Zeus Asset Management Case Week 5

Executive Summary Main differences of Zeus from its main competitor are its customer-oriented services, their core strategy of teamwork and they used municipal bond fund to purchase securities. Estimation of risk-adjusted returns is important to Zeus as In Zeus opinion, investors will not pay for the higher return generated by merely taking the higher risk. Investors demand Zeus to utilise professional skills to provide them with a return above the benchmark. There are also advantages and disadvantages of each of the riskadjusted return measures employed, making some of them to be better applied to a specific type of fund comparison than the others.

Introduction: Zeus Asset management is a fund management firm founded in 1968 in Atlanta, which is an independent, employee-owned, money management firm in southwest, providing services to both institutional and individual investors. The firm’s investment philosophy believes that conservative, risk-averse, quality-oriented approach will bring about superior performance.

Zeus unique characteristics: Zeus is very different from its competitors. Firstly, they are well known for its customer-oriented services. Most of the employees served their customers directly. Each employee was engaged in pursuing the client’s investment objectives and dilligently managing their portfolios. This customer-oriented approach gives them a competitive advantage in these high-net-wealth-individuals market. Furthermore, teamwork was the core of Zeus’s strategy, more than 75% of its investment professionals were CFAs and the average investment professional is aged at 44. Thus, they have more experience than the other competitors in the industry

In addition, Zeus believed that risk minimization and long term investment could get a better result than high return high frequency trading in short term. Thus they tend to allocate asset to long-term movement and also in medium-to-large capital growth fund due to the lower risk nature of these portfolios.

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Finally, Zeus developed a unique approach, municipal bond fund, to purchase securities. The portfolio manager could buy municipal bonds at more attractive prices and be offered more attractive bonds by dealers.

Financial performance measurement Absolute return is a way of measuring a portfolio performances based on the total return on investment over a certain period. Absolute return can be calculated by the “hold period return” calculation and present value of future estimated expected return. Although this method can calculate the profit or loss of a portfolio, it is not able to provide a robust analysis and the comparison the performance between the portfolios with others.

On the other hand, the Relative return method is able to provide the comparison of the performance of a portfolio with a benchmark. It allows checking whether a portfolio is outperforming or underperforming the market. It can also be used to measure the performance of more than one portfolios or companies.

However, both methods cannot be relied upon solely to measure the performance a portfolio, because they are unable to catch the relative risk of a portfolio. High return is always associated with high risk. If an investor invests in high beta stocks or junk bonds, he is more likely to get a high return, while it does not means that the investment is outperforming the market. Thus, risk-adjusted is a more precision measure method to measure the return from the portfolio per unit of risk and it also can be used to compare portfolio performance with portfolio of different risks. In Zeus opinion, investors will not pay for the higher return generated by merely taking the higher risk. Investors demand Zeus to utilise professional skills to provide them with a return above the benchmark.

Different methods for Risk-adjusted return: Sharpe ratio: measure the excess returns generated by a portfolio above the risk free rate in relation to return.

Advantages:

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

Directly computable from any observed series of returns without needing for additional information surrounding the source of profitability.



Measuring systematic and idiosyncratic risk.

Disadvantages: 

Merely a ranking criterion. Number value is not economically meaningful



Normal distribution assumption result in bias.

Treynor ratio: measure return in excess of the risk free rate relative to systematic risk.

Advantages: 

It can be compared with the benchmark performance or other portfolio with the same benchmark.

Disadvantaged: 

Only useful as a sub-portfolio measure of a board or fully diversified portfolio.

Jasen’s Alpha: measures the average return on portfolio over and above that predicted by CAPM.

Limitation: An absolute measure does not adjusted for any risk. It is not able behave proportionally to the level of required return of portfolio.

Information ratio: the information ratio divides the alpha of the portfolio by the nonsystematic risk.

Limitation: it relies on a measure of standard deviation. It does not present the averaging property. For Zeus, risk-adjusted return is very important due to several reasons: 

By analyzing the performance of the various mutual funds, it would help the company to establish its internal rules regarding the level or risk and return.



They can use this method to measure the excess return they earned for each unit of risk they take.

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

It is more comparable to the benchmark and other portfolios with different structure and risk level.

Benchmark comparison Equity fund: Zeus’s equity fund aim for long-term growth of capital through investments in a highquality portfolio of stocks, whose earning are expected to grow at above-average rates. Focusing more on Growth securities, which is consistent with the philosophy of riskaverse investment strategy.

In this case, equities are compared with both S&P 500 and Lipper Growth indices (Annex A). When compared with S&P 500 index, the sharpe ratio can be applied to compare between the portfolio and index. Since only growth stocks is in the portfolio, it cannot be diversified enough. In the first subperiod, the portfolio’s sharpe ratio is lower than S&P 500 index. The main reason is that the fund followed a weak cash policy, over or underweighted in cash, depending on the valuation of the market. However, the performance is improved in the second subperiod. When compared with Lipper Growth Index, we should compare the treynor ratio between them, as the portfolio is diversified enough. Similar to previous observation, the portfolio performed better during the second subperiod and outperform the Index performance. The alpha figures and information ratio show a similar result.

Bond fund: The bond fund aims to maximize total return in a way that was consistent with the preservation of capital. Due to the lack of capacity of purchasing all marketable in the Lehmann Brothers Aggregate index, the portfolio is not well diversified. Compared to Lehmann Brother Aggregate index, the sharpe ratio is suitable to compare the performance between the portfolio and index. According to the figure calculated below (Annex B), the portfolio performance improved immensely in the second subperiod. In addition, the information ratio of 1.096667 in the second subperiod also illustrates the active risk is low. The improvement could be attributed to portfolio’s specialist’s concentrating on each sector, thoroughly scouring each one, and finding attractively priced securities. Besides, the application of a powerful computer models helped identify arbitrage opportunities in different sector of the bond markets. They also use 4

bond-synthesizing to create coupon and maturity payments that were higher yielding than an equivalent risky bond.

Balance fund: The nature of balance fund, which is combined by equity and bonds, make it become diversified. This is very well diversified portfolio, which combined the high return of equity and the low risk of bonds. Hence, beta and treynor ratio can be used to measure the performance. Similar with the other portfolio, balance fund also has a superior performance in the second subperiod. Similar with the market beta, the higher treynor ratio and a positive alpha suggest the superior performance of the fund (Annex C).

International fund: The original intention of applying international fund is to diversify the portfolio of companies. However, based on the figures (Annex D), the fund’s beta is actually higher than MSCI index. With the increase in risk, the return of the portfolio is also increased significantly. The high sharpe ratio, Treynor ratio, positive Jensen’s Alpha and information ratio show that the portfolio is outperforming. The high risk is not consistent with the company’s philosophy.

Conclusion: Risk-adjusted return can help investment professionals in Zeus to have more robust analysis regarding the portfolio performance. However, other qualitative aspects should also be taken to account, such as their employee’s quality and experience, the corporate government of the company, as well as their relationship with clients. Overall, the company is relatively successful in terms of aspects analyzed above.

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Appendix

Annex A

BETA

subperiod1 subperiod2 whole period

Equities Fund zeus equity fund 0.8435 0.8852 0.8758

sharp ratio

subperiod1 subperiod2 whole period

0.5514 1.7394 1.1924

0.6835 1.6072 1.1792

0.9295 2.0383 1.5201

treynor ratio

subperiod1 subperiod2 whole period

0.0507 0.2298 0.1389

0.0619 0.2177 0.1385

0.07486 0.2463 0.1609

Jesen's Alpha

subperiod1

-0.0018

0.0012

subperiod2 whole period

-0.001 -0.0014

-0.0017 -0.0015

subperiod1

-0.6189

-0.66255

subperiod2 whole period

-0.61269 -1.21617

-0.77794 -1.04081

inforamtion ratio

Lipper growth index 0.975 0.9323 0.9428

s&p 500 index 1 1 1

Annex B Bonds Fund zeus bond fund BETA

subperiod1 subperiod2 whole period

0.8318 0.899 0.8645

lehman brothers aggregated index 1 1 1

sharpe ratio

subperiod1 subperiod2 whole period

0.7455 10,258 0.8899

0.959 0.9212 0.9458

treynor ratio

subperiod1 subperiod2

0.0341 0.0457

0.0429 0.0403

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whole period Jesen's Alpha

information ratio

subperiod1 subperiod2 whole period subperiod1 subperiod2 whole period

0.0401

0.0416

-0.0006 0.0004 -0.0001 -1.79757 1.096667 -0.41387

Annex C

BETA

subperiod1 subperiod2 whole period

Balance Fund zeus balanced fund 1.006 1.0021 1.0064

sharpe ratio

subperiod1 subperiod2 whole period

0.3489 1.2431 1.3987

0.7717 1.087 0.9207

treynor ratio

subperiod1 subperiod2 whole period

0.0309 0.0986 0.0311

0.0653 0.08 0.0268

Jesen's Alpha

subperiod1 subperiod2 whole period

-0.0026 0.0014 -0.0006

inforamtion ratio

subperiod1

-2.35665

subperiod2 whole period

1.436681 -0.81721

lipper balanced index 1 1 1

Annex D

BETA

sharpe ratio

International Fund zeus international fund

MSCI index

subperiod1 subperiod2 whole period

1.088

1

subperiod1 subperiod2 whole period

0.0308

-0.4001

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treynor ratio

Jesen's Alpha

information ratio

subperiod1 subperiod2 whole period

0.0046

subperiod1 subperiod2 whole period

0.0054

-0.05328

subperiod1 subperiod2 whole period

1.119824

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