Zeus Asset Management Case Week

Executive Summary Main differences of Zeus from its main competitor are its customer-oriented services, their core strategy of teamwork and they used municipal bond fund to purchase securities. Estimation to risk-adjusted returns is important to Zeus as In Zeus opinion, investors will not pay for the higher return generated by merely taking the higher risk. Investors demand Zeus to utilize professional skills to provide them with a return above the benchmark.

There are also advantages and disadvantages of each of the risk-adjusted return measures employed, making some of them to be better applied to a specific type of fund comparison than the there. Introduction: Zeus Asset management is a fund management firm founded in 1968 in Atlanta, which is an independent, employee-owned, money management firm in southwest, providing services to both institutional and individual investors.

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The firm’s investment philosophy believes that conservative, risk-averse, quality- oriented approach Will bring about superior performance. Zeus unique characteristics: Zeus is very different from its competitors. Firstly, they are well known for its customer-oriented services. Most of the employees served their customers directly. Each employee was engaged in pursuing the client’s investment objectives and diligently managing their portfolios. This customer-oriented approach gives them a competitive advantage in these high-net-wealth- individuals market.

Furthermore, teamwork was the core of Zeus strategy, more than 75% of its investment professionals were SFA and the average investment professional is aged at 44 Thus, they have more experience than the other competitors in the industry In addition, Zeus believed that risk minimization and long term investment could get a better result than high return high frequency trading in short term. Thus they tend to allocate asset to long-term movement and also in medium-to-large UAPITA growth fund due to the lower risk nature of these portfolios.

Finally, Zeus developed a unique approach, municipal bond fund, to purchase securities. The portfolio manager could buy municipal bonds at more attractive prices and be offered more attractive bonds by dealers. Financial performance measurement Absolute return is a way of measuring a portfolio performances based on the total return on investment over a certain period Absolute return can be calculated by the “hold period return” calculation and present value of future estimated expected return.

Although this method can calculate the profit or loss f a portfolio, it is not able to provide a robust analysis and the comparison the performance between the portfolios With Others. On the Other hand, the Relative return method is able to provide the comparison of the performance of a portfolio with a benchmark. It allows checking whether a portfolio is outperforming or underperforming the market. It can also be used to measure the performance of more than one portfolios or companies.

However, both methods cannot be relied upon solely to measure the performance a portfolio, because they are unable to catch the relative risk of a portfolio. High return is always associated with high risk, If an investor invests in high beta stocks or junk bonds, he is more likely to get a high return, while it does not means that the investment is outperforming the market, Thus, risk-adjusted sis more precision measure method to measure the return from the portfolio per unit of risk and it also can be used to compare portfolio performance with portfolio of different risks.

In Zeus opinion, investors will not pay for the higher return generated by merely taking the higher risk. Investors demand Zeus to utilize professional skills to provide them with a return above he benchmark. Different methods for Risk-adjusted return: Sharpe ratio: measure the excess returns generated by a portfolio above the risk free rate in relation to return. Advantages: Directly computable from any observed series of returns without needing for additional information surrounding the source of profitability.

Measuring systematic and idiosyncratic risk. Disadvantages: Merely a ranking criterion. Number value is not economically meaningful Normal distribution assumption result in bias. Trenton ratio: measure return in excess of the risk free rate relative to systematic risk. It can be compared with the benchmark performance or other portfolio with the same benchmark, Disadvantaged Only useful as a sub-portfolio measure of a board or fully diversified portfolio. Jansen Alpha: measures the average return on portfolio over and above that predicted by CAMP.

Limitation: An absolute measure does not adjusted for any risk. It is not able behave proportionally to the level Of required return Of portfolio. Information ratio: the information ratio divides the alpha Of the portfolio by the unsystematic risk. Limitation: it relies on a measure of standard deviation. It does not present the averaging property. For Zeus, risk-adjusted return is very important due to several reasons: By analyzing the performance of the various mutual funds, it would help the company to establish its internal rules regarding the level or risk and return.

They can use this method to measure the excess return they earned for each unit of risk they take. It is more comparable to the benchmark and other portfolios with different structure and risk level. Benchmark comparison Equity fund: Zeus equity fund aim for long-term growth of capital through investments in a high-quality portfolio of stocks, whose earning are expected to grow at above- average rates. Focusing more on Growth securities, which is consistent with the philosophy of risk-averse investment strategy. In this case, equities are compared with both S&P 500 and Lipped Growth indices (Annex A).

When compared with SOC index, the Sharpe ratio can be applied to compare between the portfolio and index. Since only growth stocks is in the portfolio, it cannot be diversified enough. In the first superior, the portfolios Sharpe ratio is lower than S&P 500 index. The main reason is that the fund followed a weak cash policy, over or underweight in cash, depending on the valuation of the market. However. The performance is improved in the second superior. When compared With Lipped Growth Index, we should compare the Trenton ratio between them, as the portfolio is diversified enough.

Similar to previous observation, the portfolio performed better during the second superior and outperform the Index performance. The alpha figures and information ratio show a similar result. Bond fund: The bond fund aims to maximize total return in a way that was consistent with the preservation to capital. Due to the lack to capacity to purchasing all marketable in the Lehmann Brothers Aggregate index, the portfolio is not well versified. Compared to Lehmann Brother Aggregate index, the Sharpe ratio is suitable to compare the performance between the portfolio and index.

According to the figure calculated below (Annex 8), the portfolio performance improved immensely in the second superior. In addition, the information ratio of 1096667 in the second superior also illustrates the active risk is low. The improvement could be attributed to portfolios specialist’s concentrating on each sector, thoroughly scouring each one, and finding attractively priced securities. Besides, the application of a powerful computer models helped identity arbitrage opportunities in different sector Of the bond markets.

They also use bond- synthesizing to create coupon and maturity payments that were higher yielding than an equivalent risky bond. Balance fund: The nature of balance fund, which is combined by equity and bonds, make it become diversified. This is very well diversified portfolio, which combined the high return of equity and the low risk of bonds. Hence, beta and Trenton ratio can be used to measure the performance. Similar with the other portfolio, balance fund also has a superior performance in the second superior.

Similar with the rake beta, the higher Trenton ratio and a positive alpha suggest the superior performance of the fund (Annex C), International fund: The original intention of applying international fund is to diversify the portfolio of companies, However, based on the figures (Annex D), the fund’s beta is actually higher than MIMICS index. With the increase in risk, the return of the portfolio is also increased significantly. The high Sharpe ratio, Trenton ratio, positive Sense’s Alpha and information ratio show that the portfolio is outperforming. The high risk is not consistent with the company’s philosophy.


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