Investment Analysis

and
Portfolio Management
Asim Javed
Muhammad Wafa Rasool
Hafiz Awais Bin Nawaz
A mutual fund
Is a professionally managed
collective investment scheme that
pools money from many investors to
purchase securities.
They are sometimes referred to as
"investment companies" or
"registered investment companies.
An investment company invests the pooled
funds in a portfolio of stocks and bonds.
Portfolio of investment is managed by an
investment management company.
Net asset value

N.A.V=Tot. Mkt. Val. Of investments
No. of outstanding shares/Units
Broad diversification

Professional Asset Management

Provide Financial Stability to the market

Improve market efficiency

To promote economy investment/Operational
Efficiency


1. Exploitation of market
2. High management fees and sales
commissions
3. Less control over timing of recognition
of gains
4. Less predictable income
4. No opportunity to customize


By structure
Open-end mutual fund
Closed-end mutual fund

By investment objective
Growth fund
Income fund
Balanced fund

Closed-end funds
Stocks trade on secondary market.
Company dont buy back.

Open-ended funds
These are mutual funds
Company buy back anytime.

When referring to mutual funds, the terms
"fixed-income," "bond," and "income" are
synonymous.

These terms denote funds that invest
primarily in government and corporate debt.

While fund holdings may appreciate in value,
the primary objective of these funds is to
provide a steady cash flow to investors.
The objective of these funds is to provide a
balanced mixture of safety, income and
capital appreciation.

The strategy of balanced funds is to invest in
a combination of fixed income and equities.

A typical balanced fund might have a
weighting of 60% equity and 40% fixed
income.
The money market consists of short-term
debt instruments, mostly Treasury bills.


This is a safe place to park your money. You
won't get great returns, but you won't have to
worry about losing your principal.


Funds that invest in stocks represent the
largest category of mutual funds.

Generally, the investment objective of this
class of funds is long-term capital growth
with some income.

There are, however, many different types of
equity funds because there are many different
types of equities.

This type of mutual fund replicates the
performance of a broad market index such as
the KSE_100 index.

An investor in an index fund figures that
most managers can't beat the market.

An index fund merely replicates the market
return and benefits investors in the form of
low fees.

These funds invest in other funds. Similar to
balanced funds, they try to make asset
allocation and diversification easier for the
investor.
The name "hedge fund" refers to the hedging
techniques traditionally used by hedge funds,
but hedge funds today do not necessarily
hedge.

Hedge funds have existed for many decades,
but have become increasingly popular in
recent years, growing to be one of the world's
major investment vehicles and sources of
capital.

Hedge funds invest in financial derivatives.


These are Shariah Compliance funds.


They follow the rules and regulations of
Quran and Sunnah (Shariah)

E.g. Rs. 100, if Debt to equity Ratio is 25/75
then Rs. 25 will be allocated for Charity and
Rs. 75 will be allocated for equity profit.
Invest in Financial distress Company.

There is no example available in Pakistan but
many examples are available in U.S of Vulture
funds.
Invest in Specific Industry

E.g pecking energy fund, invest in energy
companies (Sector)
Capital Protection Fund offers the best
investment solution to investors offering
safety of capital while having access to
the stock market.
Three common measures of performance:

1. Sharpe Measure
2. Treynor Measure
3. Sortino Ratio
4. Jensens Measure (Jensens alpha)

According to him, unsystematic risk can
never de diversified ..

Sharpe Measure evaluates performance
based upon the average excess return per
unit of risk

The risk used is total risk, measured by
standard deviation

Where
i
is the standard deviation of
returns for portfolio i over the evaluation
horizon

i
i
i
RFR R
Sh
o

=
i
i
i
RFR R
Sh
o

=
Example
Ri=.03
Rfr=.02
Stand. Dev.=.052


Shi=.03-.02/.052
Shi=0.2
Treynor Measure evaluates performance
based upon the average excess return per
unit of risk

The risk used is systematic risk,
measured by beta
i
i
i
RFR R
TR
|

=
Where:
is the average return on portfolio i per
period over the evaluation horizon

is the average risk free rate per period
over the evaluation horizon


i
is the beta of portfolio i over the
evaluation horizon
i
R
RFR
Example

Ri=.03
RFR=.02
Beta=1.17

TRi=.03-.02/1.17
TRi=.0063

Best Performance has highest ratio
i
i
i
RFR R
TR
|

=
The Sortino ratio measures performance
against downside risk.


The Sortino ratio measures the return to bad
volatility.


A large Sortino Ratio indicates a low risk of
large losses occuring





Sortino Ratio

Sortino Ratio
Performance/Downside Risk


The sortino ratio is calculated by subtracting
the Rf-rate from the return of portfolio and
then dividing it by the downside deviation.




Sortino Ratio
Performance/Downside Risk

Example

Ri=.03
RFR=.02
Downside Risk=.09

Sortino Ratio=.03-.02/.09
Sortino Ratio=.111
Also called Jensens alpha

Jensens alpha =

(return on portfolio)
minus
(what would be expected under CAPM)


Or, perhaps more intuitively:


( ) | | R F R R R F R R
M i i i
| + = o
Where the beta is estimated over the evaluation horizon
and the returns are the averages over the evaluation
horizon.
e.g. If you want to know if your portfolio
manager is doing a good job, estimate the
alpha over some time frame.

If o = 2%, this means that the manager
generated returns 2% higher than should be
expected given how much risk he took on.
He is doing a good job!

If o < 0, then the manager is doing a bad
job, getting even less than should be
expected.