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Performance Evaluation

This comprehensive analysis evaluates the performance of 14 international and 19 U.S. mutual funds using various metrics, including traditional measures like CAPM and Jensen’s Alpha, and innovative Graham-Harvey measures. By utilizing the MSCI World and MSCI US as benchmarks, we uncover critical insights into fund management performance. The study reveals that a significant number of fund managers underperform compared to these benchmarks, emphasizing the importance of understanding nuances in performance measures and questioning the effectiveness of traditional metrics versus advanced techniques.

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Performance Evaluation

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  1. Performance Evaluation Universal Investments: Christian Delay Noppaporn Supmonchai Tassanee Ratanaruangrai Juan Sandoval International Investments Professor Cam Harvey Assignment 1 February 26, 1998

  2. 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???

  3. 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

  4. Traditional measure results What if fund has lower return AND lower volatility? Inherent shortfalls reside in traditional measures 2 of 14 funds “beat” MSCI World

  5. 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

  6. 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

  7. Graham-Harvey Performance Metrics • GH1

  8. Graham-Harvey Results GH1 GH2 Similar results: 2 of 14 “beat” MSCI World using GH1 and GH2

  9. 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

  10. 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!!!

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