...INDEX FUNDS.. FM n FS PROJECT Active and Passive Management Before we get into the details of index funds, it's important to understand the two different styles of mutual-fund management: passive and active. Most mutual funds fit under the active management category. Active management involves the art of stock picking and market timing. This means the fund manager will put his/her skills to the test trying to pick securities that will perform better than the market. Because actively managed funds require more hands-on research and because they experience a higher volume of trading, their expenses are higher. Passively managed funds, on the other hand, do not attempt to beat the market. A passive strategy instead seeks to match the risk and return of the stock market or a segment of it. You can think of passive management as the buy-and-hold approach to money management. Defn- An index fund a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market condition. An index fund is a mutual fund which merely invests in the securities in the index. It is passive, in the sense that absolutely no effort is made to produce results better than the index. HISTORY: Index funds haven't been around forever -- how did they come about? Long ago, there was a student at the University of Chicago who studied modern ideas of finance taught...
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...An "index fund" describes a type of mutual fund or investment trust whose investment objective typically is to achieve approximately the same return as a particular market index. An Exchange Traded Index Fund is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETIFs experience price changes throughout the day as they are bought and sold. ETIFs, commonly referred to as index-based ETFs, are designed to track the performance of their specified indexes or, in some cases, a multiple of inverses of their indexes. Some people will agree that international investments is good. It allows investors to reduce the risk of their portfolio, but still allowing them with additional profit potentail. If you have the money to spend you would suggest that you invest in international investments. The return and the risk of an investment will depend on the actual currency that was used. The exchange Traded Funds passive nature is a necessity: the funds rely on an arbitrage mechanism to keep the prices at which they trade roughly in line with the net asset values of their underlying portfolios. For the mechanism to work, potential arbitragers need to have full, timely knowledge of a fund's holdings. ETFs are different from Mutual funds in the sense that ETF units are not sold to the public for cash. Instead, the Asset Management Company that sponsors the ETF (Fund) takes the shares of companies comprising the...
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...Should retail investors invest in index-tracker funds rather than actively-managed funds? As we all know that there are two main institutional investments which are index fund and actively managed fund. However, it seems to be a hard problem when a retail investor who wants to make an institutional investment, perhaps most of them do not know which one deserve their investment. Index funds refers to a kind of fund buying all or part of securities according to a standard formed by certain index, which aims to achieve the same level of returns of following the returns , and catch up the market growth at the same time. The index fund is a kind of passive management fund which is just opposite to the actively management fund. There are many characteristics of index fund. 1, Index Investing uses passive operation of tracking the benchmark index, which can make the costs of the fund's operating and transaction into a minimum. Portfolio strategy can be adjusted by According to the change of the index’s Composition, and what’s more, no fees will be paid about the investment research and analysis. So a lower management fee will be charged. On the other hand, the index investors tend to buy long-term holders of stocks, as opposed to active management by actively trading the formation of high turnover and must pay higher transaction costs, the investment of index funds does not take any adjustment to the investment portfolio initiatively, and the low cost of turnover transaction will...
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...Your 401(k) Account At East Coast Yachts 1. The implications that can be drawn from the given graph are: a. The actively managed funds have consistently outperformed the low fee index funds over the past decade of January 1977 through December 1986. b. Although the economic conditions over the decade in review is not mentioned in the case study, based on the fluctuations in the up and down cycles in the funds return suggest that it is following the economic cycle of the given time period. This trend is also apparent in the S&P 500 over the same time periods which offered a return of 1.09% over the decade. (Yahoo Finance, 2012). 2. The graph is not consistent with market efficiency. The efficient market hypothesis states that an investor cannot consistently outperform the market over a long period of time. To consider the market efficient all respected information should be made public and reflected in the current price of the asset (Ross, Westerfield, and Jaffe, 2010). According to the Case Study graph, the actively of the managed funds have consistently outperformed the broader market including the S&P 500 over the given time period. According to Ross, Westerfield and Jaffe (2010), Public skepticism of market efficiency is due to fluctuations in the day to day stock prices. These fluctuations however are not inconsistent with efficiency. Stocks in an efficient market will adjust to new market and economic data by changes in the stock...
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...Active Portfolio Management: Country vs. Sector Characteristics Executive Summary This project sets out to invest between 7bn and 9bn Euros for a large pension fund in European equities, chosen from the MSCI Europe Index, which also serves as the benchmark to measure performance against. Two portfolios need to be created, one to reflect asset allocation focussed on countries and the other on sectors, with the number of assets in each portfolio being no more than 150. Both portfolios must be actively managed, having at least an active risk of 3% when compared to the benchmark. To achieve this, I followed a three step top-down approach for our investment decision process. Firstly, I started with an analysis of the macroeconomic environment in Europe, followed by forming opinions on the relative strengths and weaknesses of the constituent countries and sectors, using the macro-analysis to determine which are most likely to perform well, given the long-run trends identified. Finally, I invested in all mid-cap companies within the selected countries and sectors, based on our judgement that middle sized firms are poised to prosper the most in this difficult economic environment, which I predict to remain tough for the foreseeable future. After finalising the initial portfolios in this way, I used BarraOne to optimise them. Following optimisation, I compared the risk profile of each portfolio to the benchmark. Our findings show that an actively managed portfolio, especially one constrained...
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...pertinence for TW to recommend to its clients the Research Affiliate Financial Index (RAFI) strategy over traditional indexing and over a more actively managed strategy. The RAFI is presented to Tower Watson as a new efficient B2B tool to invest, to help investment advisory firms to better establish their strategy. Indeed this index is based on fundamental criteria instead of market capitalization criteria (and thus it has an economic-centric view instead of a market-centric view). It has been proved through studies that portfolio weights decided by fundamentals are more reliable than by price. This interesting strategy, halfway between active and passive, has shown some significant higher returns over the past years, a fact that many pension funds have already noticed since the trend today for these funds is to invest more and more in passively traded funds. Even if such strategies seem to increase the investment exposure to market fluctuation they can still be considered as “smart-beta” strategies. In the end we will have understood that TW should follow that investment tendency and purchase RAFI’s license to offer a better performing investment strategy to its pension clients, keeping in mind that one should not invest all its AUM on a passive strategy but should rather diversify its portfolio between active and passive investment strategies. 2 Case Study Questions 1. What is the role of pension fund consultants such as Towers Watson (TW) towards their clients? What criteria...
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...Beta Management Company July 21, 2014 Variable Measures | |Vanguard Index 500 Trust |California R.E.I.T. |Brown Group | |Standard Deviation |4.61% |9.23% |8.17% | |Expected Return |1.10% |-2.27% |-0.67% | | |Vanguard & California R.E.I.T. |Vanguard & Brown Group | |Beta |14.121% |111.488% | |Correlation Coefficient |0.0735 |0.6562 | In evaluating the risk characteristics on a stand-alone basis, we can conclude that Brown Group offers a better return than California R.E.I.T. as well as a more stable standard deviation. When considering standard deviation as a measure of risk, the higher the deviation, the higher the risk that exists. Although the expected return for both Brown Group and California R.E.I.T. are both negative, Brown Groups expected return of -0.67%, in addition to its lower standard deviation than that of California...
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...Context: Alex Sharpe currently invests her children’s educational savings in Vanguard 500 Index Fund, which tracks the performance of S&P 500 and is passively managed. However, she is now considering switching her investment strategy to a more active one to achieve better outcomes. Hasbro, a toy manufacturer, and Reynolds, a tobacco firm, have come into Sharpe’s sight and she wants to choose one of them and invest a small proportion of equity funds in it. In order to select a more appropriate investment target, the following issues should be taken into consideration by Sharpe: 1) What are the risk-return characteristics of each stock 2) What are the impacts of either stock to the overall risk-return profiles of the equity portfolio Analysis: 1. Suppose Sharpe's position had been 99 percent of equity funds invested in the S&P500 and either one percent in Reynolds or one percent in Hasbro. Estimate the resulting portfolio position. How does each stock affect the variability of the equity investment? Which stock appears to be the riskiest? Let A (and B) be the portfolio with 99% of S&P 500 and 1% of Reynolds (and 1% Hasbro). | S&P 500 | Reynolds | Hasbro | Portfolio A | Portfolio B | Mean Return | 0.5743% | 1.8748% | 1.1838% | 0.5873% | 0.5804% | Std Dev | 3.6017% | 9.3665% | 8.1158% | 3.5933% | 3.6174% | According to our calculation, Portfolio A is a better choice with higher expected return (0.5873%) and lower standard deviation (3.5933%)...
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...Michael E. Porter) positioning 20 1 hypercompetition 20 operational effectiveness strategy 80 time-based competition reengineering productivity frontier strategic positioning 2 Lotus Notes 10 50 R.R. Donnelley & Sons Quebecor Color Press Flower Press Wo r l d Big learning organization 20 80 1995 7% 20 80 4.6% 3 competitive convergence zero-sum competition Southwest Airlines Company 20 70 80 Sony Canon Sega 20 80 Hirotaka Takeuchi Mariko Sakakibara 4 15 25 5 737 6 8 Ikea 5 Jiffy Lube International variety-based positioning mutual fund CarMax Circuit City Stores CarMax 6 Vanguard Group index fund Citibank 25 lender Bessemer Trust needs-based positioning Company 500 1:125 14 7 Carmike Cinemas 20 access-based positioning 2% 5% 1985 Strategy gies Competitive generic strate- Continental Lite 8 Delta Air Lines Continental Airlines Continental Lite JC J.C.Penney 17 NC- 17 Sears straddling trade-offs 9 Neutrogena Corporation PH Ivory Soap 10 Continental Lite CEO Continental Lite 1,000 Lite Continental 11 Corolla Corolla 10 Honda Motor Company Toyota Motor Corporation 737 10 1995 Civic fit 12 13 optimization of effort Bic Corporation product availability Gap simple consistency Gap Gap 3 Gap 3 7.5 ...
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...Ten Easy Steps to a Successful 401(k) For the majority of working Americans, the most common vehicle for owning mutual funds is through their employer's retirement plan, but very few people are making the most of this mainstay of retirement planning. Over the holidays, I had occasion to socialize with a group of very bright, successful people who are saving for retirement. We talked of many things, including their investments. And, sad to say, not one of them could coherently explain what he or she was doing, and why. Everybody, it seems, wants a quick, easy answer. And for those who are unwilling to take the trouble to figure out what they should be doing, the easy answers usually come from slick sales pitches and superficial media hype about the hottest stocks, funds and managers -- as if successful investing were a popularity contest. That's the bad news. The good news is that investors can manage their 401(k) plans to make their retirement money work much harder for them. Lots of people spend at least a dozen hours planning a vacation. I often wonder why so few are willing to spend a dozen hours managing their retirement assets. The following ten steps to 401(k) success shouldn't take more than a dozen hours. If you're young, they could put an extra $2 million into your retirement fund. Even if this job requires a total of 100 hours, that's a payoff of $20,000 an hour -- for work you can do at home in your spare time. Let's start with the most basic guideline of...
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...“This Above All: To Thine Own Self Be True” Chapel Address by John C. Bogle Founder and former Chairman, The Vanguard Group Episcopal Academy, Overbrook, PA December 2, 2004 Thank you, Christopher Bogle Webb St. John, my wonderful grandson, for that lovely introduction. And thank you, Nicole Spagnola, long-time friend of my superb granddaughter Ashley St. John, for inviting me to join you and your upper school classmates today. While I’m proud of my reputation, I confess to you all—this may surprise you—that I’m a bit intimidated to stand here before you today. While many of your parents may know a bit about me and Vanguard, you are probably wondering just what this ancient soul can possibly say that would even vaguely interest you. Why would I think that? Because I was actually your age once, trying to find my way in life, in school, and with my family and friends. My hesitancy is illustrated by this story that I heard last year in a sermon by a Scottish preacher: A father is rapping on his son’s door, trying to wake him up to go to school. Through the closed door, the son shouts: “I’m not going to get up, and I’ll give you three reasons why. “One, I hate school. “Two, the children tease me. “Three, because education is boring.” The father shouts right back: “You must get up, and I’ll give you three reasons why. “One, it’s your duty. “Two, because you’re 45 years old. “And three, because you’re the headmaster.” Well, despite my concern about “relating” to you young people...
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...Rationalist vs. Behavioralist Paradigm Problems 1. During the last five years, your instructor has discussed the emerging field of behavioral finance with many colleagues. The most common reaction has been for those colleagues to smile and say, "Behavioral finance? That's an oxymoron." Oxymoron is defined as a combination of contradictory or incongruous words (e.g. cruel kindness). Explain this reaction using a) the concept of paradigm and b) attributes of the behavioral and rational paradigms. a) According to the concept of a paradigm, someone in finance would operate on a set of principles that their work is based upon. It is the method by which they analyze their data. Under this philosophy the statement is considered an oxymoron because under the colleagues point of view they view those that study finance one that does not act on behavior. They assume that anything that involves finance automatically dictates numbers and thinking ogically in steps. It is not until there is a shift in the paradigm and that they see it from a finance position do they see the possibility of a behavioral implications. b) According to the rational paradigm, one that is interested in finance is well educated, has some predisposition towards the acclimation of wealth and is focused on the market. By the definition this means that they are rational and not behavioral. 2. The Structure of Scientific Revolutions triggered diverse reactions. Most “hard” scientists shrugged...
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...management are the two classes in which the investment strategies are categorized. Active management is whereby financial professionals try to outperform a specific benchmark. Passive funds like the exchange traded funds (ETFs) are whereby the index is tracked with no active stock selection (Barr, 2009). The risk of a failing a benchmark or index can be reduced through passive investment. Passive investment also reduces the cost. The active investment has the potential of boosting returns through outperforming some benchmarks. However, there are increased risks and also there are no guarantees that the benchmarks will be exceeded or matched. In a well-diversified portfolio, active and passive investment can flourish. The role of ETFs which is an important building block for dynamic and diverse portfolios is to offer access to equities and fixed income across large developed economies and the emerging markets. ETFs can be traded like share, thus similar liquidity is offered hence it allows the investor to adjust to their portfolios. In the context of investors’ specific objective, active management allows risks to be managed properly (Barr, 2009). Passive funds don’t neutralize risks, but they introduce benchmark risks and concentrated risks to investors and in relation to exchange-traded fund. The concept of market efficiency holds that there can be no over-valued or under-valued securities because of the market factors of discount which at all times influence the pricing of...
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...management are the two classes in which the investment strategies are categorized. Active management is whereby financial professionals try to outperform a specific benchmark. Passive funds like the exchange traded funds (ETFs) are whereby the index is tracked with no active stock selection (Barr, 2009). The risk of a failing a benchmark or index can be reduced through passive investment. Passive investment also reduces the cost. The active investment has the potential of boosting returns through outperforming some benchmarks. However, there are increased risks and also there are no guarantees that the benchmarks will be exceeded or matched. In a well-diversified portfolio, active and passive investment can flourish. The role of ETFs which is an important building block for dynamic and diverse portfolios is to offer access to equities and fixed income across large developed economies and the emerging markets. ETFs can be traded like share, thus similar liquidity is offered hence it allows the investor to adjust to their portfolios. In the context of investors’ specific objective, active management allows risks to be managed properly (Barr, 2009). Passive funds don’t neutralize risks, but they introduce benchmark risks and concentrated risks to investors and in relation to exchange-traded fund. The concept of market efficiency holds that there can be no over-valued or under-valued securities because of the market factors of discount which at all times influence the pricing of...
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...Performance Evaluation of Finnish Mutual Funds 2014 TABLE OF CONTENT 1! ABSTRACT ............................................................................................... 1! 2! INTRODUCTION ..................................................................................... 2! 2.1.! Purpose ................................................................................................................. 2! 3! THE FINNISH FUND MARKET .............................................................. 3! 4! PREVIOUS RESEARCH ........................................................................... 5! 5! METHODOLOGY ..................................................................................... 8! 5.1.! Standard Deviation .............................................................................................. 8! 5.2.! Beta ....................................................................................................................... 8! 5.3.! Jensen Alpha ........................................................................................................ 9! 5.4.! Sharpe Ratio ....................................................................................................... 10! 5.5.! Treynor Ratio ..................................................................................................... 10! 5.6.! Hypothesis ........................................................................................................... 11! ...
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