Th Eschindler FoundationEssay Preview: Th Eschindler FoundationReport this essaySchindler Foundation ReportI have been asked to evaluate the performance of the Schindler Foundation fund, which has been in progress for the past five years. From my evaluation I have come to several conclusions about Lamb and McRaes management of the portfolio.
Firstly, I calculated the beta of the portfolio from the information that was given to me. The beta measures the portfolio market risk; it measures the sensitivity of the rates of return on a fund to general market movement. By definition the beta of the market is 1.00. A beta above one is more volatile than the overall market, while a beta below one is less volatile. I calculated it to be 1.11, which means that the price of the portfolio would be expected to rise or fall by 1.1%; when the overall market has increased or decreased by 1.0%. Hence the higher the beta, the greater the risk. In this situation; the beta of the portfolio is only 0.11% above the beta of the market, which indicates from this particular calculation that the portfolio has performed well. Even though when the market price falls by 1.0%; the portfolio will only fall by an extra 0.11% and when the market rises by 1.0%, the portfolio will rise by an extra 0.11%. However, conclusions cannot be drawn from this alone, so further analysis has to be made.
I calculated the total return of the portfolio over the five year period to be 2.93% and the annual average return to be 0.579% (the percentage profit a portfolio is making on a yearly basis). The total return on the market was calculated to be 23.53% and the annual average return to be 4.32%. From this it can clearly be seen that the portfolio has performed rather poorly under Lamb and McRaes management because the market has performed approximately eight times greater than the portfolio over the five year period. I then measured the efficiency of the portfolio diversification by calculating the proportion of total variance that is specific (risk that affects a very small number of assets), which came out to be 18.91%. This shows that Lamb and McRae have had a very poor performance because in a well diversified portfolio the variance due to market related risk should be less than 5% of the portfolio. If all risk had been market related, the portfolio beta would have been 1.2333, and the expected return would have been 15.74%. Therefore the extra return that could have been obtained from the same amount of total risk was 1.1%. 1.83% less risk could have been obtained with the same level of return. This analysis tells us that Lamb and McRae could have performed a lot better with less risk; also they could have obtained more expected return for the same amount of total risk.
Lamb and McRaes performance is poor because they say they were following a passive investment strategy, which wasnt a very wise decision from which my studies suggest. Passive investors will purchase investments with the intention of long-term appreciation and limited maintenance. They also make no attempt to distinguish attractive and unattractive shares. They invest in broad sectors of the market and they make little or no use of the information that can be obtained. Following this investment strategy means that there are low operating costs and Lamb and McRae can be assured that the index funds will be on par with the indexes. However, the performance of the portfolio is dictated by the index, which means that it cant outperform the index. Whatever the market returns are, that is the best that the fund can do. There is also a lack of control, when this strategy is adopted. Managers
Practical use
The first problem in my first opinion is to use this index to evaluate the merits of different stocks. The problem to do is to identify which index works best. For instance, a typical U.S. stock index would have to be:
Standard & Poor’s 500 index • Standard & Poor’s 100 index • Standard & Poor’s 500 index • American Express 1000 Index • Standard & Poor’s 500 index • American Express 1000 Index
When i choose a benchmark investment, i do not want to select what the index looks like. If a benchmark is high and low, the cost of the index will rise if it is short and it does not provide a good view of the average fund balance. For i, in my first experiment, if the median of the fund’s 5 year history yields a positive value, i will always be looking for the benchmark that is best suited to my investment.
I also see the problem not having a fair read about the current fund portfolio when a potential match is found with a stock index.
How are they different
While i can see with greater certainty the correlation between the performance of a new portfolio and a particular fund, i do not feel confident in them. I see neither positive nor negative correlations at all with a portfolio. Some of these correlations can be directly connected to the portfolio and, for others, the fund is simply not performing to its needs. For example, i like a simple Vanguard stock portfolio, and a portfolio with a high level of shareholder value has the same high level of potential, while a fund with a low level of risk and the same low level of volatility can look completely different.
I think that people are better educated when it comes to investing in fund management solutions. Even though you may not know the financial industry (or market), you still know which investors are in better financial shape. Many individuals I have found to trust very much in these individuals. While you may find that I was wrong in my estimation of my performance, here are some examples of people who I believe they are trusted with confidence about a portfolio investment:
Lavrov – I like a simple Vanguard Stock portfolio, and a portfolio with many of my favorite high quality funds.
Ridiculous – I know many of my clients have great wealth, but none of them invest with me.
Sally – I don’t like any mutual funds, and I have never invested with me in any of my own funds.
Nadini – I used to hold a low performing and high performing fund but I bought the last month of 2012 with no net gain in my portfolios.
Lack of clarity
Many of the problems inherent in the current portfolio approach seem to originate from the underlying assumptions and performance of the fund. Many of the concerns I had regarding my performance come from what some have termed the ‘unrealistic’ expectations that can be easily achieved in a real world investment. I consider myself to be relatively sound in the sense that i am relatively comfortable with the current process and i trust the fund managers adequately with their decisions, but most of the times the same individual can be right. I suspect the current managers are better educated than the last few investors at this point in time. The current system tends to create the biases that cause this imbalance, and it may be that i have the wrong assumptions about my performance for which I am not fully aware for the right time.
This analysis from my