Zeus case study

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Introduction This report is aim to analyses the benefits of risk-adjusted performance measurements to Zeus Asset Management. Zeus Asset Management is a fund management firm founded in 1968 in Atlanta by Trickery Schneider. It serves both institutional and individual investors and With more than 51. 7 million assets under management. The director of research, John Abbot, is considering adopting risk-adjusted approach in performance assessment. Zeus competitiveness analysis Zeus main competitors are the mutual funds in particular market.

Compared with those competitors, Zeus has strong competitive advantages. Firstly, different from many managed funds of actively trading, Zeus investment philosophy is based on the belief that superior investment results should be achieved over many years by a conservative, risk-adverse, quality. Oriented approach to investment management. This can be seen by its strategic asset allocation which focuses on medium to long term capital growth. Secondly, Zeus is well known for its commitment to relationship-oriented services, The team devotes a lot in managing the client relationship.

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Thirdly, unlike most of its competitors, Zeus has a more skilled and experienced portfolio management group, More than t its investment professionals were SFA and received MBA trot top business schools, The average age of the fund managers is 44 compared that with r-ideally of 26. Moreover, Zeus has a large client base including mutual funds, trust funds, foundations and endowment, insurance companies, corporations and individual investors. Zeus pays special attention to their tax issues through carefully selecting the investment products best suit the client’s tax status.

In addition, Zeus has its unique approach in portfolio management. For example, in terms of the mutual fund, instead of each portfolio manager specializing in he municipal-bond market, one portfolio manager has the sole responsibility for that market. In that way, the municipal bonds can be managed more efficiently and meanwhile, Zeus can have cost advantage by trading at a large volume. Moreover, investment professionals make “due diligence” trips to company plants and headquarters in order to find out the “real good” stocks.

Main products of Zeus Mutual fund Zeus mutual funds are designed to meet the need of individuals who do not meet the requirements of individually managed portfolio or who have special requirements on investments. Mutual tends can bring the benefits of economies of scale, low transaction cost and some tax benefit. Equity fund The equity mutual tuned was a medium to large capital-growth tuned that mimicked the institutional growth-stock portfolio, which reflects the firm’s investment philosophy. However, the fund didn’t perform well because of a weak cash policy until the new director developed a new investment process.

The return during 06/01/1995 to 12/31/1997 is higher than the Lipped Growth Index but still lower than the Index. Bond fund A little different from other funds, the bond fund is an actively managed undo which aim to maximize total return in a way that is consistent With the preservation of capital. The portfolio managers actively manage the market timing, duration and yield curve Of the bonds and also use powerful computer models to identify arbitrage opportunities and synthetic bonds to create higher yield.

Balanced fund The balanced fund sought long-term growth of capital and income through a diversified portfolio allocated among high-quality equities and fixed-income securities. The balanced fund benefited from the changes in investment process for the equity and bond portfolios. International equity fund The international equity fund is an important component in Zeus investment portfolio. It invests in stocks outside the U. S, which has different risks and low correlation of the current portfolio. Therefore, it increased the diversification and total return to the portfolio.

Current performance measurements and their shortcomings Currently, Zeus uses the absolute and relative measures in perform measurements. Absolute measures usually includes the holding period return (HIP) and the present value of future return. Absolute measurements are easy to calculate and reflect the earning ability of a portfolio. However, they do not future the risks associated with the investment portfolios Investors may be misled if only looking at those measurements since one high-return portfolio may have high risks and do not match with their risk tolerance.

The simplest and most popular way to adjust returns for risk is to compare the portfolio’s return With the returns on a comparison universe, Which is Often called relative measurements. It is calculated by comparing the HIP to that of a benchmark, Which can be either an index or a similar company figure. It is simple to use but choosing the appropriate benchmark is also crucial as different benchmark will dead to totally different results and hence affect the investment decisions. Risk. Adjusted return measurements Risk-adjusted return measurements are usually considered superior than absolute measurements since they take the risks into consideration. Specific methods of adjusting the returns for risks include the Sharpe Ratio, Trenton Ratio, Sense’s Alpha, beta, and information ratio. Sharpe Ratio measures the portfolio risk premium tort each unit of total risk. It is calculated using the formula: . It is simple to calculate and can be used to compare portfolios with deterrent risks.

However, the Sharpe Ratio is based on normal distribution and it is believed that the non-systematic risks can be eliminated by diversification, That comes the Trenton Ratio which calculated using the formula: , where is the beta of a portfolio under CAMP. Therefore, the Trenton Ratio measures only the systematic risks of the portfolio so that it is useful only when comparing well diversified portfolios. Another method to adjust return for risks is Sense’s Alpha. It is the difference between the real return and the expected return predicted by the CAMP_ With Sense’s Alpha, we can see that whether the portfolio can enervate excess return.

Additionally, information ratio divides the alpha of the portfolio by the non-systematic risk. Similarly, under the CAMP, we can derive the beta of the portfolio to see whether the portfolio is aggressive or not compared to the market. The three methods above all based on the CAMP so when we are doing the modeling work, we must ensure that the inputs of CAMP is accurate and the assumptions are reasonable. Choosing the appropriate benchmark In terms of the bond portfolio, the Lehman Brother Aggregate Bond Index can be used as a benchmark.

The index includes a variety Of bonds such as government securities, mortgage securities, asset-backed securities and corporate securities to simulate the universe of bonds in the market. For the equity fund, S 500 Index, Lipped Growth Index and BARR Growth Index can be chosen as the benchmarks. We choose Lipped Growth Index and BARR Growth Index because Zeus equity fund mainly include medium to long term growth stocks. For the balanced fund, the Lipped Balanced Index is appropriate and MUSIC Index is chosen as the benchmark for the international fund.

Results of risk-adjusted measurements Appendix I shows the results of the risk-adjusted measurements of Zeus oratorios. First look at the equity fund. Since the Lipped Growth and BARR Growth have similar level of diversification with Zeus equity fund, we can compare the Trenton ratio. The Trenton ratio of the whole period is 0. 0105, which is almost the same as that of Lipped Growth and B*VERA Growth. Looking at the superior figure, we can see that period 2 performed much better than period I as a result of a series development of investment process.

When compared with S Index, we use the Sharpe Ratio since the S 500 Index contains not only the growth stocks. The result is consistent with what We got above_ Although there is a significant improvement in period 2, the Sense’s alpha and information ratio indicate that the fund underperformed the market slightly. The performance of bond fund is similar with the equity fund. The Sharpe ratio and Trenton ratio all indicate that period 2 performed much better than period 1.

The difference with equity fund is that the Sense’s alpha and information ration of period 2 are positive, which means the fund outperformed the market in this period. The performance of balanced fund is almost the same as the bond fund as it is a combination of equity and bond investments. The performance f international fund is quite different from the others. The beta, Sharpe ration, Trenton ratio, Sense’s alpha and information ratio are all higher than the market figure, which means, the international fund is aggressive than the market and thus generate risk premium over the market.

The aggressive approach is contradictory to Zeus risk appetite to some extent since the international fund is managed by a third party Borne International Advisor. In addition, trot Appendix 2, we can see that the correlations between international fund and other funds are relatively low, especially with the bond fund Therefore adding portion of international fund into the client’s investment portfolio is useful in diversification. To conclude, except the international fund, the other funds of Zeus did not perform well in the beginning, but after a series of changes and developments, the earning abilities of these fund are increasing.

At the end of 1997, the bond and balanced funds have already outperformed the market, Qualitative aspects Apart from the advantage that it can make the analysis more accurate and robust, adopting risk-adjusted approach can benefit Zeus in other aspects such as internal control, customer relationship management and staff education. For example, Zeus can set up a certain risk-return level as a threshold or benchmark Of investments in internal control system to help control the risk since the firm is risk-adverse.

In addition, with the increasing need of individual clients who are not financial professionals, using risk-adjusted measurements can help them know better about risk-return relationship and make investment decisions most suitable for their own risk profile. Moreover, it can help the portfolio managers improve their investing skills and experience. Conclusion and recommendation Based on the analysis result, the developments and changes Zeus has taken in he later period are useful and should be continued and it is recommended that Zeus should adopted the risk-adjusted approach.

It can help Zeus get deeper understanding of the nature and behavior of investment portfolios, establish its internal control rules regarding the level of risks and return that portfolio managers should deliver and improve the customer relationship. Appendix Appendix 1 Risk-adjusted performance measurements Appendix 2 Correlations international equity bond balance 10000 0. 6653 1 . Oho 0. 4102 0. 6751 0. 6482 0. 9976 0. 7124 Appendix 3 Regression summary