Webinar on “Investment Operations Outsourcing, What CIOs should know!”

Our webinar on “Investment Operations Outsourcing, What CIOs should know!” held on September 15th, 2009 was based on the changing trends in investment operations, which the companies have begun outsourcing to specialized service providers. The webinar generated fifty leads - a good number to start with.

The guest speaker at the webinar was Dayle Scher, Research Director, Investment Management, TowerGroup. Dayle shared her knowledge of the market forces that are leading to Investment Operation Outsourcing. She remarked that, until the year 2007, very few companies outsourced their investment operations. But after the subprime crisis, many companies are finding it a useful cost cutting solution.

Patrick Schena Principal, Investment Management Services, Headstrong, discussed the framework for successful outsourcing of investment operations. He laid down the pros and cons of outsourcing for various cadres of companies/operations. He also discussed key drivers to outsourcing operations dealing with the back office cost structure and changing trends in technology. He emphasized the role of strategic planning that acts as the basis for outsourcing decision making process.

Our second guest speaker at this webinar was Ashley L. Burkhardt Duva Chief Operating Officer & Chief Compliance Officer, Strategic Global Advisors, LLC, an investment management firm. She shared her experiences with outsourcing and explained how risks can be mitigated and the whole process made more secure for companies.


Click here to view the webinar recording.

Portfolio Performance Measurement

To calculate the performance of a fund manager, first step is to calculate the portfolio return. There are various methods which can be used by the fund managers, two main methods are:-

• Weighted Return – This is also known as internal rate of return. This is the return which will make the net present value of the investment as zero. An assumption is made that the portfolio will generate the same return over the period. Since there are many cash inflow and outflow in a portfolio this method is calculation intensive and various numerical methods are used to calculate the return. This method is preferred when the portfolio manager has the control over the portfolio cash inflow and outflow as it considers the amount of money invested.

• Weighted Return – In this method, the holding period of an investment is divided whenever there is a significant cash inflow or outflow in portfolio. Then geometric mean return of all the periods is calculated, this return is the time weighted return of the portfolio. This is the preferred method when the portfolio manager does not control the portfolio cash inflow and outflow. The best approach for calculation is to calculation the daily holding period return.

There are modified approaches to both of the above methods. These are listed below:-

• Simple Dietz method – This method is the first order approximation of the internal rate of return. Here an assumption is made that the cash inflow in the portfolio is done at the middle of the period in consideration

• Dietz method – A modification of the simple Dietz method where daily weighting is considered

• Modified Dietz – This is a hybrid of money weighted and time weighted return. The return is calculated for a sliced time period using IRR and then the geometric mean return of each periodic return is calculated

The next step after the performance measurement is to compare the portfolio or composite return to the benchmark return. There are various measures to find out if the portfolio manager has created value or not, the basis of comparison is the level of risk taken in the portfolio compared to the benchmark. These are also known as risk adjusted performance measures, following are the main measures:-

• Sharpe Ratio: This measure was developed by Prof. William Sharpe. This is the ratio of portfolio’s excess return with respect to risk free rate to the standard deviation of the portfolio. Here the assumption is that the portfolio returns are normally distributed. The higher the Sharpe ratio, the better is the portfolio performance.

• Sharpe Ratio: When the portfolio is composed of assets whose returns are non-normal, Sharpe ratio does not yield good result, to incorporate the skenewss of such cases modified Sharpe ratio is employed. Modified Sharpe ratio is the ratio of excess portfolio return to the modified VaR of the portfolio.

• Treynor Ratio: This ratio measures the excess portfolio return over risk free rate to that of the portfolio Beta. Essentially this ratio is finding the excess return per unit of market risk taken by the portfolio manager. The higher the ratio, the better is the performance.

• Sortino Ratio: If a portfolio return is more than the expected return, it is not seen as risk, but when the return is less than the required return we are exposed to the risk. So, the risk can be viewed as one sided risk, or the downside risk. Sortino ratio, measure portfolio performance on this basis, this ratio is the ratio of excess return over the minimum acceptable return to the downside risk of the portfolio. Downside risk is calculated from the semi variance of the returns which are below the minimum acceptable return. Like Sharpe and Treynor ratio, the higher the Sortino ratio, the better it is.

• Information Ratio: Information ratio is the ratio of active return (excess portfolio return over the benchmark) to the tracking error (standard deviation of the active return). This ratio helps in identifying how much extra return the portfolio manager has generated in comparison to the relevant benchmark

Apart from these there are other measures which will be discussed in the next post.