2.1.1 Alpha for the long Term Investment
2.1.2. Portfolio Characteristics
7 – Conclusion and Recommendations
1 – Introduction
1.1. Overview
The asset management for high net worth individuals is undergoing a shift period. Some Private family funds are separated based on the knowledge of the customers and their asset management sections. There are so many activities, so the focus in this project is portfolio and asset management. At the same time, the mutual fund indicates massive transformation in the asset management industry (Koijen, Brandt & Binsbergen, 2008). New funds have been introduced and they demand difficult choices between the investors because the asset management sector shifted from the focal point of the wise investment groups from long term portfolio management to ‘star’ funds or speculations on short term investments.
This portfolio in this study is for a high net worth individual who intends to choose between wealth based asset investment and the non wealth based assets. The results of the performance of the two portfolios will guide the choice of the investor.
1.3. Problem definition
As it is clearly evident in the previous section, there is a likelihood that a significant driver of the increase in the level of assets being managed is the outstanding performance that they produced as opposed to the large asset portfolios. Tis raises two fundamental questions as shown below:
1.4. Relevance
This study is essential as it gives rare attention to the study of out-performance in the general asset funds. The capacity of the mutual fund sector is also demonstrating the relevance of this assessment. Since the asset management manage by manage very large amount of wealth and portfolio, they require special skills to benefit special investors such as the retirees. It is therefore essential to allocate money according to the information about the customers (KYC - know your customers, the qualification of customer, the knowledge about the customer’s profile of risk against returns. The investment mandate is to provide the classes of wealth and portfolios, the equities, bonds, the commodities, and foreign exchange deals, real estate, ETF, HF Funds of Funds strategies / styles, long-short, trading and the emerging market.
1.5. Results
There are three types of asset management investments in this study, long term, medium term and short term. The expectation is that the medium term will show better performance of the asset investment funds, than the Non-asset funds investment funds. The short term investments present more random results. When shorter investments are estimated depending on the definite period under the research. There is no steady persistence in the asset fund management studied over the periods being evaluated. Many driving factors of the performance have no statistical evidence that there can be an out-performance. Still, it is apparent that the turnover ratio is an exceptional factor in generating greater values of alpha. The asset funds are found to be charging higher costs compared to the Non-asset funds fund investments.
2 - Implementation / Strategy
This study measures the variations in performance of the asset investment and the Non-asset funds funds using a model of three parameters. The model is sufficient not only for assessing the wealth returns from the funds, but also in the consideration of whether the asset fund performance was adequate and justified the risk that the wealth manager takes. The model show the that the mutual funds are outperformed by most of the short term funds. The model appropriately captures the time value of money as a representative of the risk free rate (Rf(t), which compensates the returns on the wealth investments. The model uses the CAPM method, part of which represents the risk reward as desired by the investors for having decided to invest in the wealth (Goyal & Wahal, 2008). The added risk is computed by the risk value (βmi), which does comparison of the return on the wealth and portfolio against the market-based premium (Rm(t) – Rf(t)) within a given period. The real CAPM formula is stated as shown below:
Ri(t) = βmi(Rm(t) – Rf(t)) + Rf(t) ------------------EQ 1
The model in EQ 1 above is extended after an observation that the empirical average returns on the wealth in short term asset funds had high market equity than the forecast equities by the CAPM model. The observations leading to the equation suggested that the capacity of the ratios exposed the asset funds to systematic risks, which the CAPM beta did not show. It means the value stocks performed better than the growth stocks and the small wealth stocks did better than the large wealth stocks on a standard occasions.
2.1. Investment Mandate
This study aims at building a portfolio, suitable for a wealth management client. The focus of this study is the management of wealth portfolio. It therefore selects 12 asset asset management and 12 Non-asset funds asset management. This selection is principally conducted from the investigation on the information about assets on the on line media. The asset and non asset funds management were chosen due to the availability of information about the assets. In that case, it is possible to re-evaluate the structure of wealth ownership for the the high net worth individuals, family offices and standard private client, with a portfolio of between £1m and £20m.
Since all the asset and non – asset funds were traded on the exchange, it is possible to generate the share prices using Blomberg as shown in table 1 below.
Table 1: Descriptive statistics
Group
Number of funds
Mean Return / week
St. Dev
Max
Min
Asset Funds
140
0.000937
0.025971
0.082688
-0.147607
Non-asset funds
2300
0.000338
0.021047
0.077492
-0.157379
All
2440
0.001275
0.047018
0.078241
-0.204986
As it is evident from table 1 above, the return per week for the asset fund is 0.000937%, while the return per weak for the Non-asset funds 0.000338%. The descriptive statistics are assessed over the overall sample, in the range between 2000 and 2010. The table shows the return per week for the asset funds being of better performance than the Non-asset funds. This is in agreement without previous prediction. Nevertheless, the asset returns are exposed to greater risks owing to the greater standard deviation in stead of the asset funds. The drawback risk in the asset funds is also larger due to the minimum in the asset funds being -0.147607%. at the same time, the advantage and the benefit of the asset funds is greater owing to the maximum of 0.082688% against the the maximum for the non asset funds of 0.77492%. table 2 below shows the other relevant information not captured in the previous analysis.
Table 2: Other relevant statistics
Fund size
Fund-age
Manager tenure
Manager’s Fee
Exposure ratio
Turnover ratio
Asset Funds
Mean
£ 602,000,000
7.8
4.1
1.44
2.08
167.33
StdDev.
£ 2,060,000,000
5.7
3.4
0.33
1.13
188.04
Max
£ 20,200,000,000
25.2
21.6
2.02
6.37
952.73
Min
£ 483,224
1.2
0.4
0.36
0.00
0.00
Non-
Mean
£ 277,000,000
9.5
4.7
1.08
1.37
126.10
asset Funds
StdDev.
£ 617,000,000
7.6
4.5
0.55
0.64
155.91
Max
£ 12,000,000,000
80.0
39.6
4.55
6.67
1596.86
Min
£ 68
1.4
0.0
0.00
0.00
0.00
All
Mean
£ 290,000,000
9.5
4.6
1.17
1.46
129.13
StdDev
£ 830,000,000
7.4
4.6
0.57
0.75
162.43
Max
£ 24,200,000,000
80.0
39.8
4.30
6.47
1595.83
Min
£ 68
1.0
0.0
0.00
0.00
0.00
Table 2 above presents an impression of the relevant statistics. From a quick view of the table, there is a significant result, which is the mean size of the wealth (funds) for the asset funds of £ 602,000,000. From our previous projection, the assets provide less funds than the Non-asset funds on normal occasions. In this section, we have produced the analysis of the fund size for the asset funds in greater details.
2.1.1 Alpha for the long Term Investment
Table 3 below provides the outcome of the long term wealth investment for a ten year period. We consider this period as a time series analysis for the long term portfolio management.
Table 3: Alpha for Long term Investment
Table 3: Comparing the alpha for the ten years’ period
Testing for Equity in Means within the Series
Sample: 12344
Included observations: 2344
Method
df
Value
Probability
T - test
1638
-27.16258
0.0000
Category Stat
Variables
Count
Mean
Std. Dev.
Std. Err. of Mean
ALPHA-10YRS-ASSET
140
-0.032307
0.021000
0.0017640
ALPHA - 10YRS - NONASSET
1400
-0.048243
0.002695
0.0000697
All
1540
-0.080550
0.023095
0.0018337
From a quick view of table 3 above, it is clearly evident that the asset funds had better performance during the ten years compared to the non asset funds for the same period. The mean alpha during the period is negative for both the asset funds and the non asset funds. However, the mean for asset funds is less negative when compared with the negative alpha of the Non-asset funds funds. The variance in the performance is statistically significant. This implies that in the long term investment in asset funds, there is a better performance compared to the Non-asset funds. In the same way, when the high net worth individuals will want establish a longterm investment, it is extremely fascinating to think about certain asset funds for the wealth investment portfolio.
Table 4: Alpha in Medium Term
Comparing the values of alpa for the five years period between 2005 and 2010
Testing Equity of Means in the Series
Sample: 1 2340
Included observations: 2340
Method
df
Value
Prob
T - test
1815
18.113
0.0000
Category Stat
Variable
Count
Mean
StdDev.
StdErr. of Mean
ALPHA - 5YRS - ASSET
140
-0.034561
0.022624
0.001897
ALPHA - 5YRS - NONASSET
1670
-0.049355
0.007206
0.000174
All
1810
-0.083916
0.029830
0.002071
Table 4 above gives the outcome of comparing the alpha for the five years between the two categories. The table presents the asset funds having performed better for the 10 years than the Non-asset funds for the same period. The alpha for the two categories of funds, the assets and the Non-asset funds are of negative values. However, the mean for the asset funds investment is negative but less in the during the chosen time frame. The variation between the means is statistically considerable. The results show that for the medium term assets and the investment in the asset funds had better advices. The high net worth individuals can consider investing in the asset funds, as opposed to the Non-asset funds.
To do an advanced analysis on the performance of the asset and non-asset funds in the medium term, we take the values of the three year performance of the funds as shown in table 5 below.
Table 5: Comparing the alpha for three years
Testing for Equity of the Means in the Series
Sample: 1 2340
Observations: 2340
Method
df
Value
Probability
T - test
2053
8.490797
0.0000
Category Stat
Variable
Count
Mean
StdDev.
StdErr. of Mean
ALPHA - 3YRS - ASSET
140
-0.014731
0.009222
0.0007720
ALPHA - 3YRS - NONASSET
1910
-0.018309
0.004340
0.0000994
All
2050
-0.022040
0.013562
0.0008714
From the results in results in table 5 above, the asset funds have again indicated better performance compared to the outcome of the Non-asset funds by the look of the means. The outcome shoes the statistical variation in the three years performance. Additionally, for the shorter period, the asset fund and the non asset funds in the wealth portfolio management show negative alpha for the chosen period. The outcome for the Non-asset funds are poorer in performance than the asset funds. The Non-asset funds exhibit an alpha with more negativity (Ferris & Yan, 2009). When the investor consider an investment in the shorter term, like the three years, then the asset funds ought to be of essence in the distribution of the asset. This is because we have demonstrated better advanced performance in the asset funds for this period of three years.
2.1.2. Portfolio Characteristics
In this section, we study the possible drivers of the alpha, not mentioned in the previous sections. These aspect are excluded from the the cross-sectional assessment, due to the various drivers of alpha. The chosen drivers are assessed for every per wealth manager in stead of per fund. We therefore do the additional regressions using the fund level.
Other feature that can be linked to each individual fund characteristics also shows a control on the performance of funds (Eggins, 2008). Consequently we have gathered the individual information concerning the size or the capacity of the funds, the age of the funds, team management, the service term (tenure) of the manager and the earnings ratio. This study also collected details about the costs of a fund considering the expenditure ratio and the asset or wealth management charges.
Table 6: Cross-Sectional Analysis of Alpha for the period of 10 Years
Dependent Variable: ALPHA – 10 - YRS
Method Used: Least Squares
Sample: 1 2364
Observations: 551
Coefficient
Std. Error
t-Statistic
Prob.
C
-0.045153
0.003117
-14.50445
0.0000
LOG_FUND SIZE
-0.000245
0.000164
-1.476368
0.145
FUND-AGE – IN - YEARS
-0.000107
0.0000394
-2.725154
0.0065
TEAM - DUMMY
-0.000349
0.000543
-0.64245
0.5203
MANAGER - TENURE
0.000034
0.000032
0.559155
0.572
TURNOVER - RATIO
0.0000043
0.000037
2.415056
0.0163
EXPENSE - RATIO
0.002068
0.000664
3.11083
0.0022
MANAGEMENT - FEE
-0.00038
0.00083
-0.47713
0.6335
R-squared
0.059955
Mean dependent var
-0.04755
Adjusted R-squared
0.0478337
S.Ddependent var
0.00624
Fund Size
The fund size provides the positive as well as the negative connection with the alpha. The outcome of the fund size is not statistically important. A greater fund size possibly leads to greater economy of scale, due to the transaction cost being relatively low. On the other hand a larger fund suffers from lack of flexibility. From these results, it is not easy to decide on the effect for decision.
Table 7: Five Years Cross-Sectional Analysis of the alpha alpha
Dependent Variable: ALPHA – 5 - YRS
Method Used: Least Squares
Sample : 1 2364
Observations: 602
Coefficient
StdError
t-Statistic
Prob.
C
-0.044786
0.00419
-10.89777
0.0000
LOG - FUND SIZE
-0.000312
0.000213
-1.445332
0.143
FUND-AGE – IN - YEARS
-0.0000754
0.0000472
-1.574436
0.114
TEAM - DUMMY
0.000455
0.000713
0.6425507
0.525
MANAGER - TENURE
-0.0000336
0.0000884
-0.374457
0.705
TURNOVER - RATIO
0.0000007
0.0000023
0.364491
0.714
EXPENSE - RATIO
0.002374
0.000873
2.645898
0.0033
MANAGEMENT - FEE
-0.001062
0.001075
-0.99106
0.3245
R-squared
0.029333
Mean dependent var
-0.0489
Adjusted R-squared
0.01744
S.Ddependent var
0.0084
Fund Age
The dependent parameter (fund age) provides a negative and positive alpha values during the five years period of analysis. The statistical significant outcome is the outcome for the ten years, during which the negative relationship is seen. Because the outcome show positive and negative values, it is possible that the age of the fund is not a significant driver of the fund performance.
Table 8: Cross-Sectional Evaluation of the alpha three years period
Dependent Variable: ALPHA – 3 - YRS
Method: Least Squares
Sample: 1 2364
Observations: 691
Coefficient
Std. Error
t-Statistic
Prob.
C
-0.015178
0.00234
-6.9149
0.0000
LOG - FUND SIZE
-0.002181
0.00316
-1.55756
0.126
FUND-AGE – IN - YEARS
0.0000361
0.00043240
0.256137
0.738
TEAM - DUMMY
-0.000428
0.00482
-0.596456
0.5409
MANAGER - TENURE
-0.0005234
0.005469
-0.495529
0.653
TURNOVER - RATIO
0.0000605
0.0005012
0.392259
0.69355
EXPENSE - RATIO
0.001244
0.0003890
2.3322062
0.4197
MANAGEMENT - FEE
-0.000392
0.0002188
-1.622305
0.0524
R-squared
0.013343
Mean dependent var
-0.01572
Adjusted R-squared
0.00322
S.Ddependent var
0.00449
The management tenure for the investment is dependent variable and is negative and very small so the values are not statistically significant.
Table 9: Cross-Sectional Analysis of the alpha for one year
Dependent Variable: ALPHA - 0910
Method: Least Squares
Sample: 1 2364
Obs: 752
Coefficient
Std. Error
t-Statistic
Prob.
C
-0.004494
0.0583
-1.04765
0.3125
LOG - FUND SIZE
0.000305
0.00419
0.973087
0.3313
FUND-AGEIN - YEARS
-0.04030
0.00507
-0.276756
0.782
TEAM - DUMMY
0.00533
0.0039
2.54255
0.01407
MANAGER - TENURE
0.000688
0.003208
1.864166
0.06328
TURNOVER - RATIO
-0.00053
0.000405
-0.666628
0.50346
EXPENSE - RATIO
0.0056478
0.003221
2.166691
0.034509
MANAGEMENT - FEE
-0.006115
0.03265
-0.4351685
0.66561
R-squared
0.026697
Mean dependent var
0.00278
Adjusted R-squared
0.017539
S.Ddependent var
0.003237
Turnover Ratio
The Turnover ratio exhibits positive association with the alpha values in the long term funds investment. This outcome is statistically important, but the outcome is not strong enough. For the moderate and the short term investment, the average also gives a positive association with the alpha (Cremers & Petajisto, 2009). However, th results indicate no statistical consequence. The turnover ratio is an essential driver of the alpha, considering the high value of trading that causes a high turnover ratio. The fund manager that can be classified as a wealth picker and will demonstrate high trading actions.
Table 10: Cross-Sectional Assesemnt of Alpha one Year
Dependent Variable: ALPHA - 2010
Method: Least Squares
Sample: 1 2364
Included observations: 773 after adjustments
Coefficient
StdError
t-Statistic
Prob.
C
-0.000911
0.00262
-0.72204
0.4705
LOG - FUND SIZE
0.000565
0.0054663
1.00418
0.3161
FUND-AGEINYEARS
0.004057
0.0003138
0.45763
0.656
TEAM - DUMMY
0.004307
0.003216
3.2658554
0.511
MANAGER - TENURE
0.003251
0.000568
0.93556774
0.3592
TURNOVER - RATIO
0.004001
0.006007
0.243438
0.851
EXPENSE - RATIO
0.000313
0.0067282
2.525734
0.517
MANAGEMENT - FEE
-0.04335
0.05339
-0.491
0.3525
R-squared
0.01435
Mean dependent var
0.05144
Adjusted R-squared
0.024356
S.D dependent var
0.00598
As indicated in the assessment in table 10 above, the greater expense ratios in the wealth management and the portfolio optimization is not driven by the many transaction costs in the asset funds. In stead, it can be viewed that in the asset investment, managing the company is easier in the efficient and the cost effective method (Ramos, 2009). At the same time , the larger Non-asset funds wealth management is of benefit when considering the economies of scale as a result of their sizes. Our outcome can not show the cost competent structure in the wealth management and so we expect that the low expenditure ratios of the Non-asset funds asset management is essentially because of the greater economies of scale.
Table 6.18 - Descriptive statistics management fee
MNGMT - FEE - ASSET
MNGMT – FEE – NON - ASSET
Mean
1.45
1.07
Median
1.54
1.13
Max
2.55
4.55
Min
0.35
0.05
StdDev.
0.35
0.55
Skewness
-1.16
0.26
Kurtosis
4.62
3.900674
Jarque-Bera
39.34
66.75
Proba
0.01
0.00
Sum
169.95
1591.56
Sum SqDev.
13.07
453.5617
Obs
117
1484
Table 6.19 - Comparison of management fee
Test for Equality of Means Between Series
Sample: 1 2500
Included observations: 2500
Method
df
Value
Probability
t-test
1599
7.320331
0.0000
Category Statistics
Variable
Count
Mean
Std. Dev.
Std. Err. of Mean
MNGMTFEEASSET
117
1.452222
0.335937
0.031057
MNGMTFEENONASSET
1484
1.07248
0.553029
0.014356
All
1601
1.100231
0.549028
0.013721
Within the documented cross-sectional analysis, there is a documentation of the positive connection between the expenditure ratio and the fund alpha. The time-series study indicated that the overall asset funds were better in performance compared to the Non-asset funds (Benson, Tang & Tutticci, 2008). The comparison of the structure of the expenditure gives a clear impression that the expenditure ratio of the asset funds is generally greater than that of the Non-asset funds. The returns that acts as the foundation of the alpha computation is not covered in the costs as well as the expense ratio and has a great effect on the last return from the portfolio.
7 – Conclusion and Recommendations
The outcome of this study shows that the asset funds (wealth fund) has more efficient performance than the non-wealth funds for the last 10 years. The mean alpha during the 10 years period is negative for the wealth based funds as well as the non-wealth based funds. Nevertheless, the mean of the asset funds was found to be negative but lower in negativity than the negative alpha values of the Non-wealth funds. In that regard, the long term asset funds demonstrated better performance than the Non-wealth (non-asset) funds. At the same time, the short term period gave better better performance as illustrated. In the 3 years period, the the review showed the average performance of the asset and the Non-asset funds funds generating negative alphas. Still in this scenario, the wealth – based fund investment performed better.
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