SAPM Prof.

Chakrabarty Gauravjwal Kundu, PRN-18, MBA-14, Symbiosis Institute of Operations Management 10th January 2014

Zeus Asset Management

1 Introduction and methodologies used
Four mutual funds operated by Zeus Asset Management, viz. Zeus Equity Fund, Zeus Bond Fund, Zeus Balanced Fund and Zeus International Fund, have been evaluated for their risk return characteristics by comparing them with suitable benchmark indices. The tools used for evaluation include: Graphical performance summaries Information Ratio Sharpe Ratio Jensens Alpha Sortino Ratio Value at Risk

The R PerformanceAnalytics library has been used for evaluations (Peter Carl and Brian G. Peterson (2013). PerformanceAnalytics: Econometric tools for performance and risk analysis. R package version 1.1.0.) For brevity, formulae for calculations have not been mentioned (except for Information Ratio) since they have been covered in class.

2 Graphical performance summaries

Graphical performance summaries have been depicted below. Data sets under consideration include the entire period of the respective funds operations. Note: Since we are dealing with graphical summaries, returns are taken as monthly figures and not annualized, unless explicitly mentioned.

Figure 1: Risk Return scatter of Zeus funds and benchmark indices. The dotted lines indicate points along which Sharpe Ratios are one, two and three

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SAPM Prof. Chakrabarty Gauravjwal Kundu, PRN-18, MBA-14, Symbiosis Institute of Operations Management 10th January 2014

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SAPM Prof. Chakrabarty Gauravjwal Kundu, PRN-18, MBA-14, Symbiosis Institute of Operations Management 10th January 2014

Figure 2: Cumulative Returns and Drawdowns of Zeus funds, compared to benchmark indices.

Figure 3: Histograms of monthly returns for various Zeus Funds. Value-at-Risk lines are included.

2.1 Inferences from graphical summaries

In terms of absolute returns, the Zeus Equity, Balanced and Bond funds have been outperformed by their benchmark indices. In terms of risk-adjusted returns, one measure of which is the Sharpe Ratio, only the Zeus Equity fund has managed to outperform its benchmarks. The remaining Zeus funds have inferior performances in terms of risk adjusted returns. Most Zeus funds, along with their benchmarks, cluster around the Sharpe Ratio=1 line. The returns charts indicate that most Zeus funds closely mirror the returns of their benchmarks, however absolute returns are found lagging. Draw-downs in the cases of Zeus funds are lower than the respective benchmarks most of the time, which may appeal to the more risk averse among investors. Page 3 of 10

SAPM Prof. Chakrabarty Gauravjwal Kundu, PRN-18, MBA-14, Symbiosis Institute of Operations Management 10th January 2014

Histograms are negatively skewed past zero which indicates positive returns most of the time. The Zeus international Fund has very high volatility of returns and poor performance. However it should be noted that it is a relatively newer fund when compared to the other three Zeus funds.

3 Sharpe Ratios
The Sharpe Ratio, which is a measure of risk adjusted Fund returns over the risk free rate, has been calculated and results are depicted below.

Annualised Sharpe Ratios

Zeus Equity Fund Lipper Growth Index S&P 500 Index Zeus Balanced Fund Lipper Balanced Index Zeus Bond Fund Lehman Brothers Aggregate Index MSCI Index Zeus International Fund 0 0.115 0.027 0.2 0.4 0.6 0.8 1 1.2 0.691 0.747 0.723 0.862 0.932 0.922 1.073

Figure 4: Sharpe Ratios of Zeus Funds and their benchmarks.

We see that except for Zeus Equity, all other Zeus funds have inferior risk-adjusted performance compared to their benchmarks.

4 Information Ratios
The information ratio is a measure of the consistency of returns of portfolio as well as the magnitude, when compared to a benchmark fund or index. William Sharpe now recommends the Information Ratio over the original Sharpe Ratio as a measure of fund performance (Sharpe, W.F., The Sharpe Ratio, Journal of Portfolio Management, Fall 1994, 49-58.). The Information Ratio is calculated as follows:

or

Where Ra is the portfolio return, Rb is the benchmark return. Information Ratios for various Zeus Funds are depicted below:

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SAPM Prof. Chakrabarty Gauravjwal Kundu, PRN-18, MBA-14, Symbiosis Institute of Operations Management 10th January 2014

Information Ratios

-1.263 -0.731 -0.319 0.796 -1.5 -1 -0.5 0 0.5 1 1.5

Zeus Equity vs S&P 500 Zeus Balanced vs Lipper Balanced

Figure 5: Information Ratios of Zeus Funds.

Zeus Bond vs Lehman Aggregate Zeus International vs MCSI

We see that except for the International Fund (which does marginally better), all other Zeus funds have been outperformed by their benchmark indices.

5 Value at Risk
The VaR is an estimate of the how much of the investment a fund would stand to lose if it takes losses (95% percent of the time). Lower VaRs are better since they indicate that there is a probability of losing a lower amount of money in case the fund takes hits.

Value at Risk
MSCI Index Zeus International Fund Lipper Balanced Index Zeus Balanced Fund Lehman Brothers Aggregate Index Zeus Bond Fund Lipper Growth Index S&P 500 Index Zeus Equity Fund 0% 1% 2% 3% 3.54% 4% 5% 6% 7% 8% 1.47% 1.22% 3.81% 4.46% 2.78% 2.98% 5.80% 7.54%

Figure 6: VaR as a percentage of fund value. Lower is better.

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SAPM Prof. Chakrabarty Gauravjwal Kundu, PRN-18, MBA-14, Symbiosis Institute of Operations Management 10th January 2014

We see that with Zeus Equity and Zeus Bond, the Value at Risk is slightly lower (better) than the benchmark, whereas with Zeus balanced it is slightly worse. The Zeus International has a much higher value at risk, given its very volatile performance.

6 Jensens Alpha
The Jensens Alpha is a measure of fund returns over the benchmark asset and the risk free rate. It is the intercept of the regression equation in the CAPM model after accounting for systematic risk. Values calculated are depicted below:

Jensen's Alpha

-1.50% 0.41% -0.89% 5.87%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

Zeus Equity vs S&P 500 Zeus Balanced vs Lipper Balanced

Figure 7: Jensen's Alpha

Zeus Bond vs Lehman Aggregate Zeus International vs MCSI

We see that most Zeus funds have fared poorly. The 5.87% figure may seem rather good for the Zeus international fund. However one must consider that the performance of its benchmark has been very poor; below the risk free rate in fact. Therefore this metric must not be viewed in isolation and must be considered only when benchmark returns have exceeded the risk free rate. For information, Zeus fund Betas have been calculated and given below. We can confirm close comovements between Zeus funds and their benchmarks.
Fund & Benchmark Zeus Equity vs. S&P 500 Zeus Bond vs. LehBro Index Zeus Balanced vs. Lipper Balanced Index Zeus International vs. MCSI Index Beta 0.8758 0.8645 1.0065 1.0879

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SAPM Prof. Chakrabarty Gauravjwal Kundu, PRN-18, MBA-14, Symbiosis Institute of Operations Management 10th January 2014

7 Sortino Ratios
The Sortino Ratio is similar to the Sharpe ratio. Except that it only considers the downside deviation as a measure of volatility. The standard deviation of only the negative returns is used as the denominator term. This based on the reasoning that funds which have high volatility are not strictly risky if the swings are all on the positive side. However, a fund with lower volatility may be worse off if its returns are mostly negative. The Sortino ratios are depicted below.

Sortino Ratios
MSCI.Index Zeus.International.Fund Lipper.Balanced.Index Zeus.Balanced.Fund Lehman.Brothers.Aggregate.Index Zeus.Bond.Fund Lipper.Growth.Index S...P.500.Index Zeus.Equity.Fund 0.00 0.10 0.20 0.30 0.40 0.50 0.3502 0.3525 0.3273 0.4628 0.4639 0.5214 0.60 0.0769 0.0422 0.4224

Figure 8: Sortino Ratios of Zues Funds and their benchmarks. Minimum acceptable returns taken as the risk-free rate.

Here too, we see that except for Zeus Equity, all other Zeus Funds have been underperforming. We see no major differences in the characteristics of the ratios when compared to the Sharpe Ratios. This indicates that in spite of underperforming, Zeus funds provide no noticeable benefits against down-side risks.

8 Conclusions
Except for the International Fund, all other Zeus funds have been underperforming with respect to the markets. Fund Managers have the potential to improve returns while maintaining risk profiles. Of serious concern is the Zeus Balanced fund, which is being outperformed by the market on both risk and return measures. The relationship led fund management style, which has served to satisfy large clients may not serve so well in the general fund scenario. The perception within Zeus of being a conservative establishment which is less risky in comparison to others is not backed up by the combined risk-return metrics. Performance management based on the metrics depicted above need to be urgently established and these should serve as the voice of the customer within the company.

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SAPM Prof. Chakrabarty Gauravjwal Kundu, PRN-18, MBA-14, Symbiosis Institute of Operations Management 10th January 2014

9 Appendix
9.1 Risk Free Rate
The Returns of US treasury Bills for the period from 1989 to 1987 were considered in calculating the risk free rate. The Annual Risk Free Rate thus calculated is 5.213%

9.2 Table of annualized fund returns, standard deviations

Annualized Annualized Annualized Return Std Dev Sharpe (Rf=5.21%) Zeus.Equity.Fund S...P.500.Index Lipper.Growth.Index Zeus.Bond.Fund Lehman.Brothers.Aggregate.Index Zeus.Balanced.Fund Lipper.Balanced.Index Zeus.International.Fund MSCI.Index Treasury.Bills 16.26% 17.24% 15.45% 8.16% 8.82% 11.66% 12.48% 5.80% 6.96% 5.21% 0.097 0.123 0.103 0.039 0.044 0.083 0.079 0.162 0.134 0.004 1.073 0.922 0.933 0.691 0.747 0.723 0.863 0.027 0.115 -0.286

9.3 R script for calculations

PerformanceAnalytics Library v1.1 on R v3.0.2.

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SAPM Prof. Chakrabarty Gauravjwal Kundu, PRN-18, MBA-14, Symbiosis Institute of Operations Management 10th January 2014

library("PerformanceAnalytics") #read timeseries data rt1<-read.zoo("Zeus Asset Management.csv",header=T,sep=",",na.strings="NA",format="%d-%m%Y") #remove portfolios not under study rt1<-rt1[,c(-10,-11,-12,-13)] #find out risk free rate (in each period, ie monthly) RfR_mo<-as.numeric(Return.annualized(rt1[,"Treasury.Bills"],scale=12)/12) #by month #find annualised returns rt1_returns<-table.AnnualizedReturns(rt1[,,],scale=12,Rf=RfR_mo) #Annualized Returns #sortino ratio, not annualized, against risk free rate rt1_sortino<-SortinoRatio(rt1,MAR=RfR_mo) #Sharpe ratio, not annualized, against risk free rate rt1_sharpe<-SharpeRatio(rt1,RfR_mo,FUN="StdDev") #standard deviations (non annualized) rt1_sd<-t(sapply(as.list(as.data.frame(rt1)),sd,na.rm=T)) #use below command if you want each stddev stored in separate variable # for (i in 1:ncol(rt1)){assign(paste("sd_",names(rt1)[i]),sd(rt1[,i],na.rm=T))} #create a list of columns in returns table for each Zeus portfolio and its benchmark benchmarks<-list(eq=c(1,2),bnd=c(4,5),blc=c(6,7),int=c(8,9)) #jensens alpha, not annualized rt1_jalpha<-vector() for(i in seq_along(benchmarks)) { ra<-benchmarks[[i]][1] rb<-benchmarks[[i]][2] rows<-complete.cases(rt1[,ra],rt1[,rb]) rt1_jalpha[i]<-CAPM.jensenAlpha(rt1[rows,ra],rt1[rows,rb],Rf=RfR_mo) } rt1_jalpha<-t(rt1_jalpha) colnames(rt1_jalpha)<-names(benchmarks) rm(ra,rb,rows) #Information Ratio rt1_ir<-vector() for (i in seq_along(benchmarks)){ ra<-benchmarks[[i]][1] rb<-benchmarks[[i]][2] rt1_ir[i]<-InformationRatio(rt1[,ra,drop=F],rt1[,rb,drop=F],scale=12) } rt1_ir<-t(rt1_ir) colnames(rt1_ir)<-names(benchmarks) rm(ra,rb,i) #Value at risk rt1_var<-as.matrix(VaR(rt1[,c(1:9)])) #charting ##Performance Summary charts

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SAPM Prof. Chakrabarty Gauravjwal Kundu, PRN-18, MBA-14, Symbiosis Institute of Operations Management 10th January 2014

charts.PerformanceSummary(rt1[,c(1,2,3,10)],Rf=RfR_mo,main="Performance Summary Equity",wealth.index=T) windows() charts.PerformanceSummary(rt1[,c(4,5,10)],Rf=RfR_mo,main="Performance Summary Bond",wealth.index=T) windows() charts.PerformanceSummary(rt1[,c(6,7,10)],Rf=RfR_mo,main="Performance Summary Balanced",wealth.index=T) windows() charts.PerformanceSummary(rt1[,c(8,9,10)],Rf=RfR_mo,main="Performance Summary International",wealth.index=T) windows() chart.RiskReturnScatter(rt1[,c(1:10)],Rf=RfR_mo) windows() chart.Histogram(rt1[,1],main="Zeus Equity monthly returns histogram",methods=c("add.normal","add.risk","add.rug")) windows() chart.Histogram(rt1[,4],main="Zeus Bond monthly returns histogram",methods=c("add.normal","add.risk","add.rug")) windows() chart.Histogram(rt1[,6],main="Zeus Balanced monthly returns histogram",methods=c("add.normal","add.risk","add.rug")) windows() chart.Histogram(rt1[,8],main="Zeus International monthly returns histogram",methods=c("add.normal","add.risk","add.rug")) #View calculated performance measures View(rt1_returns) #Annualized Returns from portfolios View(rt1_ir) #Information Ratio View(rt1_jalpha) #Jensen's Alpha View(rt1_sharpe) #Sharpe Ratio View(rt1_sortino) #Sortino Ratio View(rt1_var) #Value at risk #print performance measures in console rt1_returns rt1_ir rt1_jalpha rt1_sharpe rt1_sortino rt1_var

- Zeus

Zeus

Zeus

Zeus

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