1. Performance Evaluation International Investments Professor Cam Harvey Universal Investments: Christian Delay Noppaporn Supmonchai Tassanee Ratanaruangrai Juan Sandoval Assignment 1 February 26, 1998

2. Issues Use different performance mearsures to gain insight Determine state of asset management in terms of performance How are fund managers performing?? Are fund managers getting a free lunch???

3. Approach Analyzed 14 International & 19 U.S. Mutual funds Establish MSCI World or MSCI US as benchmark Calculate traditional measures –Mean-variance analysis, CAPM, Beta, Jensen’s Alpha, Treynor Index Calculate Graham-Harvey measures GH1 & GH2 Discuss results and conclusions

4. Traditional measure results 2 of 14 funds “beat” MSCI World What if fund has lower return AND lower volatility? Inherent shortfalls reside in traditional measures

5. Traditional measures Beta: picks up the average level of market exposure Alpha: represents the extra return over and above a position with average market exposure Weaknesses: MSCI benchmark portfolio has different volatility (risk) than each mutual fund Sharpe ratio difficult to evaluate without reference point No ability to predict future performance based on the past

6. Graham-Harvey Performance Metrics GH1 Levers up/down the MSCI World to match each international mutual fund’s volatility Determine if fund lies above or below a constructed frontier GH2 Levers up/down the international mutual fund to match the volatility of the benchmark Assumes investor has ability to lever an investment

7. Graham-Harvey Performance Metrics GH1

8. Graham-Harvey Results Similar results: 2 of 14 “beat” MSCI World using GH1 and GH2 GH1GH2

9. Traditional vs. GH* Controlling for risk is often overlooked GH deems outperformers as underperformers Sharpe vs. GH GH does better job in pinpointing genuine ability GH negative score bad, positive score good CAPM vs. GH GH does better job with fund volatility

10. Conclusions Important to know nuances of performance measures Fund managers consistently under-perform benchmarks State of Fund Mgmt in poor shape in terms of performance Fund managers are eating your lunch!!!