Performance Measurement
Portfolio Evaluation
Return based (least accurate) / Holding based / transaction based – pros & cons
Carhart Model: Which means what.
Which factors contribute the least active return.
- SMB: Small vs. Large
- HML: Growth vs. Value
- WML: Momentum.
Allocation effect (Wi-Wi) (Bi – Bi) | Selection Effect | Interaction Effect
Active Return | Manager Style Return.
Downside Capture, Upside Capture, Capture ratio
All the ratios: Which one to use during!
- Given that the fund mandate requirement is for a short-term return in excess of the risk-free rate,
the Sortino ratio is a more appropriate measure because it penalizes returns below a specific
return–in this case, 1.5% above the risk-free rate.
- The Treynor ratio penalizes returns below the risk-free rate. It will not measure the fund’s ability to
meet the requirement of a short-term return in excess of the risk-free rate.
- The information ratio evaluates the portfolio return relative to a benchmark. It will not measure the
fund’s ability to meet the requirement of a short-term return in excess of the risk-free rate.
Investment Manager Selection (Essay)
Preparatory Steps (預先) before choosing the investment manager? (1) Decide outside support is needed,
complete an IPS, determine the appropriate asset allocation.
Type 1 & 2 errors
GIPS
Global Investment Performance Standard (GIPS) contain ethical & professional
standards for the investment performance presentation, it is voluntary. Objectives:
- Advances the interest of investors and increase their confidence in the
investment industry.
- Provide accurate and comparable data.
- Create a globally accepted standard.
- Facilitate fair competition among global investment managers.
- Encourage self-regulation.
Restrictions:
- Can only be claimed on a “firm-wide basis”
- To claim compliance, a firm must comply with “all” of the applicable
requirements.
- Claim of GIPS compliance indicates:
o All firm’s data inputs, process and return calculations are compliant.
o All fee-paying segregated accounts and limited distribution pooled funds
have been “assigned to at least one composite”.
- (If firm set up investment offices at different places as “distinct business entity”
they CAN claim compliance of GIPS standard.)
- (Returns from cash and cash equivalents must be included in all return
calculations, even if the firm does not control the specific cash investment(s).”)
Modified Dietz Model:
(Ending – Beginning – Cash Flows) / (Beginning + Adjusted CF)
- Adjusted CF = (Remaining Days / Total Days) * Cash Flow.
It is NOT acceptable. GIPS requires all cash and cash equivalent returns to be included
in the total return performance calculation.
1.03*1.0415*1.0375*1.0315 –1 = 14.8%.
It is NOT acceptable. Firms are required to include all “fee-paying discretionary
accounts”. JIM’s composite only includes 60% of the fee-paying accounts.
How to count return when there is cash flow injection?
The GIPS standards state that portfolios must be valued in accordance with the definition of fair value, and
that firms must value portfolios in accordance with the composite-specific valuation policy. The GIPS
standards do NOT require firms to adhere to the principles of financial accounting.
The GIPS Glossary defines transaction costs as “the costs of buying or selling investments” and states,
“These costs typically take the form of brokerage commissions, exchange fees and/or taxes, and/or bid–
offer spreads from either internal or external brokers. Custodial fees charged per transaction should be
considered custody fees and NOT transaction costs.”
The GIPS standards state that composites must include only actual assets under management within the
defined firm, and they expressly prohibit linking the performance of simulated or model portfolios with
actual performance.
Modified Dietz formula???
