Date post: | 01-Jan-2016 |
Category: |
Documents |
Upload: | alden-farmer |
View: | 18 times |
Download: | 1 times |
Governance, Transparency and
Good Portfolio Management with
Internet-based Tools
www.mcubeit.com Dr. Arun Muralidhar
2
Outline
1) Keys to Effective Portfolio Management: 5 Key Steps
2) Good Process Overcomes Challenges in Managing Funds
3) Technology Challenges: Where Web Applications Help
4) Using Web-based Technologies Effectively – Demo
Structuring portfolios; understanding risks; converting risks into higher returns; using attribution to improve decisions
5) Using the Internet to Empower Investors
6) Summary and Conclusions
3
Who Benefits from This Presentation?
Country pension funds
Central banks
Funds-for-the-future (e.g., funds to preserve
wealth from the extraction and sale of
commodities)
Liability management organizations
IT Departments: Help make front and middle office effective
4
1. Key to Success – Effective Decisions
Good management = must make many decisions well
Must make these decisions in an informed manner
Process, transparency and governance are critical
Challenge: Can technology integrate front & back office?
Measure Risk
Evaluate Performance
Outperform Benchmark
Determine Benchmark
Set Objectives
Annual Daily MonthlyMonthly
5
1. Many Share Responsibility for a Fund
Asset-Liabilit
yRisk
Tactical & Benchmark
Risk
Manager/ActiveRisk
Responsibility
Monitor
Manage
Board of Governors
Internal Staff OutsideManagers
Annually Daily/Monthly Monthly
Strategic Decisions – Need Good Reporting
Effective Investment Decisions –
Need IT Support
ManagerSelection
Decisions – Good
Reporting
Responsibility
Decision Frequency
How to Manage the
Risk
Need good technology to track and manage all decisions
6
1. Portfolio =Many Decisions
Asset Allocation
Sector/ Region
al
Style Selectio
nManager Selection
Cash/Currency = 20%Equity = 40%
By Market (Local, US etc.)
Large Stocks/Small Stocks
By Market(Local, US, Euro)
Govt./Agency etc.
Bonds = 40%
P o r t f o l i o
Mgr
A
Mgr
B
Mgr
C
Mgr
D
Mgr
E
Mgr
F
Bank 1
for Deposit
s
Bank 2
for Deposit
s
7
1. Manage ongoing cash inflows and outflows
2. Evaluate and implement rebalancing
strategies
3. Manager selection and allocations
4. Asset, country, style, sector or currency
allocation
2. Challenges in Managing Portfolios
A portfolio is very dynamic – impacted daily.Each decision can be a source of return or,
if badly managed, can reduce returns
8
1. Resource constrained: financial (budget) and
staffing
2. “In public eye”: decisions are reviewed
publicly
3. Need to demonstrate that decisions not
political; need to show financial impact of
political constraints
4. Good governance and transparency critical
2. Challenges in Public Entities
Challenge: Can technology empower staff, to raise return and lower risk while
maintaining control?
9
SILO SYSTEMS – Narrow Applicability:
1) Focus on only one asset (stocks/bonds) or one
aspect (e.g., risk or performance
measurement; trading)
2) Multiple systems; high cost to
integrate/maintain
3) Required extensive training and client IT
backup
4) Not designed by people who managed funds
3. Current Technology Challenges
Senior managers are at risk – not knowing what is impacting the fund or how to correct
it
10
EXCEL based models are often used to make
investment decisions, which from a technology
perspective pose serious challenges: EXCEL models prone to error (not transparent)
Key man risk (if staff leaves); create large teams as
insurance
Difficult to share ideas/analyses across organization
Managers are at risk if the models have errors
3. Current Technology Challenges
Alternative technology must be transparent, robust, inexpensive and easy to use!
11
Enterprise system can be implemented at low
cost
Easy to use and can customize their overall
fund
Support all asset areas in one technology
Link portfolio management, risk and
performance in one system/framework:
transparent, flexible, quick
Data management can be simplified
3. Web/ASP Model Overcomes Problems
Senior managers are empowered – access results from their desktop (intranet or
internet)
12
Integrated system that allows user to follow specific process steps:
1. Specify a clear investment process (i.e., who makes
what decisions at what level of the fund) =
GOVERNANCE
2. Understand all the risks taken by the fund =
GOVERNANCE
3. Model decisions in a TRANSPARENT way (i.e., simple
so that anyone can understand/evaluate)
4. Attribute performance to improve decisions
4. Using Web-based Technologies Effectively
Governance, process & transparency = better returns
A Case Study:
13
Case Study: Step 1Articulate
Responsibilities/Decisions
Asset Allocation
Sector/ Region
al
Style Selectio
nManager Selection
Cash/Currency = 20%Equity = 40%
By Market (Local, US etc.)
Large Stocks/Small Stocks
By Market(Local, US, Euro)
Govt./Agency etc.
Bonds = 40%
P o r t f o l i o
Mgr
A
Mgr
B
Mgr
C
Mgr
D
Mgr
E
Mgr
F
Bank 1
for Deposit
s
Bank 2
for Deposit
s
14
Case Study: Step 2Use Portfolio Tree to Pinpoint
Risk
Risk= 1.5%
Maximum Drawdown = -7.5%
Structuring risk at total fund level=1.5% (or $300 mn)
From asset allocation and style tilts (excludes managers)
From allocations to assets other than fund benchmark
Allocation decisions have historically had big drawdowns
Risk = 1.5%
Maximum Drawdown = -5.5%
Risk = 3.2%
Maximum Drawdown = -11%
Risk = 1.8%
Maximum Drawdown = -6.8%
Pension
Fund
15
Case Study: Step 3Ensure Decisions Generate
Returns
Excess Return = 0.5%
Excess Return = 0.5%
Excess Return = 0.5%
Total Excess = 2%
Local Bonds Foreign bonds
Mortgage/Corporate
GovernmentBonds
Bonds
Total Portfolio
Equities CurrencyCash
1-mo LIBOR
Asset allocation strategy
Country allocation strategy
Sector allocation strategy
+
+
Manager Excess Return = 0.5%
+
Internal/External Managers
16
Local Bonds Foreign bonds
Mortgage/Corporate
GovernmentBonds
Bonds
Total Portfolio
Equities CurrencyCash
1-mo LIBOR
Naïve Rebalancing
Let Portfolio Drift
Sector allocation strategy
Internal/External Managers
Case Study: Step 4Use Attribution to Improve
Decisions
Excess Return = 0.5%
Excess Return = - 0.5%
Excess Return =- 0.5%
Total Excess = 0%
+
Manager Excess Return = 0.5%
+
Too much focus on manager
selection
17
Case Study: Step 5Portfolio Rules: Web =
Transparency
Good decisions add returns and reduce risk
Rule Criteria: IF ((Price of Gold Today > Price of Gold a Year Ago)) THEN Allocate more to CashELSEIF ((Price of Gold Today < Price of Gold a Year Ago)) THEN Allocate less to Cash ELSE Do Nothing
Investment Idea: Cash vs Bonds: Apparently, the price of gold is a good indicator of whether funds should be invested in cash or higher duration assets (bonds). Rising gold prices are good for cash relative to bonds.
Performance Statistics:Excess Annualized Return: 0.61%Risk: 0.94%Information Ratio: 0.65Max Drawdown: -1.24% on 3/31/1999Success Ratio: 61.1%Confidence in Skill: 97.95%
Example:
*Purely hypothetical example and not an investment recommendation
18
Case Study: Step 6Deliver Detailed Reports Through
WebPerformance Measures
Benchmark
Strategy
Return % 6.47 9.25
Cum. Return % 36.79 55.64
Risk % 2.28 5.58
Return / Risk Ratio 2.84 1.66
Excess
2.78
18.85
3.55
0.78
Success ratio of the rule %
Average returns when positive %
Average returns when negative %
Max. consecutive periods of positive returns
Max. consecutive periods of negative returns
Max. relative loss for a period %
70 56.67
1.51 0.86
-1.02 -0.60
7 7
4 5
-2.54 -1.99
Success ratio of the rule %Success ratio of the rule %
Average returns when positive %Average returns when positive %
Average returns when negative %Average returns when negative %
Max. consecutive periods of positive returnsMax. consecutive periods of positive returns
Max. consecutive periods of negative returnsMax. consecutive periods of negative returns
Max. relative loss for a period %Max. relative loss for a period %
70 70 70 56.67 56.67 56.67
1.51 1.51 1.51 0.86 0.86 0.86
-1.02 -1.02 -1.02 -0.60 -0.60 -0.60
7 7 7 7 7 7
4 4 4 5 5 5
-2.54 -2.54 -2.54 -1.99 -1.99 -1.99
StrategyStrategyStrategy ExcessExcessExcess
19
1. Boards/Senior Managers can set fund structure
and monitor all decisions easily
2. Portfolio managers can use to make better
decisions
3. Middle office can use to evaluate
risks/performance
4. Web-technology for 3 Ms of Portfolio
Management: “Measure”, “Monitor” and
“Manage”
5. Mcube IT: Better Governance/Returns Through Web Applications
20
6. Summary & Conclusions Portfolio management = many decisions and requires many
groups to coordinate (board, front office, back office, external managers)
Silo systems make it difficult and expensive to manage fund
Web (internet/intranet) can overcome challenges
Can create customized portfolio structure, analysis and reports
Can create transparency for good governance, returns and risk management
AlphaEngineTM: adopt best practices quickly and easily
22
Rule Rule DescriptionCash vs. Bonds, based on Gold
Duration choice based on price of gold. If the spot price of gold is higher than it was a year ago, overweight cash, otherwise overweight bonds
Stocks vs Bonds: Halloween Effect
Stocks tend to underperform bonds between June and Sept - apparently works in 16 out of 18 stock markets, so underweight stocks during this period
Stocks vs Bonds: Inflation/Growth
Equities undervalued when inflation rises (Modigliani-Cohn insight); equities favored when industrial production is increasing
Market Volatility Low equity volatility in a rising stock environment is bullish for equities.Oil and Economy Rising oil prices affect the economy and tend to depress equities.P/E Ratio Rule Value rule for equity (vs FI) using the S&P 500 P/EFed Model When equity yield is higher than treasury yield then buy equity, else
sell equityUnemployment Rate Buy stocks when the unemployment rate is falling (good for economy)US/International: LIBOR Rates
Overweight equity market with the stronger currency (higher interest rate)
US/EAFE: Favor Underperformer
Overweight equity market which has underperformed over past year (i.e., buy the laggard)
5. Converting Ideas To Rules to Give Good Process and Add Value
23
Rule Performance (1998-2004)
Rule
Excess Annualized
ReturnInformation
RatioConfidence
in SkillSuccess Ratio
Ratio Good /Bad Risk
Max Drawdown
Cash vs. Bonds, based on Gold 0.04% 0.20 68.8% 56.4% 1.30 -0.44%
Halloween Effect 0.98% 0.88 98.0% 63.8% 1.42 -1.58%
Inflation/ Growth 0.50% 0.57 93.1% 79.7% 1.07 -1.31%
Market Volatility 0.12% 0.11 67.8% 56.4% 1.41 -2.74%
Oil and Economy 0.45% 0.57 91.6% 70.5% 1.16 -0.84%
P/ E Ratio Rule 0.17% 0.39 87.1% 50.0% 2.12 -0.80%
Fed Model 0.47% 0.50 91.8% 61.5% 1.43 -2.17%
Unemployment Rate 0.51% 0.61 94.1% 59.0% 0.99 -1.11%
US/ EAFE: LIBOR Rates 0.17% 0.43 84.7% 55.1% 1.07 -0.71%
US/ EAFE: Favor Underperformer 0.53% 0.95 99.3% 64.1% 1.33 -1.07%