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Evaluating Portfolio Performance

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professional asset management – PowerPoint PPT presentation

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Date added: 13 March 2019
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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
  1. Less than half outperform a broad market index
    after costs and fees.
  2. Good performance associated with low expense
    ratio.
  3. Lack of consistency in performance of funds over
    time except for poor funds. Poor funds show
    persistence.
  4. 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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