2:10

Although obviously, the allocation to the equities of your home country

Â may be a very tiny fraction of your whole portfolio.

Â So, that's not the good benchmark to have a look at.

Â Clearly, we've also excluded as the right benchmark

Â the assets returns which a friend of yours has made.

Â As again in a competitor's, bank of wealth management

Â company this number may clearly be biased.

Â And also not a very good benchmark to use is the,

Â return you have achieved in the previous year, last year.

Â For it is a very important rule that you should never forget when you do investment

Â management is that past returns are no guarantee for future performance.

Â So clearly, get the, the last year's number away

Â from your brain as deciding that this is your given benchmark so

Â we know what the right benchmark isn't.

Â And probably, in this environment may be a good benchmark to look at

Â besides the market indices is the peer group is the competition.

Â You see here all these bars, they indicate the performance range and

Â we do this for one month one quarter, one year up to ten years.

Â So the height of the bars indicates the range.

Â For instance, you look at the last one, 10 years and

Â you see that the range is like from 2 to 22%.

Â So this is the scope of annual returns which

Â we have and the for the ten year return.

Â Then you see some colors here, and you see the first color and

Â it says 5 to 25 percentile.

Â What does it mean?

Â Basically we take the distribution,

Â we talk all the funds which enter the universe and we segment it.

Â Let's assume that we have 100 funds, so

Â here we will have the top 5 to the top 25 funds, okay?

Â 4:24

So the next category, you see it says 5th to 25th percentile,

Â that's the yellow part of the bars.

Â Here, we will find that up to the 25 best

Â performing managers up to 50, okay,

Â and, so on until the 95 to 75 returns.

Â And then we will find the bottom performing manager,

Â those who will be the last five in the range of this performance.

Â So now we're comparing our products, and it's highlighted here,

Â with this red square.

Â So product, and we see how it is positioned relative to this range,

Â and you see that over one year, it's within the top five performing funds.

Â It's almost at the top, very top.

Â This happens actually over two three five and ten years.

Â There you see that the square is clearly at the top,

Â so it's the best performing fund.

Â 5:32

So here, this is a simple way to illustrate,

Â how you may select a manager and indeed this is very crucial.

Â But we'll see in a minute that there are more sophisticated tools for

Â choosing managers when your operating in an absolute return environment,

Â i.e., there's no benchmark.

Â Here, there are actually two benchmarks which are indicated and sometimes,

Â when you select managers, hedge funds managers.

Â When you're running a fund of funds, a fund of hedge funds,

Â you put some benchmark just to have an idea of what the market has been doing.

Â Although, this is clearly just for reference because those managers are not

Â actively tracking or trying to deviate from a benchmark.

Â Actually, they never really look at the benchmark but

Â it's always interesting to put, say, the S&P 500, the performance

Â if you're talking about an equity long short type of hedge fund.

Â It's always good to have the S&P 500 as a reference, so this could be here for

Â instance Benchmark 1 and the MSCI World.

Â Which is the standard index which is used for world equities as Benchmark number 2.

Â So peer group analysis is clearly also very helpful to identify

Â the poorly performing managers.

Â Here, you see the same analysis which is done the same bars but

Â you see that actually the red square,

Â the product, does not perform as well as in the previous slide.

Â Here we, it's a different type of analysis because we see it by year and

Â we put the year first which is most relevant to us, it's the last year.

Â So here, assume we would be in 2012,

Â so the first year we would put on this chart is 2011.

Â There is something actually very interesting on this chart.

Â You see that in 2008 the square,

Â the red square is way at the bottom of the range of performance.

Â So it's clearly the least performing manager or

Â the worst manager of all the lot, say a hundred managers, if that's the universe.

Â And then you see that in 2009, he ends up being the first.

Â So you remember that cartoon I showed you actually was the opposite, right?

Â There was this really outperforming, award winning fund manager.

Â He was getting drunk in the bar because he had been fired by his boss because

Â the boss believes in mean reverting assets here it's somewhat the same.

Â Although, it could be the opposite story for if you've been the last of the hundred

Â performing managers in a given year, maybe next year you end up being the first.

Â And actually there is a simple explanation for

Â this which you find quite often in practice is maybe this manager

Â has been a bit early and putting more risk in his portfolio.

Â If you remember, actually 2008 was a severe down market.

Â This was the great recession, so markets went sharply down,

Â and they start bottoming out in March 09.

Â So maybe the manager here, he was right but too early and he put a lot of risk,

Â he tilted his equity portfolio towards growth stocks.

Â So in 08 that was a disaster because market went sharply down but

Â in 09 when markets turned around in March it went up like a rocket.

Â And so, there you want the best performing fund in 09 and

Â anyhow, this is typically the kind of analysis you do.

Â You look at the range, and

Â you see how a fund is positioned relative to the competition.

Â So peer group analysis may be performed using various criteria.

Â The compound annual returns, as we have just seen but also Drawdown analysis and

Â we'll see in the next video how useful this measure can prove.

Â Then we have the famous Sharpe ratio, the Sortino ratio,

Â which is more suitable for hedge funds.

Â And last but not least, we may also be interested to know the percentage of

Â months where the manager has been achieving positive returns.

Â So when is peer group analysis useful?

Â Well, basically, it's useful when you need to screen a given database

Â to spot the best managers to assemble in a given portfolio.

Â So it would be a portfolio of funds, either traditional or hedge funds.

Â So for instance, you may want to screen your database using

Â these various, quite restrictive criteria as I've indicated here.

Â So you look for a minimum three year track record,

Â that's pretty standard in the fund industry.

Â But then, okay, here it's becoming a little bit more selective,

Â you want managers who've been delivering 30% or

Â plus annually of the three not since inception.

Â And then, no losing months that may be tricky if you include the period of 2008.

Â Quite difficult to find a manager there who hasn't had a negative month.

Â And you bundle all this, we have a Sharpe ratio which would

Â be above a 1.4, so good luck to find that manager.

Â Maybe [LAUGH] the screening result will come with an output of zero, and

Â then you may need to refine your criteria.

Â But that's the idea anyhow

Â of how to use peer group analysis to spot the best performing manager.

Â So in the next video, we'll see two additional criteria,

Â a risk adjusted performance ratios, which may prove useful when

Â you need to select good managers among a universe of peers.

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Â