Mutual Fund Analysis Investment Management Term Paper

Excerpt from Term Paper :

When looking at risk, the fund does have a beta higher than that of its large cap blended peers. The beta of the fund is roughly 1.23 as compared with a beta of 1.04 for many of its peers. This can be attributed to the large concentration in financial stocks which tend to have high betas relative to the market. This is to be expected as financial shares raise disproportionately more when the economy recovers and fall just a much when the economy enters recession. The standard deviation of the portfolio is also higher at 18.15 relative to its peer group standard deviation of 15.86. These numbers again reflect the volatility inherent in a portfolio with 40% of the assets in cyclical industries such as banking and technology.

To improve performance and volatility in the fund, I would recommend two courses of action. First, I would lower the expense ration and change compensation of the manager to one that is more long-term in nature. For example, I would compensate the manager as a percentage of how much he beats the benchmark index over a five-year time horizon. This I believe will better align the interest of the manager with the interest of the shareholder. This in turn, will allow the fund to have a long-term view of asset allocation as oppose to the short sighted nature currently prevailing. Second, I would significantly lower the turnover of the portfolio. At 64%, the fund manager is turning over the portfolio too much to achieve long-term performance similar to that of the bench mark index. By changing the overall portfolio mandate and manager compensation, turnover will be reduced thus enhancing long-term returns for the shareholder.

In regards to volatility, as a manager, I would completely ignore it. Here is my rationale: There is a prevailing notion that stocks are more "Risky" than their bond or treasury counterparts. However, I disagree with this notion completely. When purchased at the right price, stocks are actually safer than bonds and treasuries while providing vast amounts of excess returns. The measure of beta is particularly detrimental to the concept of risk. Beta is a measure of stock returns relative to the market. For instance is a stock increases by 2 points while the market increased by 1, the company is said to have a beta of 2 and therefore is considered risky. However, according to the beta measurement if the market declines by 1 point, the stock will decline by 2 points. The lower price therefore doesn't make the stock MORE risky, it makes it LESS risky. Risk, as I define it is the possibility of the loss of principle, capital, or dividend. When prices are depressed, the possibility of loss is diminished; therefore the stock is less risky. Furthermore, cash is by far more risky that stocks, as the possibility of loss is guaranteed. Cash has declined by nearly 90% since America left the gold standard. Now cash valuation doesn't move up and down in price as dramatically, but why should this matter to the long-term investor? If the investor is really looking for the long-term more volatility presents opportunities to purchase securities at a discounted price. As such, I would inform the fund manager to buy more of stocks he or she has a strong conviction for.


1) Bogle, John. (2007) "The First Index Mutual Fund: A History of Vanguard Index Trust and the Vanguard Index Strategy."


Sources Used in Document:


1) Bogle, John. (2007) "The First Index Mutual Fund: A History of Vanguard Index Trust and the Vanguard Index Strategy."

2) Burton G. Malkiel, a Random Walk Down Wall Street, W.W. Norton, 1996, ISBN 0-393-03888-2

3) Rekenthaler, John (February/March 2011). "The Weighting Game, and Other Puzzles of Indexing." Morningstar Advisor. pp. 22 -- 56.

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