Mutual fund performance

Résumé du document

The principal investment strategies are, for MIGSF, to invest at least 80 % of the fund's net assets in stocks of company, of any size but with a large capitalization, which has above average earnings growth potential. MIGSG invests also in foreign securities. For AMF, the investment strategy is resumed by the achievement of three mains objectives — current income, growth of capital and conservation of principal — through investments in companies (with higher quality but less volatility) that participate in the growth of the American economy. According to VUGF, "The fund employs a 'passive management'--or indexing--investment approach designed to track the performance of the MSCI U.S. Prime Market Growth Index, a broadly diversified index predominantly made up of growth stocks of large U.S. companies. The fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index".

The objective of this take home assignment is to work on four US mutual funds. As a result, we have to develop a critical and analytical report by studying average returns, volatility, Sharpe ratio…, but also by estimate a one-factor alpha, a three-factor alpha, based on the Fama and French model, and a four-factor alpha and momentum factor, based on Carhart. We will, also, interpret alphas, coefficients in these regressions and funds performances. To do this study, we will combine information on the funds and from my own econometrics analysis, in order to compare funds as if this report would be read by an interested investor.

Extraits

[...] As we can see with the graph, the funds are under the security market line. It means that, instead of invest in those funds, investors would prefer to borrow and invest in the market portfolio. Sharpe ratio and Sortino ratio, Jensen's alpha Jensen's alpha measures abnormal return of a security or portfolio of securities over the theoretical expected return. We compute this alpha as follow : Jensen's alpha = Portfolio Return [Risk Free Rate + Portfolio Beta * (risk premium)] α AMF = 0.654 = α MIGSF = 0.539 = α MSFGF = 0.398 = α VUGF = 0.443 = All the alphas are positive, greater than zero, it means that the investments have a return in excess of the reward for the assumed risk, especially for AMF, with The Sharpe Ratio measures risk-adjusted return of an investment. [...]

[...] The momentum beta measures a fund manager's exposure to momentum stocks. To evaluate the performance of a managed portfolio, the intercept in the time-series regression using the three (or five) factors is the average abnormal return needed to judge whether a manager can beat the market 3 factors alpha : French and Fama : With the 3 factors alpha model, we add to the CAPM 2 more variables, which are size and value. The size effect is the total market value of all stocks outstanding of a firm (Market value of equity). [...]

[...] So, if the index rises of MIGFS will rises of On the contrary, the Beta of AMF, is lower because it equals In between, we have the Beta of MSFGF= 4.427 and the Beta of VUGF= 4.659 .So if the index rises of MSFGF will rises of and if the index rises of VUGF will rises of The 4 Betas are very sensitive to overall market movement, almost for MIGSF. The more Beta is high the more the risk of the company is important. So, the risk of MIGSF is higher than AMF, but the first one provides a potential for higher returns. On the contrary, the less risky fund is AMF. After that, we have to compute the CAPM. CAPM is the capital asset pricing model and the equation compute the expected return of an asset. [...]

[...] It means that the couple of two funds are not independent from each other and from the market and they share an important portion of variance. The negative and weak connections of the fluctuations are between MSFGF-MARKET VUGF-MARKET. The Pearson correlation approves what we saw with the covariance. There is a link between the variables. Indeed, the Pearson correlation is positive and strong between AMF-MARKET MIGSF-MSFGF MIGSF- MARKET MIGSF-VUGF. The Pearson correlation is positive and weak between AMF- MIGSF, AMF-MSFGF, AMF-MARKET, MIGSF-MARKET. [...]

[...] But it is the only way for me to learn, to understand and to succeed in finance. Analyze and interpretations of data : (see excel) We have to analyze the monthly returns on the above funds, between January 1984 and December 2008. Here are, graph and data board, from SPSS. The covariance, allow us to study the simultaneous variations of two variables compared with their respective average. In finance, this notion allows to measure the degree of connection of the fluctuations between two securities The more the covariance is weak and the more the series are independent and conversely more it is high and the more the series are bound. [...]