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Evaluating Portfolio Performance

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... primarily in stocks. ... Recent data shows some persistence for growth style managers ... QQQQ Nasdaq 100. Diamonds Dow Jones Ind. Ave. Low ... – PowerPoint PPT presentation

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Title: Evaluating Portfolio Performance


1

PROFESSIONAL ASSET MANAGEMENT
2
Basic Categories
  • Private Management Clients each have a separate
    account popular with institutions

Investor 1

Account 1 Account 2

Asset manager

Investor 2
3
Basic Categories
  • Investment Companies Sell shares of the fund and
    invest the proceeds in a portfolio of stocks
    popular with individuals

Investor 1
Fund Shares
Fund Portfolio


Asset manager
Investor 2
Fund Shares
4
Professional Asset Management vs. Individuals
  • 1. Diversification
  • 2. Record Keeping
  • 3. Professional Management
  • 4. Lower Transaction Costs

5
Net Asset Value
Example Market Value 100 mil Number of Shares
10 mil NAV 100 / 10 10 / share Suppose
Market Value goes up to 112.5 mil, and the
management fees during that period were 0.1 mil.
What is the ending NAV? NAV (112.5 0.1) / 10
11.24 / share
6
Types of Investment Companies
  • Closed-end funds
  • Open-end funds (a.k.a. mutual funds)

7
Closed End Funds
  • Stock of the fund trades on the regular secondary
    market
  • Fund does not usually offer additional shares or
    repurchase shares
  • NAV computed twice daily
  • Market price is NOT NECESSARILY EQUAL to NAV

8
Open-End (Mutual Fund)
  • Buy back (redeem) shares or sell additional
    shares at the NAV.
  • May be a sales charge (load) when the fund sells
    the shares to customers.
  • May charge a redemption fee when the customers
    sell their shares back to the fund.

9
Mutual Funds
  • Equity funds invest primarily in stocks.
  • Most hold some money market instruments to
    provide liquidity regarding redemptions.
  • May also hold fixed income or other securities.

10
Mutual Funds
  • Income Funds Bonds and High Dividend yield
    stocks.
  • Growth Funds Forego dividend yield for capital
    gains. Invest in well-established firms.
  • Aggressive Growth Seek maximum capital growth by
    investing in smaller, younger companies.

11
Loads Sales Charge
  • Front End Paid when shares are purchased.
  • Load 3 of NAV is typical
  • No-Load No sales charge.

12
Back-End Loads
  • 5-10 fee on sale. Typically drops by 1 every
    year.

13
12b-1 Fees
  • An alternative to a load to cover advertising
    marketing expenses. Some No-Load and Low-Load
    funds use these.
  • Can deduct as much as .75 of assets annually to
    cover fund advertising marketing.

14
Sales Marketing Fee Choice
  • Some funds give you a choice as to how you want
    to pay your share of the expenses.
  • Offer alternatives called choices A, B or C
    for example.

15
Sales Marketing Fee Choice
  • A front-end load
  • B 12b-1 rear-end load that decrease
  • the longer you hold shares.
  • C Perpetual 12b-1 fees

16
Records Fees
  • Funds can charge as much as .25 of assets
    annually for records fees.

17
Management Fees
  • Range is typically .20 to 1.00.
  • Does not include trading commissions

18
Expense Ratio
  • Expense Ratio
  • Annual Expenses/ Amt of Fund Assets
  • Annual Expenses are
  • Management fees, 12b-1 fees, records fees
  • (NOT front or back-end loads)

19
Expense Ratio
  • Studies find that funds with lower expense ratios
    earn higher returns than those with higher
    expense ratios.

20
Examples
  • Vanguard 500 Expense Ratio .18, no-load,
    Mgmt fee is .16.
  • Janus 20 Expense Ratio .87, no-load, Mgmt fee
    is .65.
  • Fidelity Magellan Expense Ratio .74, 3 front
    load, Mgmt fee .57.

21
Turnover Taxes
  • Turnover Fraction of portfolio replaced each
    year.
  • Mutual funds have pass-through-status which means
    that taxes are paid only by the investor, not the
    mutual fund.
  • Not an issue if in a tax-deferred retirement
    account

22
Performance
  • Many Studies find active managers underperform
    benchmarks after costs and fees by about 1 per
    year.
  • Risk does increase as stated objectives become
    more aggressive.
  • Some evidence of short run persistence in
    performance particularly for high expense funds
    (may be due to momentum strategies)

23
Performance
  • Less than half outperform a broad market index
    after costs and fees.
  • Good performance associated with low expense
    ratio.
  • Lack of consistency in performance of funds over
    time except for poor funds. Poor funds show
    persistence.
  • Recent data shows some persistence for growth
    style managers (momentum style)

24
ETFs
  • Exchange Traded Funds
  • Close-end index funds
  • Most trade on AMEX
  • SPDR SP 500
  • QQQQ Nasdaq 100
  • Diamonds Dow Jones Ind. Ave.
  • Low expenses

25
Hedge Funds
  • Similar to Mutual Funds
  • Lightly Regulated
  • Only open to Qualified Investors
  • Not allowed to advertise
  • No secondary market
  • Not regularly marked to market
  • Often require a lockup period for investors

26
Investment Strategies
  • Long/Short Market Neutral
  • Convertible Arbitrage
  • Merger Arbitrage
  • Statistical Arbitrage
  • Distressed Companies

27
Compensation Structure
  • Management Fee similar to mutual funds
  • Performance Fee typically 20 of profits

28
Results
  • Often difficult to know for sure
  • Some appear to be very high
  • Some studies say the industry averages no better
    than mutual funds
  • Additional fees can cut into positive results
    Especially funds of funds
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