4.

0 Evaluation and commentaries for equity fund performance

For the purpose of evaluation and commentaries, the 3-years monthly data was extracted from
the Bloomberg Terminal and any relevant calculations were performed by using Microsoft
Excel. The Affin Hwang Equity Fund was selected for this assignment and the FBMKLCI
market index was chosen as a proxy to the aggregate Malaysian market portfolio.

The results of the computations were summarised in Table 4.1 below.

Equity fund Market portfolio

Summary of calculation
Affin Hwang Equity Fund FBMKLCI
Return 0.1146% -0.1412%
Beta 0.9799 1.0000
Standard deviation 0.0253 0.0216
Treynor -0.001332 -0.003863
Sharpe -0.051600 -0.179129
Jensen Alpha 0.002480
Risk-free rate CAPM
0.2450% -0.1334%

Table 4.1: Summary of calculation

4.1 Treynor ratio

The Treynor ratio for Affin Hwang Equity Fund calculated was -0.001332 whereas the Treynor
ratio for the aggregate market was -0.003863. This indicated that the fund manager for Affin
Hwang Equity Fund had performed better that market expectations.

A negative value of the Treynor ratio could be due to either a very poor performance, or a very
remarkable performance with low level of risk. For the case of Affin Hwang Equity Fund, it
was the former. To illustrate further, it can be inferred that the return of the fund, 0.1146%, is
way lower than the risk-free rate of 0.2450%, which caused the Treynor value to be negative.
While the risk level of the equity fund, as indicated by the beta value 0.9799, is slightly lower
than market beta (1.0000). From such interpretations can it be said that for Affin Hwang Equity
Fund, the performance is poor and investors could be better off investing in risk-free assets
such as Treasury securities to earn higher returns practically at zero risk.
However, if the Treynor ratio of Affin Hwang Equity Fund was compared to that of the
aggregate market, it can be seen that the equity fund had a higher Treynor measure than the
FBMKLCI market portfolio. In other words, the Affin Hwang Equity Fund had beaten the
market portfolio on a risk-adjusted basis.

SML
0.30%

0.20%
Rate of Return

0.10%

0.00%
0 0.2 0.4 0.6 0.8 1 1.2
-0.10%

-0.20%
Beta

Risk-Free SML Affin-Hwang Equity Fund

Figure 4.1: Security market line.

Though the Treynor ratio may appear to be negative, but it did outperform the market portfolio
based on the security market line (SML) as shown in Figure 4.1. It was evident that the SML
was downward sloping. This was due to poor market performance generating an average
monthly loss despite the risks taken.

The expected return calculated using the Capital Asset Pricing Model (CAPM) was -0.1334%.
Negative expected returns demonstrated a low market performance. Despite the poor market
conditions, Affin Hwang Equity Fund could manage to generate an average monthly return of
+0.1146%, which is about 86.95% higher than the expected return.

4.2 Sharpe ratio

The Sharpe ratio measures the return earned per unit of total risk. The Sharpe ratio for Affin
Hwang Equity Fund calculated was -0.051600, which is greater than the market Sharpe ratio
value of -0.179129. Therefore, the equity fund was said to be performing better than the
aggregate market portfolio. This is because for every unit of total risk, Affin Hwang Equity
Fund can generate lower loss (or higher return) compared to the market portfolio.
Again, the negative value of the Sharpe ratio is due to a higher monthly risk-free return than
the monthly fund return. It could seem to be less attractive to invest at a glance. Nevertheless,
the actual performance can be illustrated in a clearer way by plotting a capital market line
(CML) curve as shown in Figure 4.2 below.

CML
0.40%
0.20%
Rate of Return

0.00%
0 0.01 0.02 0.03 0.04 0.05 0.06
-0.20%
-0.40%
-0.60%
-0.80%
Standard Deviation

CML Affin Hwang Equity Fund

Figure 4.2: Capital market line.

Similar to the Treynor ratio, the Sharpe ratio calculated was negative, but it can be observed
from the CML curve that the Affin Hwang Equity Fund had performed better than market
expectation. Hence the higher Sharpe value for the fund compared to the FBMKLCI.

Furthermore, it was worth noting that the SML was downward sloping. This was due to poor
market performance generating an average monthly loss in spite of the risks in the market
portfolio. At the same level of risk as measured by the standard deviation, Affin Hwang Equity
Fund could earn a positive return, whereas the market portfolio suffers a loss, according to the
CML.

4.3 Jensen Alpha

The Jensen alpha calculated for Affin Hwang Equity Fund was 0.002480. The positive value
of the alpha suggested that the monthly return of the equity fund was higher than the expected
return as per calculated using the CAPM. This result is consistent with the Affin Hwang Equity
Fund portfolio plotting above the SML curve as depicted in Figure 4.1.

This positive alpha was also an important factor to get a Sharpe ratio higher than the market
portfolio used as benchmark (Kane, Marcus & Bodie, 2013). For this assignment, the
benchmark market portfolio refers to the FBMKLCI market index. The calculation results were
also consistent to the theory since the Sharpe ratio for the equity fund was indeed greater than
the Sharpe measure of the benchmark market portfolio.

To sum up, the manager of the fund was shown to have earned a return that is more than
sufficient to compensate the risk taken over the 3-year period of study.

4.4 Risk evaluation

Portfolio Affin Hwang Equity Fund FBMKLCI

Beta 0.9799 1.0000
Standard deviation 0.0253 0.0216

Table 4.2: Beta and standard deviation for Affin Hwang Equity Fund and FBMKLCI.

The standard deviation measures the total risk of a portfolio, unlike beta, which only takes the
systematic risk into account.

According to the beta values for both the fund and market portfolios, the equity fund exhibited
lower risk than the overall market portfolio. In simple terms, Affin Hwang Equity Fund could
be less volatile than the FBMKLCI market portfolio.

On the other hand, the standard deviation of Affin Hwang Equity Fund is higher than that of
the FBMKLCI. Hence, in terms of total risk, accounting for both the systematic and
unsystematic risks, the equity fund is riskier than the market. However, given the
diversification effect of a fund portfolio, the unsystematic risk component in the equity fund
can be diversified away.

4.5 Conclusory remarks

To put it in a nutshell, the Affin Hwang Equity Fund, in general, performed better than the
market portfolio, as indicated by the Treynor ratio, Sharpe ratio and the Jensen alpha. Meaning
that the equity fund managers had the ability to generate returns that outperformed the market
return on a risk-adjusted basis during the period of 3 years.

However, the equity fund may generate a return lower than the risk-free rate. This is reflected
in the negative values of the Sharpe and Treynor ratios. According to the risk-return tradeoff,
investor demand higher return for additional risks taken in their investments, with the risk-free
rate as the minimum acceptable return. As such, investors might be better off investing in risk-
free assets rather than the equity fund because they could have earned a higher return at lower
risk or no risk at all.

All in all, the equity fund may not be attractive to invest due to monthly returns lower than the
monthly risk-free rate. That being said, the benchmark market portfolio performed worse than
the equity fund. Investors may want to consider investing in the fund given its ability to
outperform the market. Then again, this could depend on investor sentiment and their risk
preferences, which is on a behavioural aspect of things.
Reference

Kane, A., Marcus, A., & Bodie, Z. (2013). Essentials of investments. (9th Ed.). New York, NY:
McGraw-Hill.