The document discusses recent academic research on active equity managers who deliver persistent outperformance. Some key findings include:
1) Strategies with a high "active share" (the degree to which the portfolio differs from its benchmark) are more likely to outperform their benchmarks and peers.
2) Top-decile performers over periods like three years have generated positive average annual alphas the following year, while bottom-decile performers saw negative alphas.
3) Brown Advisory's equity strategies tend to have high active shares, holding a concentrated number of stocks based on in-house research rather than mirroring index weights. This approach is aligned with characteristics the research associates with persistent outperformance.
This document summarizes research on index effects that occur around index rebalancing dates. It discusses the growth of passive investing, hypotheses for why abnormal returns may occur on additions and deletions from indexes, and evaluates whether an index effect exists in the S&P/TSX Composite index in Canada. The methodology examines stock returns around rebalancing dates to identify any cumulative abnormal returns.
A superior new replacement to traditional discounted cash flow valuation models
In the aftermath of the financial meltdown, the models commonly used for discounted cash flow valuation have become outdated, practically overnight. To meet the demand for an authoritative guidebook to the new economy, internationally recognized expert Kenneth Hackel has written Security Valuation and Risk Analysis.
Ownership structure and dividend policy.doc=2Liza Khanam
This study examines the relationship between ownership structure and modes of dividend payment for companies listed on the Dhaka Stock Exchange from 2006 to 2009. It analyzes whether the percentage of shares controlled by company directors impacts the type of dividends (cash or stock) declared. Previous studies in other markets have found relationships between ownership levels and dividend policies. The paper aims to determine if such a relationship exists for Dhaka Stock Exchange companies and how ownership levels may influence choices of cash versus stock dividends.
Performance Of Fo F Do Experience And Size Matterchardingsmith
This summary provides the key information from the document in 3 sentences:
The document discusses the performance of funds of hedge funds (FHFs), analyzing whether experience and size impact performance. It uses quantile regression to study the effect of these factors on various return levels rather than just average return. The empirical results suggest that experience and size have a negative effect on performance at higher quantiles, but size has a positive effect at lower quantiles, with both factors showing no significant effect at the median.
An Empirical Analysis on the Nature of Relationship between Capital Structure...iosrjce
The financing decision with regard to capital structure theory of finance has been a topic of many
theories and their conflicting output for past many years. This paper aims to analyse the nature of relationship
between the capital structure of a firm and its performance. The data of 40 firms excluding financial services
firms listed on Nifty indices on National Stock Exchange is studied (The composition of 50 firms on Nifty
represents a well branch out index reflecting precisely the overall market conditions). Financial services firms
have been excluded from purview of this paper, as they are in the business of collecting money and investing in
financial assets rather than producing goods, hence follow a unique business valuation model. Further financial
services sector being one of the most sensitive sectors. This paper analyzes a period of 13 years (2001-2014)
covering the phases of a business cycle starting from boom (2001/02-2006/07), recession (2007/08-2008/09)
and then recovery (2009/10-2013/14). The complete business cycle will aid to demonstrate the results more
accurately. This paper also surveys the topical developments in the empirical capital structure research. The
data for a period of 13 years is analysed using descriptive statistics, correlation and multiple regression
techniques. For research purpose, the ratios such as debt-equity ratio, debt-asset ratio and long term debt are
taken as independent variables whereas Net Profit, Net Profit Margin, ROCE, ROE and ROA are the ratios
taken as dependent variables.
This document analyzes different categories of active mutual fund management based on measures of Active Share and tracking error. It finds that the most active stock pickers have outperformed their benchmarks after fees, while closet indexers and funds focusing on factor bets have underperformed after fees. Performance patterns were similar during the 2008-2009 financial crisis. Closet indexing has become more popular recently. Fund performance can be predicted by cross-sectional stock return dispersion, favoring active stock pickers when dispersion is higher.
1) The document discusses valuation techniques and principles from a course on corporate finance and valuation. It covers topics like calculating enterprise value using a discounted cash flow model and how return on invested capital (ROIC) and revenue growth drive value.
2) The document also discusses how intrinsic stock value tracks ROIC and growth, and how the stock market reflects the underlying economic performance of companies. Investor emotions can cause short-term mispricing but markets are generally efficient in the long-run.
3) Total shareholder returns are determined by performance relative to expectations. While ROIC and growth are key drivers of long-term returns, short-term returns are more influenced by changes in investor expectations.
Application of capital structure in creating valueAlexander Decker
This document discusses the application of capital structure in creating value and growth for firms in Nigeria. It begins with an abstract that outlines the challenges firms face in maximizing profits and dealing with global economic insecurity. The study examined how effective capital structure and value creation can stimulate firm growth. Questionnaires were used to collect data, which was analyzed using statistical tools. The results showed that judicious use of capital financing is significant in value creation and growth. The document recommends stakeholders provide security through partnerships to guarantee investment safety and long-term corporate value enhancement. The introduction discusses how capital structure influences shareholder returns and risk through impacting debt-equity mix, cost of capital, and firm value. Capital structure is an important managerial decision that
This document summarizes research on index effects that occur around index rebalancing dates. It discusses the growth of passive investing, hypotheses for why abnormal returns may occur on additions and deletions from indexes, and evaluates whether an index effect exists in the S&P/TSX Composite index in Canada. The methodology examines stock returns around rebalancing dates to identify any cumulative abnormal returns.
A superior new replacement to traditional discounted cash flow valuation models
In the aftermath of the financial meltdown, the models commonly used for discounted cash flow valuation have become outdated, practically overnight. To meet the demand for an authoritative guidebook to the new economy, internationally recognized expert Kenneth Hackel has written Security Valuation and Risk Analysis.
Ownership structure and dividend policy.doc=2Liza Khanam
This study examines the relationship between ownership structure and modes of dividend payment for companies listed on the Dhaka Stock Exchange from 2006 to 2009. It analyzes whether the percentage of shares controlled by company directors impacts the type of dividends (cash or stock) declared. Previous studies in other markets have found relationships between ownership levels and dividend policies. The paper aims to determine if such a relationship exists for Dhaka Stock Exchange companies and how ownership levels may influence choices of cash versus stock dividends.
Performance Of Fo F Do Experience And Size Matterchardingsmith
This summary provides the key information from the document in 3 sentences:
The document discusses the performance of funds of hedge funds (FHFs), analyzing whether experience and size impact performance. It uses quantile regression to study the effect of these factors on various return levels rather than just average return. The empirical results suggest that experience and size have a negative effect on performance at higher quantiles, but size has a positive effect at lower quantiles, with both factors showing no significant effect at the median.
An Empirical Analysis on the Nature of Relationship between Capital Structure...iosrjce
The financing decision with regard to capital structure theory of finance has been a topic of many
theories and their conflicting output for past many years. This paper aims to analyse the nature of relationship
between the capital structure of a firm and its performance. The data of 40 firms excluding financial services
firms listed on Nifty indices on National Stock Exchange is studied (The composition of 50 firms on Nifty
represents a well branch out index reflecting precisely the overall market conditions). Financial services firms
have been excluded from purview of this paper, as they are in the business of collecting money and investing in
financial assets rather than producing goods, hence follow a unique business valuation model. Further financial
services sector being one of the most sensitive sectors. This paper analyzes a period of 13 years (2001-2014)
covering the phases of a business cycle starting from boom (2001/02-2006/07), recession (2007/08-2008/09)
and then recovery (2009/10-2013/14). The complete business cycle will aid to demonstrate the results more
accurately. This paper also surveys the topical developments in the empirical capital structure research. The
data for a period of 13 years is analysed using descriptive statistics, correlation and multiple regression
techniques. For research purpose, the ratios such as debt-equity ratio, debt-asset ratio and long term debt are
taken as independent variables whereas Net Profit, Net Profit Margin, ROCE, ROE and ROA are the ratios
taken as dependent variables.
This document analyzes different categories of active mutual fund management based on measures of Active Share and tracking error. It finds that the most active stock pickers have outperformed their benchmarks after fees, while closet indexers and funds focusing on factor bets have underperformed after fees. Performance patterns were similar during the 2008-2009 financial crisis. Closet indexing has become more popular recently. Fund performance can be predicted by cross-sectional stock return dispersion, favoring active stock pickers when dispersion is higher.
1) The document discusses valuation techniques and principles from a course on corporate finance and valuation. It covers topics like calculating enterprise value using a discounted cash flow model and how return on invested capital (ROIC) and revenue growth drive value.
2) The document also discusses how intrinsic stock value tracks ROIC and growth, and how the stock market reflects the underlying economic performance of companies. Investor emotions can cause short-term mispricing but markets are generally efficient in the long-run.
3) Total shareholder returns are determined by performance relative to expectations. While ROIC and growth are key drivers of long-term returns, short-term returns are more influenced by changes in investor expectations.
Application of capital structure in creating valueAlexander Decker
This document discusses the application of capital structure in creating value and growth for firms in Nigeria. It begins with an abstract that outlines the challenges firms face in maximizing profits and dealing with global economic insecurity. The study examined how effective capital structure and value creation can stimulate firm growth. Questionnaires were used to collect data, which was analyzed using statistical tools. The results showed that judicious use of capital financing is significant in value creation and growth. The document recommends stakeholders provide security through partnerships to guarantee investment safety and long-term corporate value enhancement. The introduction discusses how capital structure influences shareholder returns and risk through impacting debt-equity mix, cost of capital, and firm value. Capital structure is an important managerial decision that
This document summarizes a research paper about economic value added (EVA). It discusses EVA as a measure of corporate financial performance that accounts for the opportunity cost of capital. The paper reviews the theoretical basis and conceptual underpinnings of EVA, how it is calculated, accounting adjustments involved in EVA calculations, and prior empirical research comparing EVA to other performance measures. The purpose is to evaluate claims about EVA's ability to measure shareholder wealth creation.
Collateralized Fund Obligations MSc thesis Executive SummaryNICOLA Padovani
This dissertation analyzes Collateralized Fund Obligations (CFOs), which issue securitized tranches backed by pools of hedge funds. The author aims to explain the limited success of CFOs compared to expectations.
The paper reviews hedge fund investment vehicles and risks. It identifies clusters of correlated hedge fund strategies using indices. It models pools of strategies using multivariate Archimedean copulas to account for joint extreme returns.
The paper analyzes how CFOs apply techniques from Collateralized Debt Obligations, like credit support and diversification covenants. It proposes a modeling and pricing approach using copulas to simulate joint distributions and calculate tranche spreads. Hypothetical CFOs are priced using
This document presents a research proposal that aims to study how companies can design their organizations to empower employees and motivate them during difficult economic times. The proposal puts forth two hypotheses: 1) Organizations with continuous complementarity between leadership behaviors within the company and external sponsors will have higher satisfaction. 2) Companies with continuous complementarity will gain larger market share in their industry. A literature review summarizes three studies that provide background on how employee proactivity and leadership traits like extraversion can impact group performance. The proposed study would examine how dominance complementarity relates to motivation and satisfaction using surveys administered to companies.
Factors Affecting Investment Decisions in the Stock ExchangeAyman Sadiq
The document discusses factors affecting investment decisions in the stock exchange. It begins with definitions and an introduction to the topic. The broad objective is to identify factors influencing investment decisions. Specific objectives are to determine the impact of company profile, financial performance, market conditions, financial facilities, types of information, and regulatory bodies. Hypotheses are presented related to each objective. The methodology section outlines data collection through surveys and analysis using t-tests and factor analysis. Key findings indicate company reputation, size, and past financial performance most influence decisions, while market factors and financial services have less impact. Insider information and analyst recommendations also hold sway.
The document provides an overview of balance sheet basics and components. It includes the balance sheet of Global Telesystems for the year ending March 31, 2000, showing assets, liabilities, and equity. It then defines and explains each line item, such as gross block, net block, capital work in progress, inventory, receivables, equity share capital, reserves, total debt, and creditors. It discusses the role of balance sheets in investment decision making and analyzing areas like inventories, receivables, debt, and management comments.
This document discusses using active share and tracking error as measures of portfolio manager skill. It defines active share as the percentage of a fund's portfolio that differs from its benchmark index. Tracking error measures systematic factor risk by capturing how much a fund's returns vary from its benchmark. Research shows funds with high active share and moderate tracking error tend to outperform on average. The document examines how active share and tracking error can help identify skillful managers by focusing on their portfolio construction process rather than just past returns.
Economic value added (eva) and shareholders wealthAlexander Decker
This document summarizes a research study that examines the relationship between Economic Value Added (EVA) and shareholder wealth creation for selected automobile companies in India. The study uses factor analysis to identify factors that contribute most to shareholder wealth maximization. The results show that three factors were extracted from eight variables analyzed, explaining 69.902% of the total variance. Specifically, sales and profit after tax were found to have a stronger relationship with EVA than other variables. The document provides background on EVA and outlines the methodology used, including measurement of EVA, sample selection, and statistical analysis conducted.
11.economic value added (eva) and shareholders wealthAlexander Decker
This document summarizes a research study that examines the relationship between Economic Value Added (EVA) and shareholder wealth creation for selected automobile companies in India. The study uses factor analysis to identify factors that contribute most to shareholder wealth maximization. The results show that three factors were extracted from eight variables, explaining 69.902% of the total variance. Specifically, sales and profit after tax were found to have a stronger relationship with EVA than other variables. The document provides background on EVA and outlines the methodology used, including measurement of EVA, sample selection, and statistical analysis.
This document summarizes a research paper that examines factors affecting investment behavior among young professionals aged 25-35. It conducted a survey of 200 young investors in Lucknow, India to understand their preferences and decision-making processes. The key findings were:
1) The most important factors guiding investment decisions for young investors were safety of funds and diversification.
2) The majority invested for both growth and income, with others focusing on financial stability or tax savings.
3) Statistical analysis found investment behavior to be independent of age, gender, and income among young investors.
Proactive Alternatives strategies for the sophisticated HNW investor with actively managed accounts. A currency hedge works well against rising interest rate volatility.
Ratio Analysis of Samsung Electronics Co. Ltd.Nikita Jangid
This document provides an overview of ratio analysis and its significance. It begins by defining ratio analysis as the process of determining and interpreting numerical relationships based on financial statements. Ratios are calculated by dividing two relevant figures and can be used to assess various aspects of organizational performance such as profitability, liquidity, efficiency, and financial stability. The document then discusses the objectives and types of ratios, how ratios should be calculated and interpreted, and compares ratios to historical standards, industry benchmarks, and budgets. It emphasizes that ratios must be carefully analyzed in context. Finally, the document outlines the significance of ratio analysis for various stakeholders like management, owners, creditors, employees and governments in evaluating financial health and making informed decisions.
Here are the steps to calculate the key ratios:
1. Gross Profit Ratio = Gross Profit/Net Sales x 100 = 201000/560000 x 100 = 35.89%
2. Operating Expenses Ratio = (Administrative Expenses + Selling and Distribution Expenses)/Net Sales x 100 = (20000 + 89000)/560000 x 100 = 18.75%
3. Operating Profit Ratio = Gross Profit - Operating Expenses/Net Sales x 100 = 201000 - (20000 + 89000)/560000 x 100 = 17.14%
4. Net Profit Ratio = Net Profit/Net Sales x 100 = 800/560000 x 100 = 0.14%
Ratio Analysis By- Ravi Thakur From CMD Ravi Thakur
Ratio analysis is a technique used to analyze financial statements and evaluate the performance, financial position, and cash flows of a business or corporation. Ratios can be used to compare a company's performance over several years, compare a company to other companies, and assess its operating and financial efficiency. Some key points covered in the document include:
- Ratio analysis involves calculating and interpreting various financial ratios to analyze trends, evaluate performance, assess risk, and make comparisons.
- Common types of ratios include liquidity ratios, leverage ratios, activity ratios, and profitability ratios.
- Ratio analysis helps lenders and others evaluate a company's liquidity position, profitability, solvency, financial stability, management quality, and risk.
This chapter discusses return on invested capital (ROIC) and growth as fundamental drivers of company value. It provides the following key points:
1. ROIC measures a company's ability to generate returns from its capital investments and should be compared to its cost of capital and returns on alternative investments.
2. The value creation formula shows that higher long-term ROIC and growth rates lead to greater company value.
3. Sustainable competitive advantages allow some companies to maintain high ROIC for extended periods, while others see ROIC decline over time as advantages erode.
4. Empirical analysis shows ROIC and growth tend to decrease as companies mature, with 50% of high-ROIC companies
This document discusses private equity, including:
1. It outlines the private equity fund structure and cash flow profile known as the "J-curve".
2. The investment process includes initial evaluation, valuation, due diligence, and case studies of financing leveraged buyouts.
3. Value creation strategies are discussed like adding board members and management, acquisitions, and operational/financial restructuring. Exits like IPOs and sales are also covered.
The document provides an overview of accounting theory and the financial reporting environment. It discusses different types of accounting theories, including positive and normative theories, and how they can be evaluated. Positive theories seek to predict and explain phenomena, while normative theories prescribe how accounting should be done. The document also examines the development of accounting standards and regulation. It notes debates around whether regulation is necessary or not, and discusses public interest theory, capture theory, and economic interest theories about who benefits from regulation.
Infosys Limited's balance sheet and statement of profit and loss for the year ended March 31, 2012 are presented. The balance sheet shows total assets of Rs. 35,815 crore with non-current assets accounting for Rs. 7,350 crore and current assets at Rs. 28,465 crore. Total equity and liabilities are Rs. 35,815 crore with shareholders' funds at Rs. 29,757 crore. The statement of profit and loss shows total revenue of Rs. 33,083 crore for 2012 with a net profit after tax of Rs. 8,470 crore. Significant accounting policies and notes on accounts are also provided.
The document provides an overview of equity research and the career paths for equity analysts. It defines equity research as conducting research on publicly traded companies to recommend buying, selling, or holding stocks. Equity analysts gather information, analyze companies through financial modeling, and make investment recommendations. Their career can progress from associate to vice president, senior vice president, and managing director levels at investment banks or from research associate to analyst, senior analyst, and portfolio manager at hedge funds. The document outlines typical job responsibilities, compensation ranges, and career timelines within these roles.
A study on financial perfomance don for precot meridian limitedJagadeeshB15
This document provides an overview of ratio analysis of financial statements. It discusses the uses of ratio analysis for various stakeholders like shareholders, creditors, employees, government and management. It also covers the different types of ratios like liquidity ratios, leverage ratios, activity ratios and profitability ratios. Standards of comparison for ratios are important and ratios can be compared over time periods for a company or compared to industry averages. The document provides context on calculating and interpreting various financial ratios to evaluate the financial position and performance of a company.
Chapter 05(a) financial analysis-ratio and other analysisAl Sabbir
The document discusses various methods for analyzing the financial performance of a company through its financial statements, including ratio analysis, common size analysis, trend analysis, DuPont analysis, and other types of analyses. It provides examples of different types of ratios that can be used, such as liquidity ratios, activity ratios, leverage ratios, and profitability ratios. It also discusses how to interpret ratios and cautions that ratios must be compared to benchmarks and should account for differences in accounting methods.
Fund flow volatility and performance rakowskibfmresearch
This paper analyzes the impact of daily mutual fund flow volatility on fund performance. The author finds that higher daily flow volatility is negatively associated with risk-adjusted fund performance. This relationship is strongest for domestic equity funds, smaller funds, better performing funds, and those that experienced net inflows. The results suggest daily fund flows impose liquidity costs through unnecessary trading that reduces returns.
Prior performance and risk chen and pennacchibfmresearch
This document summarizes a research paper that models how a mutual fund manager's choice of portfolio risk is affected by the fund's prior performance and the manager's compensation structure. The model shows that when compensation cannot fall to zero, managers take on more tracking error risk (deviation from the benchmark portfolio) as performance declines. However, increased total return volatility is not necessarily predicted. Empirical tests on over 6,000 funds from 1962-2006 find evidence managers increase tracking error, but not return, volatility during underperformance, especially for longer-tenured managers. This supports implications of the theoretical model.
This document summarizes a research paper about economic value added (EVA). It discusses EVA as a measure of corporate financial performance that accounts for the opportunity cost of capital. The paper reviews the theoretical basis and conceptual underpinnings of EVA, how it is calculated, accounting adjustments involved in EVA calculations, and prior empirical research comparing EVA to other performance measures. The purpose is to evaluate claims about EVA's ability to measure shareholder wealth creation.
Collateralized Fund Obligations MSc thesis Executive SummaryNICOLA Padovani
This dissertation analyzes Collateralized Fund Obligations (CFOs), which issue securitized tranches backed by pools of hedge funds. The author aims to explain the limited success of CFOs compared to expectations.
The paper reviews hedge fund investment vehicles and risks. It identifies clusters of correlated hedge fund strategies using indices. It models pools of strategies using multivariate Archimedean copulas to account for joint extreme returns.
The paper analyzes how CFOs apply techniques from Collateralized Debt Obligations, like credit support and diversification covenants. It proposes a modeling and pricing approach using copulas to simulate joint distributions and calculate tranche spreads. Hypothetical CFOs are priced using
This document presents a research proposal that aims to study how companies can design their organizations to empower employees and motivate them during difficult economic times. The proposal puts forth two hypotheses: 1) Organizations with continuous complementarity between leadership behaviors within the company and external sponsors will have higher satisfaction. 2) Companies with continuous complementarity will gain larger market share in their industry. A literature review summarizes three studies that provide background on how employee proactivity and leadership traits like extraversion can impact group performance. The proposed study would examine how dominance complementarity relates to motivation and satisfaction using surveys administered to companies.
Factors Affecting Investment Decisions in the Stock ExchangeAyman Sadiq
The document discusses factors affecting investment decisions in the stock exchange. It begins with definitions and an introduction to the topic. The broad objective is to identify factors influencing investment decisions. Specific objectives are to determine the impact of company profile, financial performance, market conditions, financial facilities, types of information, and regulatory bodies. Hypotheses are presented related to each objective. The methodology section outlines data collection through surveys and analysis using t-tests and factor analysis. Key findings indicate company reputation, size, and past financial performance most influence decisions, while market factors and financial services have less impact. Insider information and analyst recommendations also hold sway.
The document provides an overview of balance sheet basics and components. It includes the balance sheet of Global Telesystems for the year ending March 31, 2000, showing assets, liabilities, and equity. It then defines and explains each line item, such as gross block, net block, capital work in progress, inventory, receivables, equity share capital, reserves, total debt, and creditors. It discusses the role of balance sheets in investment decision making and analyzing areas like inventories, receivables, debt, and management comments.
This document discusses using active share and tracking error as measures of portfolio manager skill. It defines active share as the percentage of a fund's portfolio that differs from its benchmark index. Tracking error measures systematic factor risk by capturing how much a fund's returns vary from its benchmark. Research shows funds with high active share and moderate tracking error tend to outperform on average. The document examines how active share and tracking error can help identify skillful managers by focusing on their portfolio construction process rather than just past returns.
Economic value added (eva) and shareholders wealthAlexander Decker
This document summarizes a research study that examines the relationship between Economic Value Added (EVA) and shareholder wealth creation for selected automobile companies in India. The study uses factor analysis to identify factors that contribute most to shareholder wealth maximization. The results show that three factors were extracted from eight variables analyzed, explaining 69.902% of the total variance. Specifically, sales and profit after tax were found to have a stronger relationship with EVA than other variables. The document provides background on EVA and outlines the methodology used, including measurement of EVA, sample selection, and statistical analysis conducted.
11.economic value added (eva) and shareholders wealthAlexander Decker
This document summarizes a research study that examines the relationship between Economic Value Added (EVA) and shareholder wealth creation for selected automobile companies in India. The study uses factor analysis to identify factors that contribute most to shareholder wealth maximization. The results show that three factors were extracted from eight variables, explaining 69.902% of the total variance. Specifically, sales and profit after tax were found to have a stronger relationship with EVA than other variables. The document provides background on EVA and outlines the methodology used, including measurement of EVA, sample selection, and statistical analysis.
This document summarizes a research paper that examines factors affecting investment behavior among young professionals aged 25-35. It conducted a survey of 200 young investors in Lucknow, India to understand their preferences and decision-making processes. The key findings were:
1) The most important factors guiding investment decisions for young investors were safety of funds and diversification.
2) The majority invested for both growth and income, with others focusing on financial stability or tax savings.
3) Statistical analysis found investment behavior to be independent of age, gender, and income among young investors.
Proactive Alternatives strategies for the sophisticated HNW investor with actively managed accounts. A currency hedge works well against rising interest rate volatility.
Ratio Analysis of Samsung Electronics Co. Ltd.Nikita Jangid
This document provides an overview of ratio analysis and its significance. It begins by defining ratio analysis as the process of determining and interpreting numerical relationships based on financial statements. Ratios are calculated by dividing two relevant figures and can be used to assess various aspects of organizational performance such as profitability, liquidity, efficiency, and financial stability. The document then discusses the objectives and types of ratios, how ratios should be calculated and interpreted, and compares ratios to historical standards, industry benchmarks, and budgets. It emphasizes that ratios must be carefully analyzed in context. Finally, the document outlines the significance of ratio analysis for various stakeholders like management, owners, creditors, employees and governments in evaluating financial health and making informed decisions.
Here are the steps to calculate the key ratios:
1. Gross Profit Ratio = Gross Profit/Net Sales x 100 = 201000/560000 x 100 = 35.89%
2. Operating Expenses Ratio = (Administrative Expenses + Selling and Distribution Expenses)/Net Sales x 100 = (20000 + 89000)/560000 x 100 = 18.75%
3. Operating Profit Ratio = Gross Profit - Operating Expenses/Net Sales x 100 = 201000 - (20000 + 89000)/560000 x 100 = 17.14%
4. Net Profit Ratio = Net Profit/Net Sales x 100 = 800/560000 x 100 = 0.14%
Ratio Analysis By- Ravi Thakur From CMD Ravi Thakur
Ratio analysis is a technique used to analyze financial statements and evaluate the performance, financial position, and cash flows of a business or corporation. Ratios can be used to compare a company's performance over several years, compare a company to other companies, and assess its operating and financial efficiency. Some key points covered in the document include:
- Ratio analysis involves calculating and interpreting various financial ratios to analyze trends, evaluate performance, assess risk, and make comparisons.
- Common types of ratios include liquidity ratios, leverage ratios, activity ratios, and profitability ratios.
- Ratio analysis helps lenders and others evaluate a company's liquidity position, profitability, solvency, financial stability, management quality, and risk.
This chapter discusses return on invested capital (ROIC) and growth as fundamental drivers of company value. It provides the following key points:
1. ROIC measures a company's ability to generate returns from its capital investments and should be compared to its cost of capital and returns on alternative investments.
2. The value creation formula shows that higher long-term ROIC and growth rates lead to greater company value.
3. Sustainable competitive advantages allow some companies to maintain high ROIC for extended periods, while others see ROIC decline over time as advantages erode.
4. Empirical analysis shows ROIC and growth tend to decrease as companies mature, with 50% of high-ROIC companies
This document discusses private equity, including:
1. It outlines the private equity fund structure and cash flow profile known as the "J-curve".
2. The investment process includes initial evaluation, valuation, due diligence, and case studies of financing leveraged buyouts.
3. Value creation strategies are discussed like adding board members and management, acquisitions, and operational/financial restructuring. Exits like IPOs and sales are also covered.
The document provides an overview of accounting theory and the financial reporting environment. It discusses different types of accounting theories, including positive and normative theories, and how they can be evaluated. Positive theories seek to predict and explain phenomena, while normative theories prescribe how accounting should be done. The document also examines the development of accounting standards and regulation. It notes debates around whether regulation is necessary or not, and discusses public interest theory, capture theory, and economic interest theories about who benefits from regulation.
Infosys Limited's balance sheet and statement of profit and loss for the year ended March 31, 2012 are presented. The balance sheet shows total assets of Rs. 35,815 crore with non-current assets accounting for Rs. 7,350 crore and current assets at Rs. 28,465 crore. Total equity and liabilities are Rs. 35,815 crore with shareholders' funds at Rs. 29,757 crore. The statement of profit and loss shows total revenue of Rs. 33,083 crore for 2012 with a net profit after tax of Rs. 8,470 crore. Significant accounting policies and notes on accounts are also provided.
The document provides an overview of equity research and the career paths for equity analysts. It defines equity research as conducting research on publicly traded companies to recommend buying, selling, or holding stocks. Equity analysts gather information, analyze companies through financial modeling, and make investment recommendations. Their career can progress from associate to vice president, senior vice president, and managing director levels at investment banks or from research associate to analyst, senior analyst, and portfolio manager at hedge funds. The document outlines typical job responsibilities, compensation ranges, and career timelines within these roles.
A study on financial perfomance don for precot meridian limitedJagadeeshB15
This document provides an overview of ratio analysis of financial statements. It discusses the uses of ratio analysis for various stakeholders like shareholders, creditors, employees, government and management. It also covers the different types of ratios like liquidity ratios, leverage ratios, activity ratios and profitability ratios. Standards of comparison for ratios are important and ratios can be compared over time periods for a company or compared to industry averages. The document provides context on calculating and interpreting various financial ratios to evaluate the financial position and performance of a company.
Chapter 05(a) financial analysis-ratio and other analysisAl Sabbir
The document discusses various methods for analyzing the financial performance of a company through its financial statements, including ratio analysis, common size analysis, trend analysis, DuPont analysis, and other types of analyses. It provides examples of different types of ratios that can be used, such as liquidity ratios, activity ratios, leverage ratios, and profitability ratios. It also discusses how to interpret ratios and cautions that ratios must be compared to benchmarks and should account for differences in accounting methods.
Fund flow volatility and performance rakowskibfmresearch
This paper analyzes the impact of daily mutual fund flow volatility on fund performance. The author finds that higher daily flow volatility is negatively associated with risk-adjusted fund performance. This relationship is strongest for domestic equity funds, smaller funds, better performing funds, and those that experienced net inflows. The results suggest daily fund flows impose liquidity costs through unnecessary trading that reduces returns.
Prior performance and risk chen and pennacchibfmresearch
This document summarizes a research paper that models how a mutual fund manager's choice of portfolio risk is affected by the fund's prior performance and the manager's compensation structure. The model shows that when compensation cannot fall to zero, managers take on more tracking error risk (deviation from the benchmark portfolio) as performance declines. However, increased total return volatility is not necessarily predicted. Empirical tests on over 6,000 funds from 1962-2006 find evidence managers increase tracking error, but not return, volatility during underperformance, especially for longer-tenured managers. This supports implications of the theoretical model.
This document summarizes a research paper about mutual fund flows and performance. It contains the following key points:
1) The paper presents a rational model of active portfolio management that can reproduce many observed patterns in mutual fund performance and flows, without relying on investor irrationality.
2) In the model, fund flows rationally respond to past performance even though performance is not persistent on average, due to competitive capital allocation to managers.
3) The model shows that lack of performance persistence does not imply managers lack skill or that evaluating performance is wasteful, as differential ability exists but is not consistently rewarded due to competitive capital allocation.
The document discusses Barclays' process for evaluating and selecting investment managers. It states that identifying the right asset allocation and implementing it properly are both important for achieving investment goals. The process involves both science, through a formal and structured methodology, and art, by applying judgment and philosophy. Barclays aims to identify managers most likely to perform well through rigorous due diligence and ongoing monitoring. The paper will explain Barclays' comprehensive approach to manager analysis, selection, and review.
This document summarizes research on how the metric "active share" can predict potential investment returns (alpha) and risks. The researchers find:
1) Managers with high active share (meaning their portfolio holdings differ significantly from the benchmark) have generally outperformed those with low active share, especially in US, global, and international equity categories.
2) Active share predicts future returns (alpha) well in most categories except large-cap growth and small-caps.
3) Active share also forecasts relative risk levels comparably to other risk measurement tools.
4) However, high active share strategies experience larger drawdowns so may not be practical for all institutional investors. Diversifying across several high active
Price and performance in funds gil bazobfmresearch
This study examines the relationship between mutual fund fees and performance. It finds a puzzling negative relationship: funds with worse risk-adjusted performance before fees charge higher fees. The study explores several potential explanations for this relationship, including strategic fee setting by funds and the role of fund governance. Some evidence suggests funds with stronger governance structures have fees more aligned with performance.
Over a 32-year period, the study found that only 0.6% of funds delivered positive alpha (returns in excess of their benchmarks) through skill rather than luck. The proportion of skilled managers decreased over time, with only 0.6% found to be skilled in 2006 compared to 14.4% in 1990. No funds in the Growth & Income category exhibited skill, while the Aggressive Growth funds showed the most skill. Expenses eliminated the good performance of many managers who appeared skilled. The authors believe the movement of skilled managers to the higher-paying hedge fund industry best explains the decline in mutual fund manager skill over this period.
Brown Advisory believes recent academic research validates their approach to active equity management. Studies show only managers with high active share (divergent portfolios from benchmarks) and moderate tracking error consistently outperformed. Brown Advisory portfolios have high active share and low tracking error, concentrating on 30-80 carefully selected stocks across sectors. Their research-driven process aims to add value through independent thinking rather than closely tracking indexes.
Active managementmostlyefficientmarkets fajbfmresearch
This survey of literature on active vs passive management shows:
1) On average, actively managed funds do not outperform the market after accounting for fees and expenses, though a minority do add value.
2) Studies suggest some investors may be able to identify superior active managers in advance using public information.
3) Investors who identify superior active managers could improve their risk-adjusted returns by including some exposure to active strategies.
Active managementmostlyefficientmarkets fajbfmresearch
This survey of literature on active vs passive management shows:
1) On average, actively managed funds do not outperform the market after accounting for fees and expenses, though a minority do add value.
2) Studies suggest some investors may be able to identify superior active managers in advance using public information.
3) Investors who identify superior active managers could improve their risk-adjusted returns by including some exposure to active strategies.
Can Traditional Active Management Be Saved?Clare Levy
Active managers need to start incorporating the lessons of behavioural science if they have a chance of reversing the flow of assets into passive investment vehicles. Eric Rovick highlights some of the areas of cognitive risk evident in active investment management and provides a managerial and operational framework for addressing them.
Not only are many factors becoming really expensive due to their popularity, the realized historical returns were only half as good as they looked on paper. Since smart beta is all the rage RAFI is doing important work.
The following report by the Credit Suisse
Research Institute explores several important
aspects of the connection between sound governance
and improved business performance. It provides
new data to support the growing investor
interest in governance-related rules and practices
and introduces innovative ways to assess corporate
performance, such as the HOLT governance scorecard,
to support more effective governance-oriented
decision making. Moreover, our experts identify specific
company types and sectors, in which governance
can serve as a particularly robust investment
strategy instrument. Corporate governance is further
likely to contribute to investment decisions in
emerging economies, for instance when firm-level
structures actively compensate for the possible
absence of country-level governance provisions.
This document introduces a new measure called Active Share to quantify active portfolio management. Active Share describes the percentage of portfolio holdings that differ from the portfolio's benchmark index. It argues that Active Share, combined with tracking error, provides a comprehensive picture of a fund's active management approach. The authors apply this two-dimensional framework to analyze mutual funds, finding that the most active stock pickers outperform, while closet indexers and funds focusing on factor bets underperform after fees.
Should investors avoid active managed funds baksbfmresearch
This document summarizes a study that analyzes mutual fund performance from an investor's perspective. The study develops a Bayesian method to evaluate mutual fund manager performance using flexible prior beliefs about manager skill. It then applies this methodology to over 1,400 mutual funds. The study finds that even with extremely skeptical prior beliefs about manager skill, some allocation to actively managed funds is still economically justified. It quantifies how much investors would lose by completely avoiding active managers.
Should investors avoid active managed funds baksbfmresearch
This document summarizes a study that analyzes mutual fund performance from an investor's perspective. The study develops a Bayesian method to evaluate mutual fund manager performance using flexible prior beliefs about managerial skill. The method is applied to a sample of over 1,400 equity mutual funds. The study finds that even with extremely skeptical prior beliefs about manager skill, some allocation to actively managed funds is justified. The economic importance is quantified by estimating the portfolio share and certainty equivalent loss from excluding all active managers.
This paper examines the relationship between portfolio manager ownership stakes in the mutual funds they manage and those funds' future performance. The paper finds:
1) Almost half of all managers have ownership stakes in their funds, though the average stake represents a modest percentage of assets under management.
2) Higher managerial ownership is positively associated with improved future risk-adjusted fund performance - performance improves by about 3 basis points for each 1 basis point of managerial ownership.
3) Both the component of managerial ownership predicted by other fund characteristics and the residual component are significant in predicting future fund performance, indicating managerial ownership provides new information to investors.
This document discusses the importance of selecting an appropriate benchmark for evaluating investment performance. It explains that benchmarks should reflect the portfolio's strategy, asset allocation, and investment options. For multi-asset portfolios, the benchmark is typically constructed by combining various market indices weighted to represent the portfolio. Static benchmarks keep index weights constant to assess asset allocation decisions, while dynamic benchmarks adjust weights to evaluate individual managers. In summary, selecting the right benchmark is key to understanding what a portfolio's performance is communicating about the manager's investment decisions.
Most corporations dedicate significant time and attention to managing their shareholder base. Furthermore, companies overwhelmingly prefer “long-term shareholders” to “short-term shareholders.”
There is little rigorous research, however, that conclusively demonstrates the impact that individual investor groups have on corporate decision making, or that quantifies the premium (or discount) that specific shareholder groups add to corporate value.
We explore this topic in greater detail, and ask:
• Does the composition of a company’s shareholder base really matter?
• What substantive impact do shareholder—including activists—have on strategy, investment, and management?
• How long is long-term? How short is short-term?
• Can short-term market pressures be offset by long-term compensation incentives?
This document outlines the background, problem statement, objectives, hypothesis, and methodology for a study on working capital management at Arabian Industries LLC. Specifically:
1) The background provides context on working capital and its importance for business operations and financial health.
2) The problem statement identifies key issues like determining optimal levels of working capital components and financing sources.
3) The objectives are to maintain appropriate working capital levels and availability of funds, as well as ensure working capital does not negatively impact profitability.
4) The hypothesis is that working capital helps business goodwill and creates an environment of security, confidence, and efficiency.
5) The methodology will involve understanding working capital concepts, components,
This document analyzes different categories of active mutual fund management based on measures of Active Share and tracking error. It finds that the most active stock pickers have outperformed their benchmarks after fees, while closet indexers and funds focusing on factor bets have underperformed after fees. Performance patterns were similar during the 2008-2009 financial crisis. Closet indexing has become more popular recently. Fund performance can be predicted by cross-sectional stock return dispersion, favoring active stock pickers when dispersion is higher.
Do funds with few holdings outperform kaushikbfmresearch
This document summarizes a study that investigates the performance of mutual funds that hold a small number of stocks (10-30) in their portfolio, which are considered less diversified. The authors analyze funds over the period of 2001-2006 and compare their performance to benchmarks like the S&P 500 index. They find that on average, funds with fewer holdings underperform the market by about 20 basis points per month, or 2.4% annually. However, they also find that "Winner" portfolios outperform the market by 49.2% per year on average, while "Loser" portfolios underperform by 38.4% per year. Regression analysis indicates characteristics like fund turnover and concentration are positively related to
This document discusses hedge fund investment philosophy and manager selection. It makes the following key points:
1) Hedge fund returns come from systematic risk premiums, liquidity premiums, and alpha, which are amplified by leverage. True alpha is rare and hard to achieve consistently.
2) Successful manager selection focuses on those with a sustainable competitive edge investing in less crowded strategies, and an understanding of how to reduce risk in stressful times.
3) The selection process profiles managers' investment beliefs, alpha generation process, and risk philosophy to construct an expected return distribution for each manager.
What Has Evidence-Based Investing Done for Me Lately? Brian Puckett
The document discusses additional factors that can be incorporated into evidence-based investment portfolios, including profitability and momentum. While these newer factors may provide potential returns, they also present challenges to implement effectively in a real portfolio. One challenge is that it is difficult to capture the premium of one factor without sacrificing another factor. Careful consideration of benefits and tradeoffs is required when deciding whether and how to include these newer factors in portfolio construction. The document advocates for an evidence-based advisor approach to filter useful insights from excessive information and impulsive reactions that can undermine investment returns.
The document discusses measuring shareholder value creation. It outlines several direct and indirect factors that can impact shareholder value, such as capital budgeting, corporate governance, market environment, business ethics, and innovations. It also discusses challenges in measuring shareholder value, including disagreements over appropriate goals and metrics. New valuation methods are needed because traditional measures like EPS and ROI often do not accurately capture long-term value creation. Value-based management techniques aim to address these issues by linking value creation to shareholder wealth maximization and understanding financial and operational drivers of performance.
The Outsourced Chief Investment Officer Model: One Size Does Not Fit AllCallan
As investors reach for returns in a sometimes bruising market, they are adding private equity, hedge funds,
and other alternatives, leading to increasingly sophisticated—and complicated—portfolio monitoring and
management. Heightened regulatory and compliance requirements have further increased the time and
resources required to meet fiduciary responsibilities. This has led some investors to consider delegating
investment oversight, monitoring, and management duties.
The industry press regularly reports on a large and rapidly growing outsourced chief investment officer
(OCIO) market, and some fund sponsors wonder if this model would serve them better than the traditional consulting model. Funds managed through an OCIO are beholden to the same challenging market environment and regulatory atmosphere, but the burden of balancing these challenges can be largely shifted from the investment committee to the OCIO provider. Some funds find this solution meets their needs.
In the outsourced chief investment officer (OCIO) model (also known as “implemented consulting,”
“discretionary consulting,” or “delegated consulting”), an institution shifts discretionary authority to an
advisory firm to manage some or all of the investment functions typically performed by the investment committee. The precise definition of this model varies as much as the name, making the size and scope of the marketplace difficult to pin down.
The increasing popularity of this model is in part a response to the frustration investment committees
have felt amid a shifting environment in which portfolio management requires more resources. While an OCIO offers an elegant solution, it is not a panacea for all the issues facing institutional investors, and relinquishing all fiduciary oversight is not an option.
In this paper we describe the OCIO market and Callan’s approach, which acknowledges that each investor faces unique challenges that require custom solutions. We offer two case studies and a series of questions that might assist fund sponsors in weighing the appropriateness of the OCIO model for their fund.
This paper examines the relationship between mutual fund manager ownership stakes in the funds they manage and the performance of those funds. The author hypothesizes that greater manager ownership will be positively associated with fund returns and negatively associated with fund turnover, as higher ownership would better align manager and shareholder interests by reducing agency costs. Using a dataset of manager ownership disclosures from 2004-2005, the author finds that funds with higher manager ownership had higher returns and lower turnover, supporting the hypotheses. However, manager ownership was not related to a fund's tax burden.
This document summarizes a study examining 125 equity mutual funds that closed to new investment between 1993 and 2004. The study tests three hypotheses about why funds close: 1) The "good steward" hypothesis argues funds close to restrict inflows and maintain performance, and will perform well after reopening. 2) The "cheap talk" hypothesis posits closing has no real cost if fees increase and existing investors contribute, compensating managers. 3) The "family spillover" hypothesis claims closing diverts attention to other funds in the same family. The study finds little support for good steward performance, but evidence managers raise fees consistent with cheap talk, and little family benefit except briefly around closure.
Standard & poor's 16768282 fund-factors-2009 jan1bfmresearch
This document summarizes a study by Standard & Poor's on factors that predict investment fund performance. The study analyzed both qualitative factors like fund size, expenses, and age as well as quantitative metrics like Jensen's alpha and information ratio. The key findings were:
- For developed markets, larger funds with lower expenses tended to outperform. But for emerging markets, smaller funds did better due to differences in liquidity.
- Jensen's alpha and information ratio best predicted future performance of developed market equity funds over shorter time periods.
- Past performance was informative over 2 years but less so over 1 year due to noise. Fund selection should focus on factors predicting shorter term outperformance.
Performance emergingfixedincomemanagers joi_is age just a numberbfmresearch
1) Younger fixed-income managers tend to outperform older, more established managers in terms of gross returns. Returns are significantly higher for emerging managers in their first year and first five years compared to later years.
2) The study examines 54 fixed-income managers formed since 1985 that had majority employee ownership. Most were formed before 2000, when barriers to entry increased.
3) Business risk is low for emerging managers, as only 6.8% of the 88 examined managers are no longer in business. Higher first-year and early-period returns for emerging managers indicate they provide alpha during their hungry startup phase.
The document summarizes findings from the Standard & Poor's Indices Versus Active Funds (SPIVA) Scorecard, which compares the performance of actively managed mutual funds to relevant benchmarks. Some key points:
- Over the past 3 years, the majority (over 50%) of actively managed large-cap, mid-cap, small-cap, global, international, and emerging market funds underperformed their benchmarks.
- Over the past 5 years, indices outperformed a majority of active managers in nearly all major domestic and international equity categories based on equal-weighted returns. Asset-weighted averages also showed underperformance in 11 out of 18 domestic categories.
- For fixed income funds, over 50% under
This document summarizes research on the relationship between portfolio turnover and investment performance. Recent studies have found no evidence that higher portfolio turnover leads to lower returns, as was previously thought. Trading costs have declined over time, and portfolio turnover is not a good proxy for actual trading costs, which depend more on trade size and type of security traded. A 2007 study directly estimated trading costs and found no clear correlation between costs and returns. The author's own analysis of mutual funds from 2007-2008 also found little relationship between turnover and performance. Therefore, advisors should not assume higher turnover means lower returns.
This document is a guide to the markets published by JPMorgan that provides data and analysis across various asset classes including equities, fixed income, international markets, and the economy. It includes sections on returns by investment style and sector for equities, economic indicators and drivers, interest rates and other data for fixed income, international market returns and valuations, and asset class performance and correlations. The guide contains over 60 charts and analyses global and domestic financial trends and investment opportunities.
The document discusses whether the concept of "Alpha" is a useful performance metric for investors. It makes two main arguments:
1) Alpha alone does not determine if a portfolio has superior risk-adjusted returns, as portfolio volatility and correlation to benchmarks also influence risk-adjusted returns.
2) Alpha is dependent on leverage - a higher reported Alpha could simply be due to using leverage rather than superior investment skill.
The document concludes that Alpha is a misleading performance measure and not suitable as the sole metric, especially for investors concerned with total risk and returns rather than just a single return component.
Fis group study on emerging managers performance drivers 2007bfmresearch
This study examined the performance of emerging investment managers over three years ending in 2006. It found that:
1) For large cap managers, increased firm assets were negatively correlated with risk-adjusted returns for core and growth strategies, but not for value. This may be because increased assets led to less concentrated core portfolios, lowering returns.
2) For small cap managers, risk-adjusted returns were highest for firms with less than $500 million in assets, possibly due to added resources like analysts. Returns leveled off between $500 million and $1 billion, and declined above $1 billion.
3) Having more research analysts was consistently positively correlated with higher risk-adjusted returns across strategies, while the impact
This document summarizes recent academic research on active equity managers who deliver persistent outperformance. It discusses studies finding that:
1) While the average equity manager underperforms after fees, a minority of managers have demonstrated persistent outperformance that cannot be attributed to chance alone.
2) Managers with higher "active share" (the degree to which their portfolio composition differs from the benchmark) tend to generate greater risk-adjusted returns.
3) Managers with lower portfolio turnover and a focus on strong stock selection, rather than market timing, are more likely to outperform over time.
The document evaluates how Brown Advisory's investment approach aligns with the characteristics identified in these studies as being associated with persistent
The document discusses China's transition to a consumer-driven economy. It provides analysis from CLSA China Macro Strategist Andy Rothman on trends in China's economy including the declining importance of exports, strong growth in domestic consumption, increasing incomes driving spending, and continued growth in infrastructure investment. The analysis suggests China's economy remains healthy and growing despite slowing external demand.
This report provides an analysis of defined contribution retirement plans based on 2010 Vanguard recordkeeping data. Some key findings include:
- Median and average account balances reached their highest levels since tracking began in 1999, recovering from market declines.
- Use of target-date funds as investment options and default investments continues to grow significantly, with 42% of participants using them and 20% wholly invested in a single target-date fund.
- Professionally managed investment options like target-date funds are being used by an increasing number of participants, with 29% solely invested in an automatic investment program in 2010 compared to just 9% in 2005.
The document discusses the benefits of exercise for mental health. Regular physical activity can help reduce anxiety and depression and improve mood and cognitive function. Exercise causes chemical changes in the brain that may help protect against mental illness and improve symptoms.
This study explores performance persistence in mutual funds. The authors find:
1) Funds that perform relatively poorly compared to peers and benchmarks are more likely to disappear, indicating survivorship bias can be relevant in mutual fund studies.
2) Mutual fund performance persists from year to year on a risk-adjusted basis, though much of the persistence is due to repeated underperformance relative to benchmarks.
3) Persistence patterns vary dramatically between time periods, suggesting performance is correlated across managers due to common strategies not captured by risk adjustments. Poorly performing funds also persist instead of being fully eliminated by the market.
This study examines persistence in mutual fund performance over 1962-1993 using a survivorship-bias-free database. The author finds:
1) Common factors in stock returns and differences in mutual fund expenses explain almost all persistence in mutual fund returns, with the exception of strong underperformance by the worst-performing funds.
2) The "hot hands effect" documented in prior literature is driven by the one-year momentum effect in stock returns, but individual funds do not earn higher returns from actively following momentum strategies after accounting for costs.
3) Expenses have a negative impact on performance of at least one-for-one, and higher turnover also negatively impacts performance, reducing returns by around 0.95
Information ratio mgrevaluation_bossertbfmresearch
This document discusses using the Information Ratio (IR) to evaluate mutual fund managers. The IR measures excess return over a benchmark relative to excess return volatility. While commonly used, the IR has limitations that depend on benchmark choice, data frequency, and fund return distributions. The document aims to empirically analyze IR characteristics across different asset classes and countries to determine if it is a reliable performance measure or if guidelines are needed for its use.
This document summarizes a study comparing the performance of mutual funds managed by individual managers versus teams of managers. The study finds that funds managed by teams have similar risk-adjusted performance to individually-managed funds, despite team-managed funds growing at a faster rate. Additionally, team-managed funds have significantly lower risk, lower cross-sectional performance differences, lower expenses, and lower portfolio factor loadings than individually-managed funds. The study uses a large sample of domestic and international mutual funds to test these findings.
This document discusses returns-based style analysis (RBSA), a technique developed by William Sharpe to determine the style of a portfolio or mutual fund using only returns data. The document provides an overview of RBSA and compares it to holdings-based style analysis. It then describes how to implement RBSA using Excel by constructing a portfolio of indices to minimize the tracking error between the returns of the portfolio being analyzed and the index portfolio returns. The document concludes by providing an example RBSA using the Dodge & Cox Balanced Fund to illustrate the technique.
1) The study investigates how fund size affects performance in the active money management industry. Specifically, it analyzes whether fund returns decline as fund size increases.
2) The results show that both gross and net fund returns decline as lagged fund size increases, even after accounting for various performance benchmarks and fund characteristics. This suggests that larger fund size erodes performance.
3) However, controlling for its own size, a fund's performance does not deteriorate as the size of the family it belongs to increases. This indicates that scale itself does not necessarily harm performance, depending on how the fund is organized.
Examination of hedged mutual funds agarwalbfmresearch
Hedge funds have traditionally only been available to accredited investors while providing lighter regulation and stronger performance incentives compared to mutual funds. Recently, some mutual funds have adopted hedge fund-like strategies but remain subject to tighter regulation. This study examines the performance of these "hedged mutual funds" relative to both hedge funds and traditional mutual funds. It finds that despite using similar strategies as hedge funds, hedged mutual funds underperform due to their tighter regulation and weaker incentives. However, hedged mutual funds outperform traditional mutual funds, with the superior performance driven by those with managers having hedge fund experience.
Morningstar ratings and fund performance blake moreybfmresearch
This study examines the ability of Morningstar ratings to predict the future performance of mutual funds compared to alternative predictors. The authors analyze two samples of US equity funds: seasoned funds from 1992-1997 and complete funds from 1993. They assess predictive ability using out-of-sample performance over 1, 3, and 5 year horizons, adjusting for loads and styles. The results indicate that low Morningstar ratings generally predict relatively poor future performance, but there is little evidence that top-rated funds outperform similar funds. Morningstar ratings do only slightly better than alternative predictors in forecasting future fund performance.
Every business, big or small, deals with outgoing payments. Whether it’s to suppliers for inventory, to employees for salaries, or to vendors for services rendered, keeping track of these expenses is crucial. This is where payment vouchers come in – the unsung heroes of the accounting world.
Budgeting as a Control Tool in Government Accounting in Nigeria
Being a Paper Presented at the Nigerian Maritime Administration and Safety Agency (NIMASA) Budget Office Staff at Sojourner Hotel, GRA, Ikeja Lagos on Saturday 8th June, 2024.
“Amidst Tempered Optimism” Main economic trends in May 2024 based on the results of the New Monthly Enterprises Survey, #NRES
On 12 June 2024 the Institute for Economic Research and Policy Consulting (IER) held an online event “Economic Trends from a Business Perspective (May 2024)”.
During the event, the results of the 25-th monthly survey of business executives “Ukrainian Business during the war”, which was conducted in May 2024, were presented.
The field stage of the 25-th wave lasted from May 20 to May 31, 2024. In May, 532 companies were surveyed.
The enterprise managers compared the work results in May 2024 with April, assessed the indicators at the time of the survey (May 2024), and gave forecasts for the next two, three, or six months, depending on the question. In certain issues (where indicated), the work results were compared with the pre-war period (before February 24, 2022).
✅ More survey results in the presentation.
✅ Video presentation: https://youtu.be/4ZvsSKd1MzE
An accounting information system (AIS) refers to tools and systems designed for the collection and display of accounting information so accountants and executives can make informed decisions.
Economic Risk Factor Update: June 2024 [SlideShare]Commonwealth
May’s reports showed signs of continued economic growth, said Sam Millette, director, fixed income, in his latest Economic Risk Factor Update.
For more market updates, subscribe to The Independent Market Observer at https://blog.commonwealth.com/independent-market-observer.
Explore the world of investments with an in-depth comparison of the stock market and real estate. Understand their fundamentals, risks, returns, and diversification strategies to make informed financial decisions that align with your goals.
How Poonawalla Fincorp and IndusInd Bank’s Co-Branded RuPay Credit Card Cater...beulahfernandes8
The eLITE RuPay Platinum Credit Card, a strategic collaboration between Poonawalla Fincorp and IndusInd Bank, represents a significant advancement in India's digital financial landscape. Spearheaded by Abhay Bhutada, MD of Poonawalla Fincorp, the card leverages deep customer insights to offer tailored features such as no joining fees, movie ticket offers, and rewards on UPI transactions. IndusInd Bank's solid banking infrastructure and digital integration expertise ensure seamless service delivery in today's fast-paced digital economy. With a focus on meeting the growing demand for digital financial services, the card aims to cater to tech-savvy consumers and differentiate itself through unique features and superior customer service, ultimately poised to make a substantial impact in India's digital financial services space.
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2012 0224 active share
1. THE THOUGHTFUL INVESTING SERIES VOLUME 1 | FEBRUARY 2012
Active Alpha
The latest academic research suggests that there are
certain common characteristics of active equity manag-
ers who deliver persistent outperformance.
EXECUTIVE SUMMARY
One of the major trends in equity investing over the past sev-
eral decades has been a shift by both individual and institu-
tional investors toward passive, or indexed, investments. This
trend has been encouraged by two assertions that until recently
were widely accepted in academic circles, namely: 1) that active
equity managers as a group are unable consistently to outper-
form market indices after their expenses and fees are deduct-
ed; and 2) that an equity manager’s outperformance during a
particular period is simply a matter of good fortune. However,
a growing body of academic studies conducted over the past PAUL CHEW, CFA
several years calls these assertions into question and allows in- Head of Investments
vestors to view certain active managers in a new light.
ETHAN BERKWITS
At Brown Advisory, we have an understanding of how we can Market Analyst
add value for our clients as active equity managers, and this
new body of research confirms many aspects of our approach.
According to some of these studies, manager outperformance
is not a random event. Instead, active equity managers with
certain traits are more likely to outperform than others, and
these traits generally can be identified ahead of time. Many of
these characteristics, such as a high level of divergence from
a strategy’s benchmark, are core components of our invest-
ment philosophy.
In this paper, we synthesize some of the recent academic
literature studying the subject of active equity manager
performance, and examine how our firm’s approach might
be evaluated in light of that research.
2. ABOUT THIS PUBLICATION SERIES
Brown Advisory is an independent investment firm focused on meet-
ing the wide range of investment challenges and goals of our individual,
family and institutional clients. The goal of our Thoughtful Investing
Series is to provide readers with insight into our philosophy and pro-
PAUL CHEW, CFA
cess by offering an in-depth view of specific aspects of our investment
Head of Investments
approach. Over time, we will cover such topics as our in-house funda-
mental research process, our asset allocation methodology and our
systematic approach to investment in alternative investment classes.
In this first submission, we will discuss our active equity management
philosophy. We will look at recent academic research and evaluate our
firm’s approach in light of those findings. We note that the evaluation
and selection of an active equity manager is just one of many factors
that go into the development of a comprehensive investment program,
ETHAN BERKWITS
Market Analyst a process that starts with significant attention to asset allocation and
includes manager selection across a wide range of asset classes. Some
issues are more important to certain types of investors than others;
families must consider a range of intergenerational and tax-related
issues as they structure their wealth (with tax efficiency issues being
of particular importance), while institutions face a variety of fiduciary
considerations, including the current obligations that their portfolios
are designed to meet.
We chose to begin the series with the topic of active equity manage-
ment for good reason. Equity strategies play a major role in most of
our client relationships, and we have made a significant commitment
to building a high-quality investment team and a disciplined process
capable of delivering attractive equity performance over time. We look
forward to covering other aspects of our investment approach in future
publications in the series.
2 THOUGHTFUL INVESTING SERIES ACTIVE ALPHA
3. Introduction
One of the major trends in equity investing over the these managers by screening for a variety of character-
past several decades has been a shift by both individual istics related to performance, portfolio make-up and
and institutional investors toward passive, or indexed, other variables. It is on this statement that we will focus
strategies. This trend has been encouraged within aca- our discussion.
demic circles over time. Generally, the various aca- Below, we look at the findings of some of the recent
demic arguments made in favor of passive equity in- studies addressing active equity management and ex-
vesting can be boiled down to two simple statements: amine Brown Advisory’s approach as it relates to each
study. None of the studies reviewed should be seen as
1. The aggregated performance of all equity investment definitive on its own; each suggests one specific factor
managers will, by definition, roughly equal market that to some extent influences the probability of good
returns. Therefore, the average manager should un- relative returns. It goes without saying that this is an
derperform the market by approximately the amount area of rich and often contradictory academic inquiry;
of management fees and expenses charged. there are plenty of studies to support a variety of hy-
2. Some equity managers will outperform the market potheses. Taken together, however, these studies pro-
over varying periods of time, but it is impossible to vide a useful checklist for evaluating managers for their
predict which ones will do so in any given year. likelihood of outperforming in the future—and addi-
tionally the discussion should provide some insight into
Statement 1 is a simple mathematical truth, so it is how Brown Advisory thinks about investing.
not surprising that most of the academic research study- One additional note: While some of the academic
ing average equity manager performance confirms that research in this space analyzes institutional managers,
the average manager underperforms after fees. Michael the majority looks at mutual fund data due to the quan-
Jensen studied this concept in his notable 1968 paper, tity and quality of data available from publicly report-
in which he popularized the concept of investment ed fund companies. In our view, the findings of these
“alpha”—a measure that indicates how an investment studies are useful for potential investors in actively
performed after accounting for its attendant risk—and managed equity strategies, regardless of the specific
showed that the typical equity manager’s alpha was vehicle being considered.
negative.1 The underperformance of the average man-
ager has been reconfirmed in numerous studies over the
years; recent papers include studies by Barras, Scaillet
and Wermers (2010), which demonstrated an aggregate “Many studies show that the average
negative alpha generated by active mutual fund man-
agers,2 and by Busse, Goyal and Wahal (2010), which
equity manager tends to underperform
showed that active equity institutional managers as a the index, but new research indicates
group did not generate statistically significant alpha.3,4
Statement 2 asserts that it is impossible for active
that a minority subset of active
equity managers to outperform the market for any rea- equity managers have demonstrated
son other than chance, and it is this statement that is
much more open to debate. There is now a wide range
persistent outperformance.”
of academic studies refuting this assumption and sup-
porting instead the hypothesis that a minority subset
of active equity managers generates persistent out-
performance (“persistent” outperformance is a com-
monly used phrase in the academic literature; if man-
agers outperform during an initially studied period,
and are found to outperform in a subsequent period,
their performance is said to “persist”). Further, inves-
tors can greatly improve their chances of identifying
THOUGHTFUL INVESTING SERIES ACTIVE ALPHA 3
4. Active Share
FINDING alpha (see Figure 1).5 This finding was somewhat groundbreak-
ing, and deceptively so, since the idea of active share is so easy
“Active share” is a recently defined measure of the degree to understand. Most studies simply view active management
to which the composition of a portfolio differs from its as a monolithic concept, but Cremers and Petajisto provide a
benchmark; the greater the difference, the higher its ac- scale by which to measure just how active a manager is; thus,
tive share. Recent research indicates that strategies with one can quickly see the wide difference between a “benchmark-
a high active share are more likely to outperform their hugging” strategy and a truly active strategy (for actively man-
benchmarks and peers. aged funds, active share generally ranges from ~50% at the low
end to close to 100% at the high end). Their research clearly
One of the most intriguing studies in recent years was that of shows that “average” managers hug their benchmarks relatively
Cremers and Petajisto (2009), which defined the concept of closely. Coupled with the higher fees earned by active manag-
“active share” as the extent to which managers differ from their ers, it’s not surprising that “average” active managers are shown
underlying benchmark, either by owning securities not includ- so often by research to underperform the market.
ed in the benchmark or by weighting differently those securi- Additionally, Cremers and Petajisto’s research recognized the
ties that are held in common. Their research, which looked at importance of determining whether manager outperformance
a universe of 2,647 actively managed funds sampled from the was persistent, so they looked at the top-performing funds dur-
Center for Research in Security Prices (CRSP) mutual fund ing each year of the study and examined the performance of
database for the period between 1990 and 2003, provided two those funds in the subsequent year. As shown in Figure 2, only
interesting conclusions. First, it showed that if you group the funds with high active share demonstrated persistent outperfor-
universe of active equity funds into quintiles (i.e., the top 20%, mance from one year to the next, while funds with low active
the next 20%, etc.) by their active share percentage, only the share were more likely to follow a good year with a bad one.6
top quintile—in other words, the funds that differ most signifi-
cantly from their respective benchmarks—generated positive
The Value of Nonconformity
Cremers and Petajisto studied the concept of active share for the universe of actively managed, all-equity mutual funds (excluding sector
funds) for the period 1990-2003. Figure 1 shows that funds with top-quintile active share generated positive average annual alpha, while
all other funds generated negative results. Figure 2 includes only funds with top-quintile performance in the prior year and shows the
results of those funds the following year; the funds with first- and second-quintile active share showed persistent outperformance, while
the other funds did not.
FIGURE 1: Positive fund alpha found in funds with FIGURE 2: Persistent positive alpha found in funds with
high active share (1990-2003) high active share (1990-2003)
Net equal-weighted alpha
Net equal-weighted alpha
4% 3.50%
3% 3
2 2
1.15%
1 1
-1.02% -1.83% -2.18% -1.83% 0.46%
0 -0.99% -1.80% -1.58%
0
-1
-1
-2
-2
-3
-3
Top 2 3 4 Bottom Top 2 3 4 Bottom
Active Share Quintile,
Active Share Quintile: Actively Managed, All-Equity Funds Top 20% of Equity Funds (based on prior 1-yr return)
SOURCE: “How Active Is Your Fund Manager? A New Measure That Predicts Performance,” Cremers & Petajisto, Review of Financial Studies, vol. 22, no. 9, 2009.
NOTES: The study measured the results within each active share quintile in terms of “net equal-weighted alpha,” defined as the arithmetic average of the alpha of all funds within
each quintile, net of fees and expenses.
4 THOUGHTFUL INVESTING SERIES ACTIVE ALPHA
5. Active Share
OUR PHILOSOPHY
“To be great, you have to be different.” Standing Out
Brown Advisory’s core equity strategies address different
Brown Advisory’s investment philosophy has generally created
asset classes but share a philosophical belief that a concentrated
equity portfolios with high active share scores. Figure 3 shows
portfolio of carefully selected stocks can deliver above-aver-
the active share scores of our core equity strategies as of Dec.
age results over time. This approach has led to strategies with
31, 2011. Our equity managers generally hold anywhere from
top-quintile active share scores within their respective peer groups
30 to 60 positions, depending on the asset class; strategies of-
as of Dec. 31, 2011.
fered by other firms typically hold up to several hundred posi-
tions. And while we are aware of our benchmarks in terms of
FIGURE 3: Active Share of Brown Advisory Equity Strategies
sector allocation, our managers are generally not constrained
by sector-allocation limits when they feel that there are par-
PERCENTILE
ticularly strong opportunities in a particular sector. We believe
BROWN ADVISORY RANKING IN
that this approach best captures the value of our in-house re-
ACTIVE SHARE PEER GROUP
search team’s efforts.
At the risk of stating the obvious, we want to emphasize that Large-Cap Growth 85.1% 82
simply diverging from one’s benchmark isn’t a viable investment
Large-Cap Value 93.7% 82
strategy. On the contrary, we feel that equity managers who ex-
hibit high active share should be doubly focused on adhering to Flexible Value 79.8% 81
a highly disciplined and consistent investment process to guide
Small-Cap Growth 93.0% 96
their decisions. The investment team at Brown Advisory has
evolved and refined such a process, in which all our portfolio Small-Cap Value 97.4% 99
decisions are based on a consistently implemented approach that
starts with internally generated fundamental research and ends Equity Income 81.2% 86
with a financial model designed to quantify our view of a stock’s
upside potential and downside risk. We generally do not deviate SOURCE: Brown Advisory and Morningstar. Data as of 12/31/2011.
NOTES: Active share is calculated using a representative account for each strategy ver-
from this process and ensure that our investment team has the sus its benchmark. Percentile rankings are based on the strategy’s corresponding Morn-
resources it requires to implement this process. ingstar mutual fund peer group. Please see the notes at the end of the presentation for
peer group and benchmark definitions.
THOUGHTFUL INVESTING SERIES ACTIVE ALPHA 5
6. Independent Thinking
particular period may be simply due to owning a greater pro-
FINDING
portion of small companies relative to the benchmark during a
period when small companies outperformed.) Eliminating the
Top-decile or bottom-decile past performance may serve
influence of these sources of “noise” from a study is the way
as a useful tool for selecting managers more likely to
to isolate and identify managers whose performance is likely
achieve persistent results.
to persist.9
Several recent studies suggest that past performance, when fil-
tered with appropriate statistical techniques, can be useful in OUR PHILOSOPHY
improving the probability of selecting managers who will out-
perform in the future. Figure 4 shows the results of a study by
“Stick to your areas of excellence; partner with others
Kosowski, Timmermann, Wermers and White (2006), which
who excel at the rest.”
found that top-decile performers over a three-year period gen-
erated average annual alphas of +0.96% in the following year.7
Brown Advisory employs both proprietary equity strategies
Similarly, a study by Harlow and Brown (2006) sorted mutual
and those managed by a handful of carefully selected third-
funds by decile and found that top-decile performers over a
party managers. We have demonstrated over time the ability
three-year period generated average annual alphas of +1.58%
to add value in a variety of U.S. equity asset classes, but at the
the following year, while the figure for funds in the bottom
same time we have a clear view of where our expertise stops.
decile was -2.18%.8
Accordingly, for certain other asset classes in which we do not
This finding is not, as might seem at first glance, contra-
have expertise, such as commodities, real estate and emerg-
dictory with the standard warning about selecting investments
ing markets debt and equity, we look to tap the excellence of
based on past investment returns. In fact, there is not a correla-
others. The research on performance persistence offers some
tion between past and future performance when looking at raw
support for Brown Advisory’s approach to portfolio manage-
performance numbers. However, these studies did find a corre-
ment by showing that a top-down style bias is not a reliable
lation by measuring performance with a more refined tool—in
way for a manager to generate consistent results. This concept
this case, a modified form of investment alpha that adjusts for
is an important consideration for our firm, both in how we
“style bias,” such as a fund’s exposure to smaller capitalization
manage equity portfolios ourselves and in how we select
stocks, value vs. growth stocks, or “momentum” stocks. (For
outside managers.
example, in the case of small-cap bias, a manager’s results in a
The Existence of Persistence
The authors of this study sought to determine if manager alpha dur- FIGURE 4: Relationship between past and future alpha
ing rolling three-year periods from 1975 to 2002 had any correlation
with those same managers’ results in the subsequent year. Manag-
ers with top-decile alpha during those three-year periods generated Top 0.96%
Decile by Past 3-year Alpha
positive average annual alphas of +0.96% in the following year, while 2 0.24%
bottom-decile managers generated negative average annual alphas 3 -0.24%
4 -0.24%
of -3.48% in the following year.
5 -0.48%
6 -0.96%
7 -1.08%
8 -0.84%
9 -1.08%
Bottom -3.48%
-4 -3 -2 -1 0 1
Annual Future Alpha (%)
SOURCES: “Can Mutual Fund ‘Stars’ Really Pick Stocks? New Evidence from a Bootstrap
Analysis,” Kosowski, Timmermann, Wermers and White, Journal of Finance, vol. 56, no. 6,
2006; “Active Management in Mostly Efficient Markets,” Jones and Wermers, Financial
Analysts Journal, vol. 67, no. 6, 2011.
NOTES: Results based on a sample of 2,118 U.S. equity funds listed during the period
covered in the Center for Research in Security Prices (CRSP) mutual fund database.
6 THOUGHTFUL INVESTING SERIES ACTIVE ALPHA
7. Independent Thinking
In some cases, our internally managed strategies deliber-
ately eliminate such biases from their investment process. For
example, our large-cap growth strategy specifically screens out “We select outside managers who
momentum stocks and cyclically sensitive stocks in order to
keep the portfolio focused on companies that, in our team’s share a philosophy similar to our
estimation, can reliably grow revenues at 14% or more per year own—based on bottom-up research,
in a variety of economic scenarios. We do have strategies la-
beled as “growth” and “value,” but as mentioned previously, strong security selection and
we do not constrain ourselves with benchmark-related or other avoidance of systematic biases.”
externally developed definitions. Instead, we maintain a stand-
alone investment thesis for each of our equity strategies, using
criteria to evaluate growth or value that we have independently
developed based on years of experience. We believe that this
approach offers the advantage of uncovering growth or value
opportunities in places that may be less obvious to conven-
tional growth or value investors.
We also apply this concept as we select outside managers.
We generally seek out managers who share a philosophy similar
to our own; among a variety of other factors, we look for man-
agers who generate results from bottom-up research and strong
individual security selection, while avoiding managers whose
results are primarily driven by a systematic bias that may move
in and out of favor over time.
Wasatch Advisors is a good example of the kind of disciplined,
independent-minded manager that we favor; hence, our decision
to select the Wasatch Emerging Markets Small Cap strategy for
our clients in early 2011. Based on demographic and economic
developments around the world, we decided to invest a portion
of client portfolios in such a way as to benefit from the secu-
lar rise of the middle class in emerging markets. However, we
felt uncomfortable with many managers who—consistent with
popular benchmarks—invested heavily in global energy and ma-
terials companies as opposed to companies that more directly
cater to the rising affluence of the populations of developing na-
tions. After an extensive due-diligence process, we were attracted
to Wasatch’s strategy, which exhibited a number of the desirable
characteristics outlined so far in this paper. First, its focus on the
emerging-markets middle class theme was one example of a gen-
eral philosophical willingness to intelligently diverge from the
benchmark; as a result, its active share as of Dec. 31, 2011, was
95.4% compared to its benchmark—relatively high compared
to other funds we considered. Additionally, Wasatch takes care to
protect itself from any style bias, focusing on bottom-up, funda-
mental factors as its primary basis for decision making.
THOUGHTFUL INVESTING SERIES ACTIVE ALPHA 7
8. Collaboration
FINDING little as 10%.10 His results are somewhat surprising, given the
attention paid to “star managers” in the financial press, and they
Performance is not solely the product of “star managers”; emphasize the value of identifying strategies that are backed by
instead, it is a joint product of managers and their firms, strong research teams rather than just a well-regarded manager.
and in the majority of cases the firm is more responsible
for performance than the manager.
OUR PHILOSOPHY
A recent study by Baks (2003) sought to build a model that
separately attributes performance to fund managers and the “Make excellence a collaborative process.”
overall firm structure supporting the funds being managed.
Baks built a database that tracked over 2,000 fund managers Over the years, Brown Advisory has deliberately built a disci-
and their responsibilities for different funds during their careers plined equity investment process, intended to serve as a “per-
from 1992 to 1999; he subsequently built a regression frame- formance engine” that powers our proprietary equity strategies,
work to learn about the contributions of managers and fund as illustrated in Figure 5. The first component of this engine is
organizations by studying results when managers change funds a strong and interdependent team, now comprising more than
or manage multiple funds simultaneously. While the results of 30 seasoned portfolio managers and research analysts. Impor-
the study were not entirely conclusive, they did generally point tantly, all full-time members of the team are equity owners of
to the importance of the fund organization in driving fund Brown Advisory, a factor that keeps turnover to a minimum
returns. Baks found that managers were typically responsible and aligns the long-term interests of our employees with those
for no more than 50% of performance results and at times as of our clients. In addition, and in contrast to many investment
Many Strategies, One Common Engine
FIGURE 5: From Investment Thesis to Investment Portfolio
Investment Thesis Investment Portfolio
aring
Others
e sh Others
g
Equity Income Equity Income
led
Valuation Focus Portfolio Discipline
know
Brown Advisory
Small-Cap Value Small-Cap Value
Research Team Upside/Downside Active Share
Small-Cap Growth Modeling Small-Cap Growth
Brown Advisory Concentrated Portfolios
know
Flexible Value Network Flexible Value
Generally Low Turnover
led
Large-Cap Value ge Large-Cap Value
sh
aring
Large-Cap Growth Large-Cap Growth
Investment Thesis Portfolio
8 THOUGHTFUL INVESTING SERIES ACTIVE ALPHA
9. Collaboration
firms, we don’t view portfolio managers as necessarily senior decisions, in which existing holdings and new ideas are con-
to research analysts. Instead, these roles are viewed as equally stantly competing for one of the limited spots in our portfolios
valuable, collaborative functions; analysts need not “jump the based primarily on each stock’s “upside/downside” (our short-
fence” to become portfolio managers in order to increase their hand term for our team’s estimate of the ratio of the stock’s
compensation or standing within the firm. The level playing upside potential versus its downside risk). “Upside/downside”
field among investment professionals promotes the frank dis- is also a key factor driving our sell discipline and our deci-
cussion of issues and keeps the Brown Advisory team stable and sions regarding position size within the portfolio. When we
focused. While our research analysts generate most of the ideas increase or trim exposure to a stock (or sell it outright), our
for our portfolios, our due-diligence process on those compa- decisions may be influenced by fundamental changes to a
nies is typically a collaboration between portfolio managers company’s business, valuation considerations or competing
and research analysts, each lending relevant skills and experi- ideas we find more attractive. All of those factors, however, are
ence to the task. boiled down to their respective impacts on our upside/down-
Another critical component of this engine is our disciplined side model and whether the stock’s price is still attractive in
process for modeling upside potential versus downside risk light of the model.
(see Figure 6). Our analysts and portfolio managers calculate In short, we believe that our equity strategies are driven by
the potential upside to an investment if things go well, and a comprehensive system, not just by individual managers.
a downside worst-case price. This tool is a cornerstone of our
process and used in several important ways. Most obviously, it
is useful for individual security evaluation at the time of pur-
chase, but it is also helpful in ongoing portfolio management
Darwinian Capitalism in Action
Brown Advisory’s equity analysts model the upside potential and downside risk for each stock they follow.
By comparing the two, our portfolio managers get a sense of the relative attractiveness of potential stock
holdings. This methodology is also valuable when applied to our concentrated portfolios. New ideas and
current holdings compete for scarce places in our portfolios in a kind of “Darwinian capitalism,” all based
on upside/downside.
FIGURE 6: Example of upside / downside calculations
ANALYST PROJECTIONS
CURRENT
UPSIDE FROM DOWNSIDE FROM SUGGESTED
RATIO PORTFOLIO
CURRENT PRICE CURRENT PRICE ACTION
WEIGHTING
Stock A 40% 17% 2.35 3.00% Increase
Stock B 27% 18% 1.50 2.50% Hold
Stock C 35% 24% 1.45 1.75% Hold
Stock D 25% 23% 1.08 2.50% Trim
Stock E 14% 25% 0.56 1.50% Sell
SOURCE: Brown Advisory
THOUGHTFUL INVESTING SERIES ACTIVE ALPHA 9
10. Consistency and Discipline
FINDING these funds were fundamentally changing their risk stance and
therefore their investment strategy. Moreover, they found that
Funds that display a consistent level of risk generally out- funds in the highest RS decile generated negative annualized
perform those whose risk levels vary over time. alpha of -3.5% during the period covered by the study.
Huang, Sialm and Zhang (2010) studied what they called mu-
tual fund “risk shifting,” motivated by the relatively high level OUR PHILOSOPHY
of change they observed in the annual volatility of a significant
percentage of mutual funds.11 The study looked at the impact of “Long-term investors needn’t worry about quarter’s end.”
risk shifting on performance during the period between 1980
and 2009; the authors believed that risk shifting is most often We are firm believers in a consistent approach to portfolio risk.
driven by motivations apart from shareholders’ interests, such Because our portfolios are built based on the intrinsic value
as when underperforming managers “juice” performance at the of individual companies, we seek to avoid changing our risk
end of a reporting period by taking on added risk, or when stance in response to short-term performance events or mar-
managers lock in gains for purposes of protecting their com- ket reactions (Figure 7). Additionally, we are long-term, low-
pensation.12 By looking at a risk shifting measure (RS)—which turnover investors (Figure 8); since we intend to hold positions
they defined as the difference between past realized volatility of for longer periods of time, we choose our entry and exit points
a fund versus the volatility of its current holdings—they found based on carefully constructed models. The notion of trading
that 20% of mutual funds each year shifted their annual vola- simply for the sake of improving the portfolio cosmetically is
tility levels by more than 6 percentage points, indicating that not a consideration.
Steady As She Goes Holding On
While our equity managers respond to risks and opportunities that One of the tenets of our firm’s equity investment philosophy is to
are presented by changing company fundamentals, their intent is to buy companies that we believe have the potential to be long-term
generally maintain a consistent risk stance over time. The chart be- portfolio holdings. While circumstances may change our view with
low demonstrates an example of this consistency by showing how respect to an individual security, our approach generally results in
steadily the volatility of our Large-Cap Value strategy has tracked portfolio turnover that is equal to or below our various peer groups.
with the volatility of its benchmark over the past five years.
FIGURE 8: Portfolio turnover, Brown Advisory vs. peers
FIGURE 7: Trailing 3-year annualized standard deviation
STRATEGY PEER GROUP
25
Large-Cap Growth 30% 74%
Standard Deviation
3-Year Annualized
20
25
15 Large-Cap Value 64% 61%
20
10
Flexible Value 33% 55%
15
5
Small-Cap Growth
10 61% 85%
0
2006 2007 2008 2009 2010 2011 5
Small-Cap Value 55% 53%
Large Cap Value Composite 0
Russell 1000 Value Index SOURCE: Internal data, Morningstar data as of 12/31/11.
NOTES: Portfolio turnover figures are calculated using a representative account for each
strategy for the 12-month period ended 12/31/11. Please see the notes at the end of the
SOURCE: Factset. Data as of 12/31/2011. presentation for peer group definitions.
NOTES: Performance volatility information, as measured by 3-year annualized standard
deviation, is represented by the Brown Advisory Large Cap Value Comopsite and is com-
pared to the Russell 1000 Value Index. The GIPS-compliant presentation for this composite
is available upon request and provides more information about the composite. Please see
the notes at the end of the presentation for index definitions.
10 THOUGHTFUL INVESTING SERIES ACTIVE ALPHA
11. The Long View
ACTIVE EQUITY MANAGER PERFORMANCE
THROUGHOUT THE ECONOMIC CYCLE
Performance When It Counts
The academic research summarized so far suggests that there is
a set of tools that may be useful in identifying managers with Actively managed equity funds generated significant value during
a higher likelihood of persistent outperformance. Taking these recessionary periods in the last half of the 20th century.
ideas one step further, other studies suggest that there are par-
ticular environments in which active managers as a group tend FIGURE 9: Average annual four-factor alpha for equity funds,
to deliver better performance. 1962-2005
Unfortunately, there is no definitive data on this topic cov-
ering the current market cycle; the most recent study by Ko- RECESSION EXPANSION FULL
sowski (2011) covers the period between 1962 and 2005. That PERIODS PERIODS SAMPLE
study suggests that active managers add the most value in dif-
ficult markets (see Figure 9); as a broad group, active managers All Growth
3.87% -1.27% -0.37%
Funds
generated positive alpha during periods of economic recession
during the period studied. The author was careful to control Aggressive
for recession-related effects within the study, such as the higher Growth 0.82% -1.63% -0.98%
propensity of funds to carry cash to meet fund redemptions Funds
and the possibility of survivorship bias as a result of weaker
Growth
funds exiting the sample via fund liquidations or mergers. Dur- 3.21% -1.22% -0.41%
Funds
ing the period of the study, actively managed equity funds as
a group generated average annual alpha of more than 4% a Growth &
year during recessions, while generating negative average an- Income 3.27% -1.21% -0.40%
nual alpha of -1% during expansion periods. Similar results Funds
were shown by funds across the range of fund styles studied.13 Balanced
These striking results are backed up by other studies, such & Income 5.48% -1.69% -0.71%
as that of Moskowitz (2000),14 and Avramov and Wermers Funds
(2006).15 All of these studies strongly support the idea that ac-
tive equity managers add the most value in difficult markets,16 ALL EQUITY
4.08% -1.33% -0.43%
FUNDS
when the market isn’t a one-way street upward, when careful
selection is essential to identifying firms that can thrive in chal-
lenging conditions, and when a watchful eye can minimize ex- SOURCE: “Do Mutual Funds Perform When It Matters Most? U.S. Mutual Fund Perfor-
mance and Risk in Recessions and Expansions,” Kosowski, Quarterly Journal of Finance,
posure to particularly risky investments. vol. 1, no. 3, 2011.
NOTES: Recession and expansion periods defined by the National Bureau of Econom-
ic Research. Results based on all U.S. equity funds listed during the period covered in
the Center for Research in Security Prices (CRSP) survivor-bias free mutual fund
files. Fund categories constructed by the authors based on each fund’s reported invest-
ment objectives.
THOUGHTFUL INVESTING SERIES ACTIVE ALPHA 11
12. Conclusion
The academic literature on the topic of active versus passive management is hardly conclusive.
Rigorous research makes persuasive cases on both sides of this question, and we expect a healthy
back and forth debate to continue in academic circles well into the future. However, there is a
strong body of work that suggests that some top-quality active equity managers can in fact out-
perform the market consistently, and that those who do often share certain attributes, philoso-
phies and processes. Not surprisingly, the attributes for success suggested by this body of research
are quite similar to those sought by the institutional investment community: track record, proven
consistency, strong managers supported by strong research teams, and a process that focuses on
well-supported and consistently smart divergence from the benchmark.
Over time, Brown Advisory has sharpened its investment philosophy, and we are encouraged
that the firm’s approach seems to be validated by academic research. Ultimately, however, we
judge the success of our philosophy by the results that we generate for our clients; the academic
confirmation covered herein only strengthens our commitment to a process that we follow on
behalf of our clients every day.
12 THOUGHTFUL INVESTING SERIES ACTIVE ALPHA
13. The views expressed are those of the authors and Brown Advisory as of the date referenced and are subject to change at any time based on market or
other conditions. These views are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of
future performance. In addition, these views may not be relied upon as investment advice. The information provided in this material should not be consid-
ered a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be
profitable. To the extent specific securities are mentioned, they have been selected by the authors on an objective basis to illustrate views expressed in the
commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been
prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all
available data. This piece is intended solely for our clients and is for informational purposes only. It should not be construed as a research report.
Peer Group Definitions: Portfolio information throughout this paper is taken from representative accounts within Brown Advisory’s equity strategies; please
see the attached GIPS-compliant presentations for Brown Advisory’s equity strategies for more information. Representative accounts are compared to the
following peer groups, with data provided by Morningstar, Inc.: Brown Advisory Large Cap Growth strategy is compared to a peer group of 174 institutional
funds within the Morningstar Large Growth category; Brown Advisory Large Cap Value strategy is compared to a peer group of 136 institutional funds
within the Morningstar Large Value category; Brown Advisory Small Cap Growth strategy is compared to a peer group of 99 institutional funds within the
Morningstar Small Growth category; Brown Advisory Small Cap Value strategy is compared to a peer group of 50 institutional funds within the Morningstar
Small Value category; Brown Advisory Flexible Value strategy is compared to a peer group of 174 institutional funds within the Morningstar Large Blend
category; Brown Advisory Equity Income strategy is compared to a peer group comprised of a subset of 39 institutional funds within the Morningstar Large
Blend category, which have a primary prospectus objective of “Growth & Income.” Morningstar data contained herein: (1) is proprietary to Morningstar
and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its
content providers are responsible for any damages or losses arising from any use of this information.
Benchmark Definitions: The Brown Advisory Institutional Large Cap Growth strategy is benchmarked to the Russell 1000 Growth Index, which measures
the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios
and higher forecasted growth values. The Brown Advisory Large Cap Value strategy is benchmarked to the Russell 1000 Value Index, which measures
the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and
lower expected growth values. The Brown Advisory Small Cap Growth strategy is benchmarked to the Russell 2000 Growth Index, which measures the
performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000 Index companies with higher price-to-book ratios
and higher forecasted growth values. The Brown Advisory Small Cap Value strategy is benchmarked to the Russell 2000 Value Index, which measures
the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 Index companies with lower price-to-book
ratios and lower forecasted growth values. The Brown Advisory Flexible Value and Equity Income strategies are benchmarked to the S&P 500 Index, an
unmanaged index, that consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index
(stock price times number of shares outstanding), with each stock’s weight in the Index proportionate to its market value. One cannot invest directly
in an index. The Russell 1000® Index, Russell 1000 Growth® Index, Russell 1000 Value® Index, Russell 2000® Index, Russell 2000 Growth®
Index, and Russell 2000 Value® Index are trademarks / service marks of the Frank Russell Company. Russell® is a trademark of the Frank
Russell company.
Brown Advisory is the marketing name for Brown Advisory, LLC, Brown Investment Advisory & Trust Company, Brown Advisory Securities, LLC,
Brown Advisory Ltd., and Brown Advisory Trust Company of Delaware, LLC.
1. “The Performance of Mutual Funds in the Period 1945-1964,” Michael Jensen, Journal of Finance, vol. 23, no. 2, 1968.
2. “False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas,” Barras, Scaillet and Wermers, Journal of Finance, vol. 65,
no. 1, 2010.
3. “Performance and Persistence in Institutional Investment Management,” Busse, Goyal and Wahal, Journal of Finance, vol. 65, No. 2, 2010
4. “Active Management in Mostly Efficient Markets,” Jones and Wermers, Financial Analysts Journal, vol. 67, no. 6, 2011.
5. “How Active Is Your Fund Manager? A New Measure That Predicts Performance,” Cremers and Petajisto, Review of Financial Studies, vol. 22, no. 9.
6. “How Active Is Your Fund Manager? A New Measure That Predicts Performance,” Cremers and Petajisto, Review of Financial Studies, vol. 22, no. 9.
7. “Can Mutual Fund ‘Stars’ Really Pick Stocks? New Evidence from a Bootstrap Analysis,” Kosowski, Timmermann, Wermers and White, Journal of
Finance, vol. 56, no. 6, 2006.
8. “Active Management in Mostly Efficient Markets,” Jones and Wermers, Financial Analysts Journal, vol. 67, no. 6, 2011.
9. “Active Management in Mostly Efficient Markets,” Jones and Wermers, Financial Analysts Journal, vol. 67, no. 6, 2011.
10. “On the Performance of Mutual Fund Managers,” Baks, Emory University, June 2003.
11. “Risk Shifting and Mutual Fund Performance,” Huang, Sialm and Zhang, Review of Financial Studies, vol. 24, no. 8, 2011.
12. “Active Management in Mostly Efficient Markets,” Jones and Wermers, Financial Analysts Journal, vol. 67, no. 6, 2011.
13. “Do Mutual Funds Perform When It Matters Most? U.S. Mutual Fund Performance and Risk in Recessions and Expansions,” Kosowski, Quarterly
Journal of Finance, vol. 1, no. 3, 2011.
14. “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transaction Costs and Expenses,” Moskowitz, Journal of
Finance, vol. 55, no. 4, 2000.
15. “Investing in mutual funds when returns are predictable,” Avramov and Wermers, Journal of Financial Economics, vol. 81, no. 2, 2006.
16. “Active Management in Mostly Efficient Markets,” Jones and Wermers, Financial Analysts Journal, vol. 67, no. 6, 2011.
THOUGHTFUL INVESTING SERIES ACTIVE ALPHA 13
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14 THOUGHTFUL INVESTING SERIES ACTIVE ALPHA