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Global portfolio Management Project
 

Global portfolio Management Project

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I made the presentation for the final project for Global Portfolio Management class by using several asset management software such as Ibbotson Encorr, Zephyr Associates, and Barra Portfolio Manager.

I made the presentation for the final project for Global Portfolio Management class by using several asset management software such as Ibbotson Encorr, Zephyr Associates, and Barra Portfolio Manager.

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  • - Now, I will show our recommendations and how our recommendation improve the client’s portfolio performance. - First of all, according our asset allocation analysis, we found that Vanguard 2045 is the most appropriate portfolio for this clients based on her age, risk-tolerance, and requirement to diversification. - Thus, we allocate these 6 mutual funds selected through style analysis to form a portfolio with similar assets classes allocation of Vanguard 2045. - By diversifying asset classes to US domestic fixed income and expand the categories of US domestic equity, we could help this client improve the performance of current portfolio.
  • - This table shows the client’s current asset allocation and holding products. Now, we diversify the US large cap equity to large cap and large cap growth and also change the Vanguard Index 500 to our two recommended funds. As for the US mid cap equity, we maintain the similar weight but change the fund to Thromburg Core Growth. We do not change a lot in the weigh of US small cap equity, and keep holding the same fund. However, the weight of International equity is too high, causing high risk in the current portfolio. Thus, we take 10% off from the international equity and add this 10% to US Fixed Income. At last, we allocate only 18% in international equity. After our adjustment, guess what??
  • The expected return increases about 9% The standard deviation reduce 8% As for the sharpe ratio, how amazing!! it grows dramatically from 0.54 to 2.06. Those data show that our recommendation indeed improve the client’s current performance obviously.
  • To conclude, by adopting our recommendation, the client’s portfolio performance not only outperforms the current performance but also beats the target, Vanguard 2040, Vanguard 2045, Vanguard 2050, and 60%US Eq./40% US F.I. That’s our presentation. Thank you for you attention!

Global portfolio Management Project Global portfolio Management Project Presentation Transcript

  • East West Bank Employee 401(K) Ling-Lin Chiu (Grace)
  • Agenda
    • Section I : Asset Allocation Analysis
    • Section II: Style Analysis
    • Section III: Recommendations
  • Company Background
    • East West Bancorp: $11.8 Billion in Asset, $391.3 Million Revenue (2007 Annual)
    • 2 nd largest Commercial Bank Headquarter in Southern CA
    • 72 Branches through out Major Cities include Los Angeles, Orange, San Francisco, San Metro and Houston.
    • One of the Largest Commercial Banks Servicing Chinese-American Community
  • Client Profile
    • Gender: Female
    • Age: 26
    • Employment History: 3 Years with East West Bank
    • Target Retirement Age: Age 65
    • Risk Level: Moderate Aggressive Style; Require 7% to 8% Annual Return
    • Years Plan to Spend in Retirement: 20 Years
    • Social Security Benefit: 1960 and later, Full Retirement Age: 67
  • 401K Plan Asset Class-Part I
    • Large Cap Stock-Blend: Vanguard Index Trust 500 (VFINX)
    • Large Cap Stock-Value: Washington Mutual Investors Fund (RWMEX)
    • Large Cap Stock-Blend: Davis NY Venture Fund A (NYVTX)
    • Large Cap Stock-Growth: American Funds Grth Funds of Amer R4 (RGAEX)
    • Large Cap Stock-Growth: Franklin Flex Cap Growth Fund (FKCGX)
    • Mid Cap Stock-Value: Goldman Sachs Mid Cap Value Fund INS (GSMCX)
    • Mid Cap Stock-Blend: Vanguard Mid-Cap Index Fund-Inv (VIMSX)
    • Mid Cap Stock-Growth: Thornburg Core Growth I (THIGX)
  • 401K Plan Asset Class-Part II
    • Small Cap Stock-Value: Royce Total Return Fund (RYTRX)
    • Small Cap stock-Blend: Vanguard Small Cap Index (NAESX)
    • Small Cap Stock-Growth: Royce Value Plus Fund Investment (RYVPX)
    • Other-Company Stock: East West Bancorp Inc (EWBC)
    • Fixed Income-Stable Value: Stable Value Fund (In-House )
    • Fixed Income-Intermediate Bond: PIMCO Total Return Fund Admin (PTRAX)
    • Balanced-Value: MFS Total Return Fund (MSFRX)
    • International Stock-Blend: American Funds EuroPacific Gr R4 (REREX)
  • Current Asset Allocation
    • Defined Contribution Account: 401K Plan with Prudential
    • 401K Plan Policy: Matches $1.00 to Account for Every $1.00 Client Contribute, Up to the First 6.00% of Annual Eligible Pay
    Asset Allocation (as of 12/31/07) Percentage (%) Domestic Equity-Vanguard Index 500 35 Domestic Equity-Vanguard Mid-Cap Index 19 Domestic Equity -Vanguard Small Cap Index 19 World exEM Equity-American Funds Euro Pacific Gr R4 27 Total 100
  • Target Asset Allocation Asset Class Percentage (%) Domestic Equity 20 World exEM 20 Emerging Markets Equity 15 Private Equity 5 Real Estate 5 High Yield 5 Domestic Fixed Income 10 Absolute Return 10 Non US Fixed Income 5 Cash Equivalents 5 Total 100
  • Inputs: Assets-Constrained Frontier   % Expected Return Standard Deviation Yield Current Holding Broad Domestic Equity 9.0 16.9 0 73 World exEM 9.0 16.6 0 27 Emerging Markets Equity 9.6 31.2 0 0 Private Equity 12.0 34.0 0 0 Real Estate 7.6 16.5 0 0 High Yield 7.0 11.5 0 0 Domestic Fixed 5.3 4.5 0 0 Absolute Return 6.5 9.7 0 0 Non US Fixed 5.2 9.6 0 0 Cash Equivalents 3.5 0.8 0 0
  • Individual Constraints %  Min. Holding Max. Holding Cost to Increase Cost to Decrease Include Constraint Locking Broad Domestic Equity 20 60 0 0 X None World exEM 0 20 0 0 X None Emerging Markets Equity 0 10 0 0 X None Private Equity 0 10 0 0 X None Real Estate 0 10 0 0 X None High Yield 0 20 0 0 X None Domestic Fixed 0 40 0 0 X None Absolute Return 0 10 0 0 X None Non US Fixed 0 10 0 0 X None Cash Equivalents 0 100 0 0 X None
  • Correlations   US Eq. Int’l Eq. World Ex EM Em. Eq. P.E.  REIT    H.Y.   US Fixed Absolute Non-US F.   Cash Broad Domestic Equity 1.00 0.70 0.92 0.50 0.68 0.54 0.66 0.20 0.56 -0.03 -0.12 World exEM 0.92 0.93 1.00 0.51 0.71 0.55 0.65 0.19 0.57 0.10 -0.20 Emerging Markets Equity 0.50 0.45 0.51 1.00 0.50 0.39 0.30 0.10 0.32 -0.02 -0.15 Private Equity 0.68 0.64 0.71 0.50 1.00 0.44 0.47 0.15 0.43 0.10 0.07 Real Estate 0.54 0.47 0.55 0.39 0.44 1.00 0.55 0.17 0.40 0.03 -0.06 High Yield 0.66 0.55 0.65 0.30 0.47 0.55 1.00 0.29 0.45 0.10 0.07 Domestic Fixed 0.20 0.15 0.19 0.10 0.15 0.17 0.29 1.00 0.40 0.32 0.30 Absolute Return 0.56 0.50 0.57 0.32 0.43 0.40 0.45 0.40 1.00 0.15 0.50 Non US Fixed -0.03 0.21 0.10 -0.02 0.10 0.03 0.10 0.32 0.15 1.00 -0.05 Cash Equivalents -0.12 -0.25 -0.20 -0.15 0.07 -0.06 0.07 0.30 0.50 -0.05 1.00
  • Unconstraint efficient frontier
  • Constraint efficient frontier
  • Unconstraint: Performance %  Position 50 Current Target Vanguard 2040 Vanguard 2045 Vanguard 2050 60% US Eq./40% F.I. Domestic Equity 32.89 73 20 72 71.9 71.7 60 World exEM 41.65 27 20 14.3 14.5 14.5 0 Emerging Markets Equity 3.5 0 15 3.7 3.6 3.8 0 Private Equity 14.12 0 5 0 0 0 0 Real Estate 7.84 0 5 0 0 0 0 High Yield 0 0 5 0 0 0 0 Domestic Fixed 0 0 10 10 10 10 40 Absolute Return 0 0 10 0 0 0 0 Non US Fixed 0 0 5 0 0 0 0 Cash Equivalents 0 0 5 0 0 0 0 Expected Return 9.33 9 7.98 8.65 8.65 8.65 7.5 Standard Deviation 17.38 16.56 12.65 15.1 15.1 15.1 10.65 Sharpe Ratio 0.54 0.54 0.63 0.57 0.57 0.57 0.7
  • Constraint: Performance %  Position 50 Current Target Vanguard 2040 Vanguard 2045 Vanguard 2050 60% US Eq./40% US F.I. Domestic Equity 20 73 20 72 71.9 71.7 60 World ex EM 20 27 20 14.3 14.5 14.5 0 Emerging Markets Equity 2.36 0 15 3.7 3.6 3.8 0 Private Equity 6.3 0 5 0 0 0 0 Real Estate 5.73 0 5 0 0 0 0 High Yield 6.01 0 5 0 0 0 0 Domestic Fixed 29.5 0 10 10 10 10 40 Absolute Return 7.08 0 10 0 0 0 0 Non US Fixed 3.02 0 5 0 0 0 0 Cash Equivalents 0 0 5 0 0 0 0 Expected Return 7.6 9 7.98 8.65 8.65 8.65 7.5 Standard Deviation 10.53 16.56 12.65 15.1 15.1 15.1 10.65 Sharpe Ratio 0.72 0.54 0.63 0.57 0.57 0.57 0.7
  • Performance Comparison
    • Unconstrained
    • constrained
      Position 50 Current Target Vanguard 2040 Vanguard 2045 Vanguard 2050 60% US Eq./ 40% F.I Sharpe Ratio 0.54 0.54 0.63 0.57 0.57 0.57 0.7   Position 50 Current Target Vanguard 2040 Vanguard 2045 Vanguard 2050 60% US Eq. /40% F.I Sharpe Ratio 0.72 0.54 0.63 0.57 0.57 0.57 0.7
  • Asset Allocation Recommendations
    • According to our analysis, 60%/40% has the highest Sharpe Ratio 0.70, which should be the first priority for the client in terms of the returns per unit risk.
    • The client ‘s current asset allocation has no fixed income investment, make the portfolio too aggressive and risky. However, 60%/40% is too conservative.
    • Considering the level of risk tolerance (risk-lover) and the age (26), we suggest that Vanguard 2045 be the most appropriate investment for the client
  • Vanguard Target Retirement 2045 Fund
    • Recommend for Investors :
    • Long-Term Growth and Income-Generating
    • Diversified Holding of Stocks and Bonds with Adjusting Allocation upon Age Changes
    • Target Retirement Between 2043 and 2047
    Asset Class Percentage Holding (%) Vanguard Total Stock Market Index Fund 71.7 Vanguard European Stock Index Fund 10.1 Vanguard Total Bond Market Index Fund 10.0 Vanguard Pacific Stock Index Fund 4.4 Vanguard Emerging Markets Stock Index Fund 3.8 Total 100
  • Agenda
    • Section I : Asset Allocation Analysis
    • Section II: Style Analysis
    • Section III: Recommendations
  • Large Cap Funds 0.80 0.98 -1.18 0.45 -1.17 IR 12.10% 15.64% 5-yr 8.68% 9.23% 3-yr Yes 11.81% 16.02% 1-yr 83.50% Russell 1000 Growth FKCGX Franklin Flex Cap 12.10% 15.87% 5-yr 8.68% 11.99% 3-yr Yes 11.81% 10.88% 1-yr 84% Russell 1000 Growth RGAEX American Funds Growth 13.43% 12.69% 5-yr 9.08% 8.49% 3-yr Yes 5.77% 5.39% 1-yr 99.50% Russell 1000 VFINX Vanguard Index 500 13.43% 14.75% 5-yr 9.08% 10.18% 3-yr Yes 5.77% 4.97% 1-yr 89.40% Russell 1000 NYVTX Davis NY Venture Fund A 14.63% 11.85% 5-yr 9.32% 8.24% 3-yr Yes -0.17% 3.90% 1-yr 94% Russell 1000 Value RWMEX Washington Mutual Investors Fund Classifi- cation Bmk Return Return   Year R 2 Benchmark Ticker Mutual Fund Name
  • US Large Cap-Davis NY Venture A
  • US Large Cap-Davis NY Venture A Investment Policy
    • Long-term capital growth
    • Equity securities in market
    • cap > $10m companies
  • Large-cap-American Fund Growth
  • Large-cap-American Fund Growth
  • Large-cap-American Fund Growth Investment Policy
    • Up to 15% assets in
    • international securities
    • Up to 10% in Debt
    • securities
  • Mid-Cap Funds Yes Yes Yes Classif cation 1.07 -0.66 -0.32 IR 17.90% 24.25% 5-yr 11.39% 17.70% 3-yr 11.43% 11.88% 1-yr 81% Russell MidCap Growth THIGX Thornburg Core Growth 18.21% 17.24% 5-yr 11.09% 11.12% 3-yr 5.60% 6.02% 1-yr 98.40% Russell MidCap VIMSX Vanguard Mid-Cap Index Fund-Inv 17.92% 16.89% 5-yr 10.11% 10.64% 3-yr -1.42% 3.34% 1-yr 90.70% Russell MidCap Value GSMCX Goldman Sachs Mid Cap Value Fund INS BmkReturn Return   Year R2 Benchmark Ticker Mutual Fund Name
  • US Mid Cap-Thornburg Core Growth Fund
  • US Mid Cap-Thornburg Core Growth Fund Investment Policy
    • Primarily domestic
    • securities
    • May own foreign
    • securities and debt
    • securities
  • Small-Cap Funds Yes Yes Yes Classif cation 0.01 0.41 -0.34 IR 16.50% 26.32% 5-yr 8.11% 11.73% 3-yr 7.05% 3.24% 1-yr 81.10% Russell 2000 G RYVPX Royce Value Plus 16.25% 17.01% 5-yr 6.80% 7.89% 3-yr -1.57% 1.15% 1-yr 98.90% Russell 2000 NAESX Vanguard Small Cap 15.80% 14.11% 5-yr 5.27% 8.20% 3-yr -9.77% 2.36% 1-yr 93.80% Russell 2000V RYTRX Royce Total Return BmkReturn Return Year  R2 Benchmark Ticker Mutual Fund Name
  • Vanguard Small Cap Index Fund Total Net Assets: $13.6 B # of Stocks: 1725 Median Market Cap: $1.6 B Expense Ratio: 0.23%
  • Vanguard Small Cap Index Fund
  • Vanguard Small Cap Index Fund Investment Policy
    • Tracks MSCI US Small
    • Cap Index
  • Balanced and Int’l Funds Yes Yes Yes Classif cation 0.21 -0.69 0.85 IR 22.08% 22.75% 5-yr 17.32% 20.58% 3-yr 11.63% 18.87% 1-yr 91.50% MSCI EAFE REREX America Fund Euro Pacific Growth 4.42%   5-yr 4.56%   3-yr 6.96%   1-yr   Lehman Aggregate 14.63% 9.54% 5-yr 9.32% 6.62% 3-yr -0.17% 4.98% 1-yr 87.90% Russell 1000 Value MSFRX MFS Total Return 4.06% 5.05% 5-yr 4.32% 5.03% 3-yr 7.40% 8.81% 1-yr 92.20% Lehman Brothers Gov/Credit Intermediate PTRAX PIMCO Total Return Fund Admin BmkReturn Return   Year R2 Benchmark Ticker Mutual Fund Name
  • US Fixed Income-PIMCO Total Return
  • US Fixed Income-PIMCO Total Return Investment Policy
    • At least 65% of assets
    • in Fixed Income
    • Up to 10% in high yield securities
    • 20% in foreign
    • currency securities
  • Int’l Equity– American Fund EuroPacific Growth
  • Int’l Equity– American Fund EuroPacific Growth
    • Invests at least 80%
    • in MSCI EAFE
    Investment Policy
  • Int’l Equity– American Fund EuroPacific Growth 0.67% 22.08% 22.75% 5 year 3.26% 17.32% 20.58% 3 year 7.24% 11.63% 18.87% 1 year ALPHA EAFE Fund Return
  • Mutual Funds Selected Y Y Y Y Y Y Classification Fund Name Asset Class IR Exp. Ratio (%) PIMCO Total Return Fund Domestic Fixed Income 0.85 0.68 American Funds Growth Domestic Equity-Large Cap Growth 0.98 0.68 Davis NY Venture Fund A Domestic Equity-Large Cap 0.80 0.85 Thromburg Core Growth Domestic Equity-Mid Cap 1.07 1.10 Vanguard Small Cap Index Domestic Equity-Small Cap 0.41 0.23 American Funds EuroPacific Growth Int'l Equity 0.21 0.87 Total: 6 Mutual Funds
  • Agenda
    • Section I : Asset Allocation Analysis
    • Section II: Style Analysis
    • Section III: Recommendations
    • Allocate the 6 recommended mutual funds in terms of Vanguard 2045’s allocation of asset classes
    • - Client’s age
    • - Client’s risk tolerance
    • - Information Ratio & Classifications
    • Reduce the portfolio risk by allocating part of capital to US Fixed Income
    • Diversify the client’s allocation in US domestic equity
    Recommendations (1)
  • Recommendations (2) 27% 19% 19% 35% 0% 0% Weighted Asset Class Current Funds Domestic Fixed Income N/A Domestic Equity- Large Cap Growth N/A Domestic Equity- Large Cap Vanguard Index 500 Domestic Equity- Mid Cap Vanguard Mid- Cap Index Domestic Equity- Small Cap Vanguard Small Cap Index Int'l Equity American Fund Euro Pacific American Funds EuroPacific Growth Vanguard Small Cap Index Thromburg Core Growth Davis NY Venture Fund A American Funds Growth PIMCO Total Return Fund Recommended Fund Name 18% 20% 20% 16% 16% 10% Weighted
  • Improved Performance 0.54 2.06 Sharpe Ratio 9% 17.75% 16.56% 8.63% Expected Return Standard Deviation % Current Recommended
  • Summary
    • Our recommended portfolio outperforms
    2.06 8.63 17.75 Recommended 0.7 0.57 0.57 0.57 0.63 0.54 Sharpe Ratio 10.65 15.1 15.1 15.1 12.65 16.56 Standard Deviation 7.5 8.65 8.65 8.65 7.98 9 Expected Return 60% US Eq./40% US F.I. Vanguard 2050 Vanguard 2045 Vanguard 2040 Target Current % 
  • Work Citied
    • “ Retirement benefits by year of birth.” Social Security Online . Feb. 29, 2008. http://www.ssa.gov/retire2/agereduction.htm Apr. 19, 2008
    • “ Retirement Income Calculation.” Prudential Retirement. https://www.retirement.prudential.com/TRSWeb/accountsHome.do Apr. 19, 2008
    • “ Investor Relations.” East West Bank. http://www.eastwestbank.com/English/Investor_Relations.asp Apr. 22, 2008
    • “ EWBC Key Statistics.” Yahoo! Finance. http://finance.yahoo.com/q/ks?s=EWBC Apr. 22, 2008
    • “ Holdings-Asset Allocation-Vanguard 2045 Retirement Fund.” Vanguard Website. https://personal.vanguard.com/us/funds/holdings?FundId=0306&FundIntExt=INT Apr. 19, 2008
    • “ Holdings-Asset Allocation- Vanguard 2050 Retirement Fund..” Vanguard Website. https://personal.vanguard.com/us/funds/holdings?FundId=0699&FundIntExt=INT Apr. 19, 2008
    • “ Holdings-Asset Allocation-Vanguard 2050 Retirement Fund.” Vanguard Website. https://personal.vanguard.com/us/funds/holdings?FundId=0696&FundIntExt=INT Apr. 19, 2008
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