1. Audley Financial Training
AF4 Performance Review
2/3/2019
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2. Audley Financial Training
How well did we do?
Absolute returns
Holding Period Return
Money weighted Return
Time weighted Return
Relative returns
Alpha
Benchmarking
Risk related returns`
Sharpe ratio
Information ratio
2/3/2019
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3. Audley Financial Training
Holding Period Return
Bill invested £10,000 on January 1 and received £400 in dividends. The fund had grown to £11,000 on December 31.
What return had he made?
£11,000 -£10,000 + £400 = 14%
£10,000
2/3/2019
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4. Money weighted return: money in
Aims to take away the distortions created by adding new money or taking money out
Original Value
(CV –OV) - New money
OV + (New x n/12)
Final Value
Number of months the new money was invested
2/3/2019
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5. Audley Financial Training
MWR: Money in
Original Investment £10,000 January 1. £10,000 added June 1
Value December 31 £22,500
(£22,500 - £10,000) - £10,000
£10,000 + (£10,000 x 7/12)
£2,500
£15,833 = 15.78%
2/3/2019
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6. Money weighted return: money out
Aims to take away the distortions created by adding new money or taking money out
(CV –OV) + withdrawn money
OV - (withdrawn money x n/12)
Number of months the withdrawn money wasn’t invested
2/3/2019
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7. Audley Financial Training
MWR: Money out
Original Investment £50,000 January 1. £12,000 withdrawn September 1
Value December 31 £40,000
(£40,000 - £50,000) + £12,000
£50,000 - (£12,000 x 4/12)
£2,000
£46,000 = 4.34%
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8. Time Weighted Return (TWR)
Period 2
£20,000 added Total £70,000 Ended £72,000
Period 1
Start £45,000 end £50,000
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9. Audley Financial Training
The calculation
Work out HPR for each period
Period 1: £50,000 less £45,000/£45,000 = 0.11
Period 2: £72,000 less £70,000/£70,000 = 0.028
Add 1 to each figure and multiply
1.11 x = 1.141
Deduct 1 to get 0.141
Multiply by 100 to get a TWR of 14.1%
2/3/2019
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10. Time Weighted Return summary
Calculate the HPR for each separate period
Put the answer as a decimal rather than a percentage and add 1 to each answer.
Multiply the two together.
Subtract 1 from the result and multiply by 100 to get a percentage
2/3/2019
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11. Audley Financial Training
Which to use?
HPR simple and is accurate if no new money is introduced (or withdrawn)
MWR gives an accurate figure if new money is introduced or withdrawn but is misleading if used to compare the performance of two managers
TWR is used to compare two managers’ performance as it is not affected by cash flows in and out of the fund
2/3/2019
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12. Relative performance measures
HPR, MWR and TWR are absolute measures.
They record how the manager performed
But not how well they performed
A negative return of 5% might be very good if the overall market return was minus 10%
2/3/2019
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13. 7% Alpha 3% Alpha -4% Alpha Actual return 10% Actual return 3%
Return predicted by CAPM 7%
Actual return 3%
Alpha -4%
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14. Audley Financial Training
Why benchmark?
To provide independence and neutrality
Assess the performance of the manager
Help and agree manage client expectations with regard to the portfolio’s performance
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15. Audley Financial Training
Selection criteria
Specified in advance
Agreed with the client
Transparent and unambiguous
Appropriate to the client’s objectives in line with their attitude to risk
Two components:
The percentage of each sector held by the benchmark
The chosen index for each sector
2/3/2019
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16. Comparison with an index
UK shares
FTSE 100/250/all share
2/3/2019
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17. Audley Financial Training
2/3/2019
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18. Audley Financial Training
Portfolio Analysis
At the end of the review period the portfolio will have either under or overperformed its benchmark.
This will be as a result of two factors:
The portfolio got a better or worse performance than the index in each sector
This is compounded by having a different asset allocation to the benchmark.
2/3/2019
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19. Weighting: Sector UK shares: Index FTSE 100
Portfolio
Benchmark
40%
40%
30%
50%
Portfolio underweight
Portfolio Overweight
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20. Audley Financial Training
Benchmark 35% UK equities
Portfolio 50% UK equities
Both return 7%
Benchmark 35% x 7% = 2.45%
Portfolio 50% x 7% = 3.5%
Benchmark 35% UK equities
Portfolio 50% UK equities
BM return 4%
Portfolio 7%
Benchmark 35% x 4% = 1.4%
Portfolio 50% x7% = 3.5%
Benchmark 35% x 7% = 2.45%
Portfolio 50% x 4% = 2%
Benchmark 35% UK equities
Portfolio 50% UK equities
BM return 7%
Portfolio 4%
Benchmark 50% x 7% = 3.5%
Portfolio 35% x 4% = 1.4%
2/3/2019
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21. Audley Financial Training
Performance analysis
Benchmark
Portfolio
Percentage
Index
Contrib UK
55%
18%
9.9%
Overseas
30%
15%
4.5%
Gilts
10%
1.5%
15.9%
Percentage
Return
Contrib UK
30%
20% 6%
Overseas
50%
10% 5%
Gilts
15% 3%
14%
2/3/2019
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22. Performance due to asset allocation
P/F allocation
BM return
Contribution
Difference UK
30%
18%
5.4%
9.9%
-4.5%
Overseas
50%
15%
7.5%
4.5% 3%
Gilts
20%
10% 2%
1.5%
0.5%
14.9%
15.9%
-1%
2/3/2019
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23. Performance due to Stock Picking
Benchmark allocation
Portfolio return
Contribution
BM return
Difference UK
55%
20%
11%
9.9%
+1.1%
Overseas
30%
10% 3%
4.5%
-1.5%
Gilts
15%
2.25%
1.5%
+ 0.75%
16.25%
15.9%
+0.35%
2/3/2019
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24. Sharpe ratio Three inputs: Portfolio return Risk free return
Standard Deviation of portfolio
Measures performance adjusted for risk
Formula
Portfolio return less RF SD
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25. Audley Financial Training
Sharpe ratio
Portfolio A 15% return, SD 8%
Portfolio B 6% return SD 2%
Risk Free return 1%
A 15-1/8 = 1.75
B 6-1/2 = 2.5
With Sharpe the higher the number the better
B has produced the best risk adjusted return
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26. Audley Financial Training
Information ratio
Year
Portfolio BM
Difference 1 5% 3% 2% 2
-2%
-4% 3 4
-3%
-5% 5
25%
23% 6 8% 0% 7 4% 6% 8 9 10
Average
5.2%
3.6%
SD 1.9%
Measures the consistency of a manager over a period of time
Calculates the difference between the portfolio and the benchmark.
Portfolio return – BM return
SD of difference
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27. Audley Financial Training
Interpreting IR
5.2% less 3.6% = 0.84
1.9%
IR can be positive or negative
0.5 is considered good
0.85 is very good
Greater than 1 is excellent
2/3/2019
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28. AF4 Day 2 objectives
By the end of the event delegates will be able to:
Identify the factors that must be considered in recommending an appropriate portfolio for a client’s needs
Understand the characteristics of the main investment strategies.
Understand the characteristics of “non-main stream” investments such as options, CFDs and Hedge Funds.
Accurately calculate the Holding Period Return, Money Weighted Period Return, Time Weighted Period Return and identify when it would be appropriate to use each.
Understand the concept of Alpha.
Accurately calculate and interpret the main risk related returns, Sharp Ratio and Information Ratio
Understand the concept of benchmarking.
Analyse the performance of a portfolio and identify the cause of under or over performance.
2/3/2019
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