2:10

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

may be a very tiny fraction of your whole portfolio.

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

Clearly, we've also excluded as the right benchmark

the assets returns which a friend of yours has made.

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

company this number may clearly be biased.

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

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

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

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

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

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

we know what the right benchmark isn't.

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

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

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

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

So the height of the bars indicates the range.

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

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

So this is the scope of annual returns which

we have and the for the ten year return.

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

it says 5 to 25 percentile.

What does it mean?

Basically we take the distribution,

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

Let's assume that we have 100 funds, so

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

4:24

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

that's the yellow part of the bars.

Here, we will find that up to the 25 best

performing managers up to 50, okay,

and, so on until the 95 to 75 returns.

And then we will find the bottom performing manager,

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

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

with this red square.

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

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

It's almost at the top, very top.

This happens actually over two three five and ten years.

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

so it's the best performing fund.

5:32

So here, this is a simple way to illustrate,

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

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

choosing managers when your operating in an absolute return environment,

i.e., there's no benchmark.

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

when you select managers, hedge funds managers.

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

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

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

actively tracking or trying to deviate from a benchmark.

Actually, they never really look at the benchmark but

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

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

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

instance Benchmark 1 and the MSCI World.

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

So peer group analysis is clearly also very helpful to identify

the poorly performing managers.

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

you see that actually the red square,

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

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

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

So here, assume we would be in 2012,

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

There is something actually very interesting on this chart.

You see that in 2008 the square,

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

So it's clearly the least performing manager or

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

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

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

There was this really outperforming, award winning fund manager.

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

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

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

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

And actually there is a simple explanation for

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

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

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

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

and they start bottoming out in March 09.

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

he tilted his equity portfolio towards growth stocks.

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

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

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

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

You look at the range, and

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

So peer group analysis may be performed using various criteria.

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

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

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

which is more suitable for hedge funds.

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

months where the manager has been achieving positive returns.

So when is peer group analysis useful?

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

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

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

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

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

So you look for a minimum three year track record,

that's pretty standard in the fund industry.

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

you want managers who've been delivering 30% or

plus annually of the three not since inception.

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

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

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

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

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

then you may need to refine your criteria.

But that's the idea anyhow

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

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

a risk adjusted performance ratios, which may prove useful when

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

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