In this Capstone project, you will have to choose between three different characters (each with a unique set of financial constraints and objectives) and design an appropriate wealth plan for them over the next 5 years. You will have to use the knowledge you gained in each of the four preceding courses to reach that objective. Indeed, you will need to know which assets to consider and how to manage them depending on changes in the economic outlook (Course 1), how to evaluate and deal with your character's emotional biases in order to suggest them a wealth strategy they will be able to follow (Course 2), how to build an optimal portfolio and manage its risk once the strategy has been designed (Course 3) and how to adequately measure the performance of your plan while taking advantage of investment vehicles and future trends in the investment management industry to further your character's goals (Course 4). This Capstone project was designed in collaboration with UBS, our corporate partner, who benefits from years of experience in guiding clients with their wealth planning.
Beating the benchmark or the peer group? - Peer group analysis
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來自 University of Geneva 的課程
Planning your Client's Wealth over a 5-year Horizon
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Final Reporting
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University of Geneva- Michel GirardinLecturer in Macro-Finance - Project Leader for the "Investment Management" specialization
Geneva Finance Research Institute
[MUSIC]
So you beat the benchmark or the peer group?
That's what we're going to talk about in this set of two videos.
So, when performing a mandate with a relative
performance objective, you may be confronted to this
dilemma should I be confronting myself to a given market,
a benchmarket, market index, or to my competitors?
Actually, the two may not be necessarily mutually exclusive.
Actually, you may wish to compare a funds manager
to a given benchmark, and also to the competition.
But sometimes, and in particular in the hedge fund industry,
there's no such thing as a benchmark enhance,
its more the peer group analysis which will be relevant.
So we're going to be talking about this peer group analysis,
how it's performed here in this video.
And then in the next video, I will show you an index
which I particularly like when we have to identify
good manager especially in the hedge fund industry.
But first, let's have a look at how we can get to this peer group analysis.
You remember the slides when we talked about the right benchmark?
And we said that typically the right benchmark is not necessarily
the equity in the stock market index of your home country.
This tends to be a frequent bias that clients have, they go to a bank,
a wealth manager and they have a diversified portfolio and then they
have their [FOREIGN] if they're in France or the S&P 500 in the U.S. and they
compare the returns of their portfolio to that of the stock market index.
Although, obviously, the allocation to the equities of your home country
may be a very tiny fraction of your whole portfolio.
So, that's not a good benchmark to have a look at.
Clearly, we've also excluded as the right benchmark,
the assets returns which a friend of yours has gained
in a competitor's bank of wealth management company,
this number may clearly be biased.
And also, not a very good benchmark to use, is the return you've
achieved in the previous year, last year, for it is a very important
rule that you should never forget when you do investment management,
is that past returns are no guarantee for future performance.
So you clearly get the last year's number away from your
brain as deciding that this is your given benchmark.
So we know what the right benchmark isn't, and
probably in this environment maybe a good benchmark to look at,
besides the market indices, is the peer group,
is the competition, and you see here all these bars,
they indicate the performance range, and we do this for one month.
One quarter, one year up to ten years.
So thus, the height of the bars indicates the range.
For instance you look at the last one,
ten years and you see that the range is from 2 to 22%.
So this is the scope of annual returns which
we have in for the 10 year return.
Then you see some colors here and you see the first color and
it says five to 25 percentile.
What does it mean?
Basically, we take the distribution,
we take all the funds which entered the universe and we segment it.
Let's assume that we have 100 funds, so
here we will have the top 5 to the top 25 funds, okay?
So the next category you see it says 50 to 25th percentile,
that's the yellow part of the bars.
Here, we will find up to
the 25 best performing managers up to 50, okay?
And so on, until the 95 to 75 returns.
And then we will find the bottom performing managers,
those who will be the last five in the range of this performance.
So now we are comparing our product and
it's highlighted here with this red square.
So product, and we see how it is positioned relative to this range and
you see that over one year.
It's within the top five performing funds.
It's almost at the top, very top.
This happens actually over two, three, five, and ten years.
There you see that the square is clearly at the top,
so it's the best performing fund.
So here, this is a simple way to illustrate how you may select a manager.
And, indeed, this is very crucial, but we'll see in a minute that there
are more sophisticated tools for choosing managers when you're operating in
an absolute return environment, i.e., there's no benchmark.
Here there are actually two benchmarks, which are indicated.
And sometimes when you select managers, hedge fund managers,
when you're running a front of funds, a front of hedge funds,
you put some benchmark just to have an idea of what the market has been doing,
although this is clearly just for reference because those managers are not
actively tracking or trying to deviate from a benchmark.
Actually they never really look at the benchmark.
But it's always interesting to put say the S&P 500,
the performance if you're talking about an equity long-short type of hedge fund.
It's always good to have the S&P 500 as reference, so this could be here, for
instance, Benchmark 1.
And the MSCI world, which is the standard index which is used for
world equities as Benchmark Number 2.
So peer group analysis is clearly also very helpful to identify
the poorly performing managers.
And here you see the same analysis which is done, the same bars, but
you see that, actually the red square,
the product does not perform as well as in the previous slide.
Here it's a different type of analysis because we see it by year.
And we put the year first which is most relevant to us.
It's the last year.
So here assume it would be in 2012, so the first year we put on this chart is 2011.
There's something actually very interesting in this chart,
you see that in 2008, the square,
the red square is way at the bottom of the range of performance, so
it's clearly the least performing manager, or the worst manager of all the lots.
Say 100 managers, if that's the Universe.
And then you see in 09, 2009, he ends up being the first.
So you remember that cartoon I showed you actually was the opposite, right.
There was this really outperforming award-winning fund manager
was getting drunk in the bar because he had been fired by his boss,
because the boss believes in mean reverting assets.
Here it's somewhat the same, although it could be the opposite story.
For, if you have been the last of the 100th
performing managers in a given year, maybe next year you end up being the first.
And actually there is a simple explanation for
this, which you find quite often also in practice.
Is maybe, this manager has been a bit early.
And putting more risk in his portfolio.
For, if you remember, actually 2008 was a severe down market.
This was the Great Recession.
So, markets went sharply down.
And they start bottoming out in March 2009.
So, maybe the manager here, he was right, but too early.
And he put a lot of risk, he tilted his equity portfolio towards growth stocks.
So, in '08 that was a disaster because market went sharply down.
But, in '09 when markets turned around in March he went up, like a rocket.
And so, there he won the best performing fund in 09.
So, anyhow, this is typically the kind of analysis you do.
You look at the range and
you see how a fund is positioned relative to competition.
So peer group analysis may be performed using various criteria.
The compounded annual returns, as we have just seen, but also draw down analysis,
and we'll see in the next video, how useful this measure can prove.
Then we have the famous Sharpe ratio, the Sortino ratio,
which is more suitable for hedge funds and last but
not least, we may also be interested to know the percentage of
a months where the manager has been achieving positive returns.
So when is peer group analysis useful?
Well basically, it's useful when you need to screen a given database
to spot the best managers to assemble in a given portfolio.
So it would be a portfolio of funds, either traditional or hedge funds.
So for instance, you may want to screen your database using
these various, quite restrictive criteria, I've indicated here.
So you look for minimum three year track, track records.
That's pretty standard in the fund industry, but
then, okay, here it's becoming a bit more selective.
You want managers who've been delivering 30% or
plus annually of the three note since exception.
And then, no losing month,
that may be tricky if you include the period of the 2008,
quite difficult to find a manager that who hasn't have a negative month,
and you bundle all this with a Sharpe ratio which would be above 1.4.
So good luck finding that manger.
Maybe the screening result will come with an output of zero.
And then you may need to refine your criteria, but that's
the idea of how to use peer group analysis to spot the best performing manager.
So in the next video we will see two additional criteria,
risk adjusted performance ratios, which may prove useful
when you need to select good managers among a universe of peers.
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