Evaluating manager strategy

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sfad

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The strategy of the below asset manager is to rely on active interest rate management decisions to outperform the benchmark.
Period return (%)
Interest rate effect 1.37
Interest rate management effect 0.16
Other management effects 0.03
Trading Activity return 0.10
Total Return 1.66
We are asked to evaluate the extent to which their performance can be attributed to their strategy.
Answer says that very little of the performance results can be attributed to relying on active interest rate management. So the 0.16% of performance from interest rate management (which is 0.16/1.66=9.6% total) means they haven’t stuck to their strategy. At what % threshold would we say they have stuck to their stated investment strategy?
 
interest rate management effect should be greater than the “interest rate effect”.
I think that can be used as a rule of thumb. the active bets made to “manage” interest rate - should be greater than the natural effect of interest rate changes.
 
cpk123 wrote:
interest rate management effect should be greater than the “interest rate effect”.
I think that can be used as a rule of thumb. the active bets made to “manage” interest rate - should be greater than the natural effect of interest rate changes.
Click to expand...
I wouldn’t say greater, but at least not zero.
 
MrSmart wrote:
cpk123 wrote:
interest rate management effect should be greater than the “interest rate effect”.
I think that can be used as a rule of thumb. the active bets made to “manage” interest rate - should be greater than the natural effect of interest rate changes.
Click to expand...

I wouldn’t say greater, but at least not zero.
Click to expand...
+1 agree
 
not sure what you mean by at least not zero - to both Coke and MrSmart.
You have a situation in the example where Interest Rate effect is 1.37%, Interest Rate Management is 0.16%. Did the manager live up to his mandate? No. My reasoning - if his strategy had been good - he would have been able to produce a Interest Rate Management effect that would work in conjunction with the interest rate effect - and produced > 1.37% to his client in total.
It was 0.16% which is NOT ZERO.
So can you care to clarify what you mean when you state the above. I am confused. I believe he SHOULD HAVE > 1.37% on average.
 
Is the first return a benchmark return, or is this a total return breakdown of the portfolio?
The interest rate managment effect is the excess above the normal interest rate effect, as I understand, being the same number as the one above it will not give a zero active interest rate management return, but simply double-counting.
I might be wrong.
 
cpk123 wrote:
not sure what you mean by at least not zero - to both Coke and MrSmart.
You have a situation in the example where Interest Rate effect is 1.37%, Interest Rate Management is 0.16%. Did the manager live up to his mandate? No. My reasoning - if his strategy had been good - he would have been able to produce a Interest Rate Management effect that would work in conjunction with the interest rate effect - and produced > 1.37% to his client in total.
It was 0.16% which is NOT ZERO.
So can you care to clarify what you mean when you state the above. I am confused. I believe he SHOULD HAVE > 1.37% on average.
Click to expand...
Yes the difference should be at least 0, in order to beat the benchmark.
 
His total Return was 1.66% MORE than the benchmark.
The 0.16% was the proportion of the 1.66% attributed to Interest Rate Management effect, compared to 1.37% for the Interest Rate Effect.
This is the way the table is constructed in the Book as well.
Now what do you say? Is the 0.16% good enough???
 
cpk123 wrote:
His total Return was 1.66% MORE than the benchmark.
The 0.16% was the proportion of the 1.66% attributed to Interest Rate Management effect, compared to 1.37% for the Interest Rate Effect.
This is the way the table is constructed in the Book as well.
Now what do you say? Is the 0.16% good enough???
Click to expand...
Im getting confused, let me check how it is written. Sorry. Im not catching up.
As I first thought he was a bad manager since he had 0.16% vs 0.0137, this difference as i understand must be at least 0.
 
cpk123 wrote:
His total Return was 1.66% MORE than the benchmark.
The 0.16% was the proportion of the 1.66% attributed to Interest Rate Management effect, compared to 1.37% for the Interest Rate Effect.
This is the way the table is constructed in the Book as well.
Now what do you say? Is the 0.16% good enough???
Click to expand...
Forgive me master cpk123 for I have sinned.
 
sfad wrote:
The strategy of the below asset manager is to rely on active interest rate management decisions to outperform the benchmark.
Period return (%)
Interest rate effect 1.37
Interest rate management effect 0.16
Other management effects 0.03
Trading Activity return 0.10
Total Return 1.66
We are asked to evaluate the extent to which their performance can be attributed to their strategy.
Answer says that very little of the performance results can be attributed to relying on active interest rate management. So the 0.16% of performance from interest rate management (which is 0.16/1.66=9.6% total) means they haven’t stuck to their strategy. At what % threshold would we say they have stuck to their stated investment strategy?
Click to expand...
Another example from a mock:
Return (%)
Interest rate effect 3.54
Interest rate management effect 0.12
Other management effects 0.32
Trading activity return 0.13
Total return 1.11
Strategy is to add value by identifying undervalued securities/sectors. We are asked to evaluate whether performance is consistent with strategy.
The answer says since manager has generated a 0.32% return from other management effects this is consistent with their stated strategy to add value by identifying undervalued securities/sectors.
Here, 0.32% of the total 1.11% is considered consistent with strategy, but in the previous example, 0.16% of the total 1.66% is not consistent with strategy.
So how should we approach this?
 
the 0.16 / 1.66 is < 10%
0.32 / 1.11 is > 30%
however the 0.32 part, if I am recall is from 2011 exam - where they did not break down the other management effects completely. There are 3 categories (Sector / quality, Bond selection, Transaction costs) inside there and I guess they are asking you to know Other Management effects is the category you are to look for in this case.
 
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