practical implementation in a context where the presence of a variety of investment styles needs to be acc ounted for.
Application of a Linear Regression Model to the Proactive Investment Strategy of a Pension Fund
Author:
Kenneth G. Buffin
Date:
2001
Abstract:
The consulting actuary is typically concerned with pension plan design and funding issues. For large pension plans, the preparation of asset/liability studies and fund projections will present many challenges and opportunities for the consultant, including the development of optimal asset allocation strategies and risk mitigation strategies. Investment performance measurement and attribution analysis are two other areas where actuaries can make useful contributions to effective asset/liability management. This paper advocates a broader role for actuaries in the proactive investment strategy of a pension fund by utilizing quantitative techniques and feedback analysis.
Equity fund managers are measured by track records relative to published benchmarks and their peers in performance surveys. These performance comparisons are based on pre-tax returns and, thus, hide important information for tax paying investors. This essay briefly outlines the impact of franked dividend yield and turnover on after-tax returns for superannuation investors in the Australian taxation environment...
The motto of professional investment performance evaluators has long been to evaluate skill, not luck."" However, about five years ago, those of us in the evaluation business became aware of the significance of investment style in measuring skill. That is, we learned that skill could only be properly identified if we first lifted the thick clouds of style that routinely distort our perspective. The immediate past is a good case in point. Damning Growth stock managers for their recent losses is folly because it's style, not skill, that is the culprit...
The year end client servicing cycle is upon us, and we’ll soon be putting investment performance into perspective. The following highlights from our December Surz Market Review should be helpful to this purpose.
The commentary covers the past year, 5 years and 80 years.
David B. Loeper, CIMA, Wealthcare Capital Management
Date:
December, 2000
Abstract:
...thousands of advisors who have promoted their value based on the theory of asset allocation and MPT are facing the reality of asset allocation’s practical failure being exposed by the mathematical facts of sophisticated Monte Carlo and probability analysis…
In July 2002, Morningstar unveiled a revised star-rating system designed to eliminate the style-based bias of the old system. The new system includes two innovations for categorizing funds that have received little attention.
The old star-rating system compared historic risk and returns of a mutual fund against the risk and return of one of four broad groups of funds: domestic stock, international stock, taxable bond and tax-exempt bond.
As a consequence, a fund's star rating primarily reflected whether its investment style had been hot or cold, while it was intended to reflect the fund's management skill.
The new system attempts to correct the style bias by comparing a fund's performance against a much smaller group of "similar" funds, such as comparing a small-cap value fund against other small-cap value funds. It promises to do a better job of reflecting the fund's management skill.
The method Morningstar has developed for assigning funds to a particular fund category (28 new stock fund categories and 20 new bond fund categories) creates two innovative ideas.
Equity funds are now separated across a value-growth dimension based on value and growth factors instead of value factors alone.
Investment-grade bond funds are now funneled into categories based on duration and government-general dimensions instead of duration and quality. While reasonable in theory, these approaches are untested empirically.
Singer and Karnosky's (1995) exact and complete return attribution framework does not account for risk, since it ignores accumulated historical information. Its implied investment strategy selection is based on simple return maximization and ignores....
This paper explores the investment styles in mutual funds and hedge funds. The results indicate that there are 39 dominant mutual fund styles that are mixes or specialized subsets of nine broadly defined asset classes. There is little evidence of market timing or asset class rotation in these dominant mutual fund styles. There are five dominant hedge fund styles. Two are correlated with broadly defined asset classes, while the other three are dynamic trading strategies on a number of asset classes. Thus, a 12-factor model with nine asset classes and three dynamic trading strategies should provide a good first step in a unified approach for performance attribution and style analysis of mutual funds and hedge funds.
Perspectives on Capital Markets in 2006 and Beyond
Author:
Ron Surz, PPCA
Date:
January 2007
Abstract:
The U.S. stock market, as measured by the entire Compustat database, returned 16% in 2006, as did the narrower S&P 500. As shown in the exhibit to the right, the 2006 S&P return is substantially higher than its long-run ( 81-year) history of 10% returns per year. By contrast, a 3% return on bonds, as measured by the Citigroup High Grade Corporate Bond Index, is below historical norms. Completing the annual picture, inflation at 3% and T-bill returns at 5% are both near historical averages. It was a good year for stock investors, but not so good for bonds, which is just the opposite of 2005....
Ratings and Rankings: What They Can Tell You About Financial Companies
Author:
Teachers Insurance and Annuity Association College Retirement Equities Fund
Date:
July 1998
Abstract:
When you’re saving and investing for the future, you want to rest assured that your money is in the hands of a solid, reputable organization — in other words, that your money is going to be there when you need it. You probably also want to know how these assets are performing, relative to the risk level you’re comfortable with for meeting your goals. Ratings of financial companies and investment funds can help answer both of these questions.
SEI Investments - Manager Selection and Monitoring
Author:
SEI Investments
Date:
June 2001
Abstract:
SEI Investments takes a highly disciplined approach to investing, based on years of research and experience. SEI has over 30 years of providing manager analysis and performance evaluation. Historically the nation’s largest pension consulting firm, our credentials have included being the performance “report card” for such firms as Fidelity Investments, Goldman Sachs, Salomon Brothers, Alex Brown and many others. These organizations looked to SEI to determine how well their managers were performing....
Selecting, Reviewing and Replacing Investment Managers
Author:
Investment Policy Committee, UWO Pension Plans for Academic and Administrative Staff
Date:
January 2000
Abstract:
Executive Summary: The Investment Policy Committee of the UWO Joint Pension Board recommend that the documentation of the selection, review and replacement process for investment managers for the UWO pension plan assets is essential. This document is reference for the pension board and all other interested parties which illustrates the consistent method employed by the committee in these activities.
The Investment Policy Committee first apply the Joint Pension Boards principles, which are outlined in detailed in their policy & governance document, for the selection, review and replacement of investment managers. In particular the principles of Choice, Fairness and Liquidity are considered as well as the bias towards Passive Management. Consideration of these principles, however, does not provide all the answers. The committee also considers the universe of alternatives available for the task, the professional research and opinions provided by the pension boards investment consultant, the performance history of the managers, the style and investment process employed by managers as well as the administrative implications selecting or replacing a manager. == This document lays out the board activities with respect to investment managers and includes certain actions that will normally be considered by the committee given certain situations, such as a change in the opinion of our investment consultants or consecutive quarters of under performance of a benchmark.
The committee also considers the universe of alternatives available for the task, the professional research and opinions provided by the pension boards investment consultant, the performance history of the managers, the style and investment process employed by managers as well as the administrative implications selecting or replacing a manager.
This document lays out the board activities with respect to investment managers and includes certain actions that will normally be considered by the committee given certain situations, such as a change in the opinion of our investment consultants or consecutive quarters of under performance of a benchmark.
The Performance of Local versus Foreign Mutual Fund Managers
Author:
Rogér Otten & Dennis Bams
Date:
January 2003
Abstract:
In this paper we examine the performance of local US equity funds versus foreign UK funds also investing in the US equity market. Based on informational disadvantages one would expect the foreign funds to under-perform the local funds, especially in the research intensive small company market. After controlling for tax treatment, fund objectives, investment style and time-variation in betas, we do not find evidence for this. In the small company segment we even find a slight out-performance for foreign funds compared to local funds. In addition to that we observe a home bias in the UK portfolios, which could not be explained by currency effects or other non-US equity holdings.
Trading Costs and Return Volatility: Evidence From Exchange Listings
Author:
Hendrik Bessembinder & Subhrendu Rath
Date:
January, 2002
Abstract:
Bid-ask spreads and return volatility both decline substantially following Exchange listing for firms that moved from Nasdaq to the NYSE between 1996 and 2000, with the largest reductions in volatility for firms with the largest reductions in spreads.
This finding is inconsistent with the often-expressed reasoning that volatility can be reduced by increasing trading costs, e.g. by imposing a transactions tax. Decreases in bid-ask spreads and volatility continue to be observed, but are smaller in magnitude, for stocks that list after the 1997 adoption of market reforms. Consistent with the results reported by Barclay (1997) for an earlier sample, but somewhat surprising in light of market reforms, the largest spread reductions are for stocks where Nasdaq liquidity providers round quotations most often.
Year End Investment Performance Reviews: Phlebotomy or Ideonomy?
Author:
Ron Surz, PPCA
Date:
January 2007
Abstract:
Annual investment performance reviews are showing that value has outperformed growth recently. Furthermore these reviews show that investors generally would have been better off with passive value indexes over active value managers, but that the reverse is true for the growth style because active growth managers have generally beaten growth indexes. What is going on here?
A Performance Attribution Model For Fixed-Income Portfolios
Author:
Nabil Khoury, Marc Veilleux & Robert Viau
Date:
2003
Abstract:
Eleven factors to consider when evaluating bond holdings.
Performance attribution analysis partitions a portfolio’s ex-post return into specific components associated with particular decisions made during the management process, in order to assess their impact on overall performance.
In the case of equity portfolios, attribution analysis typically breaks down ex-post return into three components related to asset allocation decisions, industry choice decisions and security selection decisions. The contribution of each component to the overall performance of the portfolio is then determined by calculating the negative or positive departure of its associated return from that of a corresponding benchmark.
This process can shed light on the efficiency of the portfolio’s management process and identify areas where changes could enhance performance...
Accurate Benchmarking is Gone but Not Forgotten: The Imperative Need to Get Back to Basics
Author:
Ron Surz, PPCA Inc & RCG LLC
Date:
September 2006
Abstract:
Investment performance evaluators have lost touch with a basic and self-evident truth: If the benchmark is wrong all of the analytics are wrong. The cost of this mistake is high because investment managers are hired and fired for the wrong reasons, sacrificing performance and fees.
It’s imperative that we get back to basics, that we get the benchmark right. Fiduciary prudence dictates best practice over common practice despite popular opinion to the contrary, as does the “do no harm” rule. Indexes and peer groups are the common forms of benchmarks. These are not best practices. The article describes how accurate benchmarks can be constructed from indexes and how peer group biases can be overcome.
Ted J. Schwartzman, Investments Management Institute Endowments and Foundation Forum
Date:
January 2002
Abstract:
This is a presentation that looks at alternative asset structure, private equity and alternative assets due diligence, and representative costs of alternative asset programs….
Apodictic Evaluation of Hedge Fund Performance: A Necessary Truth
Author:
Ron Surz, PPCA Inc
Date:
2004
Abstract:
A white paper on a significant breakthrough in the evaluation of hedge fund performance.
It takes a distinctive word to describe the subject of this article. The word “apodictic” means “expressing necessary truth”. This word also contains the letters POD, which is the acronym for the subject of this article: Portfolio Opportunity Distributions. Peer groups and indexes simply don’t work for hedge funds. POD for hedge funds, or HedgePOD, solves the problem that has vexed these other evaluation approaches: each hedge fund is unique, and therefore without peers...
The decision of asset allocation is one of, if not the, most important one an institutional investor can make. There are a number of considerations to take into account when trying to make this decision, and there is no right answer for all investors. The appropriate asset allocation is contingent upon the type of investor, risk appetite, and overall objective. The basic inputs for asset allocation models are expected returns, expected yields, risk estimates, correlations, time frame, expected payouts and any other client-specific factors. This paper will outline three different types of asset allocation....
Andrew Baum, Tony Key, George Matysiak, Joakim Franson
Date:
June 1999
Abstract:
Property investors, increasingly, use performance measurement - or 'benchmarking' -services. They exist, first and foremost, to show whether a portfolio has achieved a rate of return better or worse than the 'market' average, or met investment objectives specified in a more sophisticated fashion. After benchmarking has answered the question by how much did we out- (under-) perform the benchmark?, there is an inevitable demand for 'portfolio analysis' which addresses the question why did we out(under-) perform the benchmark? An ideal system of portfolio analysis would identify the contribution of all aspects of portfolio strategy and management to relative returns. It would separate, for example, profits earned on investments from returns on held properties. Those are two distinctly separate activities with different return and risk characteristics, and reflect different features of management 'skill'. Among held properties, relative return may be influenced by anything and everything from the broadest allocation of investment between sectors to skill in selecting tenants, negotiating rent reviews, and controlling operating expenses.
Evaluating Hedge Fund Performance: A brief presentation
Author:
Ron surz, PPCA Inc
Date:
September, 2006
Abstract:
Despite the growing popularity & importance of hedge fund investing, hedge fund due diligence, as it is currently conducted, is a sham. Well meaning analysts continue to use peer group comparisons to evaluate hedge fund performance even though hedge fund peer groups have well-documented deficiencies. Consequently, losers are hired while winners go undetected. This is a serious mistake that is a source of inferior fund-of-funds performance.
The short 20-slide presentation reviews 7 articles that document the following:
· The deficiencies of hedge fund peer groups
· A solution to the problems with hedge fund groups
· Examples of new & improved hedge fund due diligence
Hedge Fund Strategy Performance: Using Conditional Approaches
Author:
Bhaswar Gupta,Burak Cerrahoglu & Alper Daglioglu
Date:
October 2003
Abstract:
The search for methodologies that accurately measure performance and performance persistence continues to evolve. This is especially true for investment strategies such as hedge funds, which have been shown, in several instances, to not be normally distributed. In this article, we evaluate performance of hedge funds using conditional approaches and GMM. Unlike the Sharpe ratio or Jensen’s alpha, our results would still be valid even if hedge funds were not normally distributed. We use the CISDM hedge fund database for this study. We create three portfolios to measure performance: an Active portfolio (which consists of funds in the active database), a Dead portfolio (which consists of funds in the defunct database) and an All portfolio (which consists of funds in both the active and defunct databases). We find that while the Active portfolios show evidence of positive risk-adjusted returns in most cases, the Dead portfolios do not and only some of the All portfolios show evidence of positive risk-adjusted returns. The results are similar irrespective of whether we use Jensen’s alpha or conditional approaches. Our results point to two conclusions: one the explanatory variables used in this paper may not be able to capture the type of trading strategies followed by hedge fund strategies and two the estimated alphas are good estimates of the true alphas which are mostly due to managers’ skills and hence cannot be explained by naïve static or dynamic trading strategies. In our analysis of market timing models, we show that hedge fund managers in general lack market timing ability and fund level analysis is required to determine the few that do have market timing ability. The results also suggest that hedge fund returns have option-like properties and future research should include option-based factors in performance evaluation.
A presentation that was held at the Eighth Annual Asset Alternatives Private Equity Analyst Conference. The topic was on performance measurement, persistance and Internal Rate of Return….
