The main problem with the current measure is that it did not take risk into consideration. The main aim in this case study is to determine if the current performance evaluation is sufficient or a better risk adjusted measure could be form. Other than that, we would also take into consideration of the difference between Zeus with its main competitors and how different type of investors would have different investment strategy due to their different risk preference. Robber with current measure As the current fund performance measurement consist mainly of holding erred and benchmark return, these return have weaknesses that does not allow it to be a sufficient measurement. As HIP generally calculated based on determining what the total return is earned from holding the investment for a specific period of time. The advantage of it is that it is easy to calculate and understand by investors, at the same time taking into account of the income and growth.
However it did not take into account of time value of money, that make the return inaccurate for a longer time period Other than that, the holding period return is based on historical value thus generally not the best measure s it is not a forward looking method. Other than that, a benchmark return would be a good measure in term that Zeus could compare against a certain index however it is not easy to find an index that have similar properties as the fund being compared.
As we have to always compare an apple with an apple Other than taking an industry average or any Other index that we deem fill As different company have different specifications that will result in different return, it would not deem fit to compare a return between apple and Monika. Thus more performance evaluations should be carry out to determine the accuracy of the information generated based on the return.
Zeus vs. Fidelity Investments Zeus is well known of its passively managed funds due to the fact that its portfolio managers average age is 44 years old, being way higher than the competitor portfolio managers average age of 26. Other than that, Zeus employees have been through mainly recessions and major downturns, thus they would tend to be more conservative than others that have been through most impressive bull market. As the way to dealing in a recession should be more passive and in bull market the strategy have to be active in order to gain excess refit.
As the employee has work on average more than 7 years thus it is more closely related to the firm’s objective of being customer relation based. It would rather being risk averse and earn slow income than earning high income at times but may lose a large portion if it is not being correctly forecast. The Clients One of the reasons that Zeus is so large in size as it has different customer base that have different risk preference, its funds could cater for several different kind of customers.
For wealthy investors that could meet a minimum requirement of 2 million could be group in the individually managed accounts While those Who do not have such huge amount of money could be group into the mutual funds account that is more on a cost savings. As the main function Of mutual funds account is to gather all money from investors to form a large pool of money for investment purposes that include an equity fund, bond fund, international equity fund and balanced fund.
There are basically around 45% of the asset under management is the separately managed individual portfolios and 12% on mutual funds, and these individual investors are typically risk averse, Thus the oratorio managers have to cater for such needs, as these investors account for a large percentage of assets under the company investments profile, That is also why Zeus is known to being passive and risk averse, other than the employee it hired, it is also due to the investors risk preference is more on the risk adverse side.
In the individual managed fund, tax is a very important issue as high tax bracket investors would generally prefer low pre-tax yield with tax exemptions and vice versa. The equity fund and the bond fund The main objective for the equity fund is to mimic the institutional growth-stock oratorio as it seek long term growth through investing in high quality portfolio of stocks and it has been benchmark against SO and Lipped Growth Index. However, as stated that it focus mainly on growth stock, so S 500 might not be suitable to be benchmark against but Lipped Would.
Anyhow, the results generated might not be as accurate as it might be survivorship biased due to the fact that it would eliminate stocks that have negative changes in forecasted earnings. The main objective of the bond fund is to maximize total return by an actively managed portfolio Of high quality and fixed income securities indicated hat it is active and yet conservative. As Zeus is maintaining a minimum average quality rating or AAA or higher at all times and such securities are often of lower risk and enjoy lower return compared to the company with lower credit rating.
The balanced fund and the international equity fund The main objective of the balanced fund is to minimize risk while generating competitive returns over long run, thus it would always maintain a well- diversified portfolio, The main objective of the international equity fund is not to generate higher return but is to provide tether diversification to the clients that eave majority investment domestically, Thus such investment would generally have lower risk and thus would require lower required rate to return as shown in the CAMP calculated in Exhibit l, This is due to the low or negative correlations between the international and domestic market, thus since the inception it could see an almost improvement in return generated. It could be seen that each fund have their own function that is cater to different customer risk preference. Investors that do not have much money and wish to save on transaction cost could go to mutual funds. Investors that are risk adverse could go to balanced fund and any investors who holds large amount of domestic shares that hopes to further diversify their portfolio could go into international equity fund.
However investors that looks for return could invest in the bond or equity funds that maximize return or looking for growth prospect although it is still being conservative as the aim is based on long run. Performance evaluation analysis According to the Exhibit 1 , eve used several evaluation ratios to determine the accuracy Of the return performance. Each Of them hue their own pros and cons and thus all of them are used together to make sure that the results generated is more accurate and relevant. Capron measures the required rate Of return, beta measures the overall risk of the fund, Sharpe measures risk adjusted return on the total risk, Trenton measures the risk adjusted return on the systematic risks, Jensen alpha measures the abnormal return earned, lastly information ratio determines the capability of the active portfolio managers.
It could be seen that Equity Fund has the overall highest Sharpe and Trenton ratio indicating that the undid are able to generate higher risk adjusted return with the lowest beta as its main objective is to achieved growth in the high quality securities over the long run with generally lower risk associated. While the international equity tuned has the lowest CAMP and highest Jensen Alpha and information ratio indicating that the fund required lower rate of return due to the main reason of the fund is for diversification, With the highest information ratio also indicate that the manager are able to actively manage the portfolio to generate excess return on top of the undid, thus it is complimenting the Jensen Alpha as well.
However in sub I, bond funds would have the lowest CAMP and highest Sharpe ratio as it carry lower risk than the equities even though it has been transacting actively. While the equity fund has overall win out against other funds in terms of being able to generate excess return and manager capability. Relative Return By comparing the annual returns across the fund and the benchmark target, it is shown in Exhibit 2 that the equity fund, bond fund and the balanced fund are slightly lower than the benchmark target. This could be due to Zeus passive ND conservative investment strategy, thus the return would be slightly lower as the risk associated is lower as well. However, the international equity fund has an approximate 6. 1% higher annual return than the benchmark.