Performance Evaluation

International Investments

Professor Cam Harvey

Universal Investments:Christian Delay

Noppaporn SupmonchaiTassanee Ratanaruangrai

Juan Sandoval

Assignment 1

February 26, 1998

Issues

•Use different performance mearsures to gain insight

•Determine state of asset management in terms of performance

•How are fund managers performing?? Are fund managers getting a free lunch???

Approach

•Analyzed 14 International & 19 U.S. Mutual funds

•Establish MSCI World or MSCI US as benchmark

•Calculate traditional measures

–Mean-variance analysis, CAPM, Beta, Jensen’s Alpha, Treynor Index

•Calculate Graham-Harvey measures

•GH1 & GH2

•Discuss results and conclusions

Traditional measure results

Mean-Variance Analysis

0.00

2.00

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20.00

0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00

Annualized Standard Deviation

Ave

rage

Ann

ual R

etur

n

2 of 14 funds “beat” MSCI World

What if fund has lower return AND lower volatility?

Inherent shortfalls reside in traditional measures

Traditional measures

•Beta: picks up the average level of market exposure

•Alpha: represents the extra return over and above a position with average market exposure

•Weaknesses:

•MSCI benchmark portfolio has different volatility (risk) than each mutual fund

•Sharpe ratio difficult to evaluate without reference point

•No ability to predict future performance based on the past

Graham-Harvey Performance Metrics

•GH1

•Levers up/down the MSCI World to match each international mutual fund’s volatility

•Determine if fund lies above or below a constructed frontier

•GH2

•Levers up/down the international mutual fund to match the volatility of the benchmark

•Assumes investor has ability to lever an investment

Graham-Harvey Performance Metrics

•GH1

Graham-Harvey Results

-18-16-14-12-10-8-6-4-2024

0 5 10 15 20

Annualized Standard Deviation

GH1

-16-14-12-10-8-6-4-2024

0 5 10 15 20

Annualized Standard DeviationGH

2

Similar results: 2 of 14 “beat” MSCI World using GH1 and GH2

GH1 GH2

Traditional vs. GH*

•Controlling for risk is often overlooked

•GH deems outperformers as underperformers

•Sharpe vs. GH

•GH does better job in pinpointing genuine ability

•GH negative score bad, positive score good

•CAPM vs. GH

•GH does better job with fund volatility

Conclusions

•Important to know nuances of performance measures

•Fund managers consistently under-perform benchmarks

•State of Fund Mgmt in poor shape in terms of performance

•Fund managers are eating your lunch!!!