Evaluation of Portfolio Performance What is Required of a Portfolio Manager (PM)? We have two major requirements of a PM: 1.

The ability to derive above average returns for a given risk class (large risk-adjusted returns); and 2. the ability to completely diversify the portfolio to eliminate all unsystematic risk. May also desire large real (inflation-adjusted) returns, maximization of current income, high after-tax rate of return, preservation of capital. Requirement #1 can be achieved either through superior timing or superior security selection. A PM can select high beta securities during a time when he thinks the market will perform well and low (or negative) beta stocks at a time when he thinks the market will perform poorly. Conversely, a PM can try to select undervalued stocks or bonds for a given risk class. Requirement #2 argues that one should be able to completely diversify away all unsystematic risk (as you will not be compensated for it). You can measure the level of diversification by computing the correlation between the returns of the portfolio and the market portfolio. A completely diversified portfolio correlated perfectly with the completely diversified market portfolio because both include only systematic risk. Some portfolio evaluation techniques measure for one requirement (high risk-adjusted returns) and not the other; some measure for complete diversification and not the other; some measure for both, but don't distinguish between the two requirements. Composite Equity Portfolio Performance Measures As late as the mid 1960s investors evaluated PM performance based solely on the rate of return. They were aware of risk, but didn't know how to measure it or adjust for it. Some investigators divided portfolios into similar risk classes (based upon a measure of risk such as the variance of return) and then compared the returns for alternative portfolios within the same risk class. We shall look at some measures of composite performance that combine risk and return levels into a single value. Treynor Portfolio Performance Measure (aka: reward to volatility ratio) This measure was developed by Jack Treynor in 1965. Treynor (helped developed CAPM) argues that, using the characteristic line, one can determine the relationship between a security and the market. Deviations from the characteristic line (unique returns) should cancel out if you have a fully diversified portfolio.

Treynor's Composite Performance Measure: He was interested in a performance measure that would apply to ALL investors regardless of their risk preferences. He argued that investors would prefer a CML with a higher slope (as it would place them on a higher utility curve). The slope of this portfolio possibility line is:

A larger Ti value indicates a larger slope and a better portfolio for ALL INVESTORS REGARDLESS OF THEIR RISK PREFERENCES. The numerator represents the risk premium and the denominator represents the risk of the portfolio; thus the value, T, represents the portfolio's return per unit of systematic risk. All risk averse investors would want to maximize this value. The Treynor measure only measures systematic risk--it automatically assumes an adequately diversified portfolio. You can compare the T measures for different portfolios. The higher the T value, the better the portfolio performance. For instance, the T value for the market is:

In this expression, b m = 1. Demonstration of Comparative Treynor Measures: Assume that you are an administrator of a large pension fund (i.e. Terry Teague of Boeing) and you are trying to decide whether to renew your contracts with your three money managers. You must measure how they have performed. Assume you have the following results for each individual's performance:

Investment Manager Z B Y

Average Annual Rate Beta of Return 0.12 0.16 0.18 0.90 1.05 1.2

You can calculate the T values for each investment manager: Tm TZ (0.14-0.08)/1.00=0.06 (0.12-0.08)/0.90=0.044

TB TY

(0.16-0.08)/1.05=0.076 (0.18-0.08)/1.20=0.083

These results show that Z did not even "beat-the-market." Y had the best performance, and both B and Y beat the market. [To find required return, the line is: .08 + .06(Beta). One can achieve a negative T value if you achieve very poor performance or very good performance with low risk. For instance, if you had a positive beta portfolio but your return was less than that of the risk-free rate (which implies you weren't adequately diversified or that the market performed poorly) then you would have a (-) T value. If you have a negative beta portfolio and you earn a return higher than the risk-free rate, then you would have a high Tvalue. Negative T values can be confusing, thus you may be better off plotting the values on the SML or using the CAPM (in this case, .08+.06(Beta)) to calculate the required return and compare it with the actual return. Sharpe Portfolio Performance Measure (aka: reward to variability ratio) This measure was developed in 1966. It is as follows:

It is VERY similar to Treynor's measure, except it uses the total risk of the portfolio rather than just the systematic risk. The Sharpe measure calculates the risk premium earned per unit of total risk. In theory, the S measure compares portfolios on the CML, whereas the T measure compares portfolios on the SML. Demonstration of Comparative Sharpe Measures: Sample returns and SDs for four portfolios (and the calculated Sharpe Index) are given below:

Portfolio B O P Market

Avg. Annual RofR 0.13 0.17 0.16 0.14

SD of return 0.18 0.22 0.23 0.20

Sharpe measure 0.278 0.409 0.348 0.30

Thus, portfolio O did the best, and B failed to beat the market. We could draw the CML given this information: CML=.08 + (0.30)SD

Treynor Measure vs. Sharpe Measure. The Sharpe measure evaluates the portfolio manager on the basis of both rate of return and diversification (as it considers total portfolio risk in the denominator). If we had a fully diversified portfolio, then both the Sharpe and Treynor measures should given us the same ranking. A poorly diversified portfolio could have a higher ranking under the Treynor measure than for the Sharpe measure. Jenson Portfolio Performance Measure (aka differential return measure) This measure (as are all the previous measures) is based on the CAPM: We can express the expectations formula (the above formula) in terms of realized rates of return by adding an error term to reflect the difference between E(Rj) vs actual Rj:

By subtracting the risk free rate from both sides, we get:

Using this format, one would not expect an intercept in the regression. However, if we had superior portfolio managers who were actively seeking out undervalued securities, they could earn a higher risk-adjusted return than those implied in the model. So, if we examined returns of superior portfolios, they would have a significant positive intercept. An inferior manager would have a significant negative intercept. A manager that was not clearly superior or inferior would have a statistically insignificant intercept. We would test the constant, or intercept, in the following regression:

This constant term would tell us how much of the return is attributable to the manager's ability to derive above-average returns adjusted for risk. Applying the Jenson Measure. This requires that you use a different risk-free rate for each time interval during the sample period. You must subtract the risk-free rate from the returns during each observation period rather than calculating the average return and average risk-free rate as in the Sharpe and Treynor measures. Also, the Jensen measure does not evaluate the ability of the portfolio manager to diversify, as it calculates risk premiums in terms of systematic risk (beta). For evaluating diversified portfolios (such a most mutual funds) this is probably adequate. Jensen finds that mutual fund returns are typically correlated with the market at rates above .90. Application of Portfolio Performance Measures Calculated Sharpe, Treynor and Jenson measures for 20 mutual funds. Using the Jenson measure, only 3 managers had superior performance (Fidelity Magellan, Templeton Growth Funds, and Value Line Special Situations Fund) while 2 managers had inferior performance (Oppenheimer Fund and T. Rowe Price Growth Stock Fund).

Relationship among Portfolio Performance Measures For all three methods, if we are examining a well-diversified portfolio, the rankings should be similar. A rank correlation measure finds that there is about a 90% correlation among all three measures. Reilly recommends that all three measures. [In my opinion the Jensen measure is the most stringent. It is testing for statistical significance, whereas the other methods are not. The other methods are also examining average returns, whereas the Jensen measure uses actual returns during each observation period.] Factors that Affect Use of Performance Measures You need to judge a portfolio manager over a period of time, not just over one quarter or even one year. You need to examine the manager's performance during both rising and falling markets. There are also other problems associated with these measures: w Measurement Problems: All of these measures are based on the CAPM. Thus, we need a real world proxy for the theoretical market portfolio. Analysts typically use the S&P500 Index as the proxy; however, it does not constitute a true market portfolio. It only includes common stocks trading on the NYSE. Roll, in his 1980/1981 papers, calls this benchmark error. We use the market portfolio to calculate the betas for the portfolios. Roll argues that if the proxy used for the market portfolio is inefficient, the betas calculated will be inappropriate. The true SML may actually have a higher (or lower) slope. Thus, if we plot a security that lies above the SML it could actually plot below the "true" SML. w Global Investing: Incorporating global investments (with their lower coefficients of correlation) will surely move the efficient frontier to the left, thus providing diversification benefits. It may also shift the efficient frontier upward (increasing returns). [However, we have no proxy to measure global markets.] Portfolio Performance Evaluation and Active Portfolio Management Chapter 17Outline Conventional Measurement Techniques 2 Sharpe Index and M Jensen Index Treynor Index Active Management

Market Timing Style Analysis Conventional Performance Measurement One of the first direct applications of Markowitzs portfolio theory was for risk-adjusted performance measurement Before the 1960s, risk adjustment took the form of asset-type classifications, which were imprecise and not very analytical The Three main risk-adjusted measures: ( 2 Sharpe Index (or M Treynor Index Jensens AlphaSharpe Index The Sharpe measure provides an estimate of excess return per unit of standard deviation (or total risk). This can then be compared to a benchmark portfolio. Which is better: Portfolio 1 or 2? 0 5 10

15 20 25 5 10 15 20 25 30 Standard Deviation Expected Return

p fp p rR S = roxy p M 1 Portfolio 2 PortfolioMeasure (Modigliani and Modigliani) 2 The M Uses total volatility as risk measure (like Sharpe Index) Calculate the portfolio variance 1. Add T-Bills to the portfolio to make the risk the same as 2. the Market: 2

Mkt = P, TBills ) + 2w(1-w) 2 TBills ( 2 ) + (1-w) 2 p ( 2 Solve w 2 Mkt )= 2 p ( 2 Or just w This adjusted portfolio P* then has returns: 3. ) + (1-w)r P = w(r P* r

f M 4. 2 M -r P* = rMeasure 2 The M Measure gives 2 The M The Sharpe the same results as the measure, just in different form. M - r P* =r 2 M Which is better: Portfolio 1 or 2? 0 5 10 15 20 25 5 10 15 20 25 30

Standard Deviation Expected Return roxy p M 1 Portfolio 2 Portfolio +M 2 -M 2Treynor Index The Treynor measure provides an estimate of excess return per unit of beta (or market risk). Again, this can then be compared with a benchmark portfolio. Which is better 1 or 2? Statistical problems?

p fp p rR T

= 2 Portfolio 1 Portfolio roxy p M 0 5 10 15 20 25 0.25 0.5 0.75 1 1.25 1.5 Beta Expected ReturnJensen Index The Jensen index provides an estimate of excess return relative to what is predicted by CAPM. This is also the alpha of the security characteristic line is generated from regressions We can also define other related measures such as the appraisal ratio: alpha relative to the portfolios diversifiable risk ] [ fMpfpp rRrR =

0 5 10 15 20 25 -0.5 0 0.5 1 1.5 2 2.5 Beta Expected Return y rox p M 2 Portfolio 1 Portfolio Criticisms of Measures All performance measures nest within the mean- variance framework of CAPM. Thus, benchmark error is always problem An APT-based alternative developed by Gruber accounts for other risk factors Changing risk measures (betas and volatilities) plague all testsWhats ahead? New York City Trip Signup Vicki Rollo 307 Purnell Hall Cost is $25 2 options 1. Midtownvisit Nasdaq, Protiviti, ITG and JPMorgan

2. Wall Streetvisit the NYMEX, AMEX + ?? Homework #3 due on Thursday!!! Test #2 next Wednesday, November 1 Grubers 4-Factor Model captures managerial i Controlling for factor risk, ability to select securities. Actively managed mutual funds outperform by 65 basis points (b.p.) or 0.65% per year Expense ratios averaged 113 b.p. (or 1.13%)! Overall, net result is that the average actively-managed mutual fund underperforms by 48 b.p. or 0.48% Since we can buy an S&P500 index fund for about 10- 12 b.p., we are better off, on average, by passive indexingThe Lure of Active Management Some portfolio managers have hot hands that appear to be better than just lucky Anomalies in past returns suggest that there may be some value in finding predictable patterns in stock returns The potential benefits are large, if we exceed the market averages For 10% returns over 40 years (until retirement), FV = 10,000*1.10 40

= $452,593 For 10.5% returns over the same horizon, FV = 10,000*1.105 40 = $542,614Market Timing The act of moving in and out of the market, based on future expectations Get price appreciation while Avoiding bad periods Enticing since potential benefits are large here too! Example in book (p. 591) Invest $1 in 1924 1. In T-bills, get $17.56 at end of 2003 2. In SP500, get $1,992.80 3. If perfect timing, get $148,472!Actual Market Timing Results See Wall Street Journal article on actual mutual fund investment returns Average investor falls victim to psychological biases Buys more after prices run up Doesnt sell to minimize losses Net result is that the average investor dramatically underperforms even the average mutual fund return fees! Even before Bottom Line: Market timing can be hazardous to your wealthStyle Analysis s to the style of assets that Process of benchmarking fund return

comprise the portfolio Sharpe comes up with 12: 1. T-Bills 2. Intermediate bonds 3. Long-term bonds 4. Corporate bonds 5. Mortgages 6. Value stocks 7. Growth stocks 8. Mid-cap stocks 9. Smalll stocks 10. Foreign stocks 11. European stocks 12. Japanese StocksStyle becomes the benchmark Compare fund returns to weighted average of the style portfolio Fidelity Magellan, for instance, 47% growth stocks 31% mid-cap stocks 18% small stocks 4% European stocks Analogous to factors being other portfolio returns Regress fund returns on these style portfolios Residual returns signal under- or over-performance Like the alpha in CAPM or APT models

Average residual = -0.074% per month! (over 636 funds)International Investing Chapter 18Summary Global Markets offer unique risk/return tradeoffs Should be included in true CAPM analyses May be quantified as unique APT factors Home country bias Most investors notoriously overweight home country stocks compared to international stocks Many investors actually hold no foreign equities Unique Risk Factors Exchange rate risk Country-specific (political) riskExchange Rate Risk International investing gives returns denominated in foreign currencies Even if stock returns in the foreign currency are large, dollar-denominated returns may not be Exchange rate can make $-denominated returns higher or lower Can be hedged away using derivativesusually futures See FINC416 Derivative Securities See FINC415 International Finance International mutual funds offer exchange rate hedged returnsBenefits of International Diversification Easy to over-estimate benefits

 Recent history of country-specific risk might suffer from survivor bias Unknown political risk makes recent actual performance exceed the expected performance Historic covariances underestimate future covariances Past diversification benefits are over-estimated Simple rule would be to invest in two other countries Same benefits as 44 countries andard deviation than the Benefits amount to 1% less st simple U.S. index portfolioBehavioral Finance and Technical Analysis Chapter 19Returns and Behavioral Explanations Calendar effects 1. Seasonal flow of funds gets translated into stock purchases (end of year bonuses, end of month paychecks). 2. Window dressing by institutional traders each quarter SEC requires quarterly reporting Managers, wanting to be seen as smart, load up on good stocks, dump bad stocks before reporting 3. Good and bad news released around calendar year turns.Technical Analysis--Overview Using past stock prices and volume information to predict future stock prices The premise is that there would be predictable patterns in returns Charting Techniques

Technical Indicators Value Lines System Charting The Dow Theory 1. Primary trend (long-term) Last for several months, years 2. Secondary (intermediate) trend when prices corrected Shorter term deviations get revert back to trend values 3. Tertiary (minor) trends Unimportant daily fluctuationsOther Charting Techniques Point and Figure Charts Traces up and down movements without regard to time See Figure 19.4, Table 19.2 in book Buy and sell signals when prices penetrate previous highs and lows Candlestick Charts Used to identify support and resistance Used to identify rallies, trendsTechnical Indicators Sentiment Indicators give bullish/bearish signals Trin statistics use advances, declines and volume Odd-lot theory assumes that individual investors miss key market turning points Confidence index is the ratio of 10 top-rated bond yields to 10 intermediate-grade yields Put/Call ratios look at options market activity

 Mutual fund cash positions assumes that mutual fund investors miss key market turning points Technical Indicators Flow of Funds Short Interest (reflects smart money) Credit Balances in brokerage accounts (signals intent for future purchases) Market Structure Moving averages Breadth (advances minus declines cumulated over time) Relative strength (momentum) The Value Line system 1. Relative earnings momentum 2. Earnings surprises 3. Value index (a 3 factor model of value)

i Diplomarbeit zur Erlangung des akademischen Grades Magister rerum socialium oeconomicarumque (Mag. rer. soc. oec.) Portfolio Performance Evaluation Institut fr Betriebswirtschaftslehre Universitt Wien Studienrichtung: Internationale Betriebswirtschaft o. Univ.-Prof. Dr. Josef Zechner eingereicht von Johann Aldrian (Matr.nr.: 9501942) Wien, 8. September 2000ii Eidesstattliche Erklrung Ich erklre hiermit an Eides statt, da ich die vorliegende Arbeit selbstndig und ohne Benutzung anderer als der angegebenen Hilfsmittel angefertigt habe. Die aus fremden Quellen direkt oder indirekt bernommenen Gedanken sind als solche kenntlich gemacht. Die Arbeit wurde bisher in gleicher oder hnlicher Form keiner anderen Prfungsbehrde vorgelegt und auch nicht verffentlicht.

Wien, 8. September 2000 Portfolio Performance Evaluationiv TABLE OF CONTENT 1. INTRODUCTION

.iii

1.1. THE RELEVANCE OF PORTFOLIO-MANAGEMENT-EVALUATION 1 1.2. STRUCTURE OF THIS MASTER'S THESIS 2 2. TRADITIONAL MEASURES OF PORTFOLIO PERFORMANCE EVALUATION AND ITS IMPLICATIONS. 2.1. FUNDAMENTALS 4 2.1.1. THE CONCEPT OF EFFICIENT MARKETS 4 2.1.2. RETURN AND RISK AS DETERMINANTS OF THE MARKET 6 2.2. PORTFOLIO MANAGEMENT 8 2.2.1. ACTIVE PORTFOLIO MANAGEMENT 9 2.2.2. PASSIVE PORTFOLIO MANAGEMENT 12 2.2.3. WHAT INDEX TO USE 13 2.3. TRADITIONAL MEASURES OF PERFORMANCE 15 2.3.1. SECURITY-MARKET-LINE BASED PERFORMANCE MEASURES 15 2.3.2. CAPITAL-MARKET-LINE BASED PERFORMANCE MEASURES 18 2.4. WEAKNESSES OF TRADITIONAL MEASURES OF PERFORMANCE 21 3. ALTERNATIVE MEASURES OF PORTFOLIO PERFORMANCE 3.1. THE FAMA AND FRENCH THREE & FIVE FACTOR APT-MODEL 24 3.2. THE GRINBLATT & TITMAN NO BENCHMARK MODEL 27 3.3. THE SHARPE APPROACH: ASSET ALLOCATION AND STYLE ANALYSIS 31 24 4

3.3.1. DETERMINANTS OF THE MODEL 32 3.3.2. THE PROCEDURE 35 3.3.3. CRITICISMS AND IMPROVEMENTS 37 4. APPLIED STYLE ANALYSIS 4.1. THE DATA 40 4.1.1. AUSTRIAN INVESTMENT FUNDS 40 4.1.2. ASSET CLASSES 45 4.1.2.1. Equity Asset Classes 45 4.1.2.2. Fixed Income Asset Classes 47 4.1.2.3. Statistical Properties of the Employed Asset Classes 48v 4.2. DETERMINING THE FUNDS STYLE AND SELECTION RETURN 50 4.2.1. THE FUNDS AVERAGE COMPOSITION 50 4.2.2. ROLLING A WINDOW 55 4.2.3. COMPARISON OF REAL AND ESTIMATED STYLE WEIGHTS 61 4.2.4. CONTRIBUTION THROUGH SELECTION 63 4.2.5. SUMMARY OF FINDINGS 70 4.3. SOME ADDITIONAL INSIGHT USING US MUTUAL FUNDS 71 5. CONCLUSION AND FINAL REMARKS DATA APPENDIXvi Abbreviations Con: Constantia Privat Invest Fund A 4: Appollo 4 Fund Gen: Generali Mixfund Rai: Raiffeisen Global Mix Fund Ers: SparInvest Fund 79 40

Spa: Global Securities Trust Fund EVALUE: European Value Stock Index Net Dividends Reinvested EGROWTH: European Growth Stock Index Net Dividends Reinvested ESTAND: European Composite Stock Index Net Dividends Reinvested NAVALUE: North American Value Stock Index Net Dividends Reinvested NAGROWTH: North American Growth Stock Index Net Dividends Reinvested NASTAND: North American Composite Stock Index Net Dividends Reinvested JPSTAND: Japanese Composite Stock Index Net Dividends Reinvested ATX: Austrian Trading Index (Composite Stock Index) G7GOV: Government Bond Index of the 7 Largest European Countries API: Austrian Performance Index (Government Bond Index Interest Reinvested)1 1. Introduction 1.1. The Relevance of Portfolio-Management-Evaluation Whenever an investor employs resources, be it in the form of hiring employees for his company, establishing a charitable fund or investing money in an investment fund he will want to measure the performance of his investment. In any of the above named cases the investor will establish an evaluation system that provides him with the feedback needed to determine whether the investment generates the predetermined utility. In the case of the employee the investor will demand from him the accomplishment of the agreed on work objectives. From the manager of the charity fund he will demand evidence that the money was not spent lavishly. Both times he will bind the executing subjects to some kind of charta which was defined in advance. In the very same manner he will consider the evaluation of the investment manager. The investment manager will be bound to the investment policy and subject to a constant evaluation of his

achievements. His achievement will be the return on the capital the investor provided. At this point one will have to determine whether the achieved return was good or poor and whether it was skill or luck? This is the punchline investors are are always facing when entrusting their money to an investment manager. The evaluation now boils down to two main questions. The first question the investor will want to address is the question of performance. What is good and what is poor performance and where is the line in between - the benchmark - and what to take as the benchmark. Should we employ the performance of a riskless asset e.g. a T-bond, a generic like the S&P2 500 or other portfolio manager's performance as the benchmark? Unfortunately, these simplistic measures of performance generally do not produce the desired degree of specification. The investor will also want to find out whether his investment manager is skillful of fortunate through an evaluation process, which can be applied to his manager and thereby finding what kind of constranints may help to get the investment manager to achieve the goal set by the investor. In answering how to destinct between a skilled and unskilled portfolio manager and what is good and poor performance, I will address the question central to this master's thesis. Can Sharpe's asset allocation model and resulting style analysis be a useful tool in assessing an investment portfolio's performance and the level of skill of its investment manager? 1.2. Structure of this master's thesis The first chapter is devoted to the definition of the problem and its justification in order to give the reader a general overview of this works content. In chapter 2 CAPM implications on performance measurement are being

elaborated and conventional measures of performance are being discussed in a critical context. The last part of Chapter 2 will emphasize on weaknesses and critiques of traditional measures of performance. In Chapter 3 I will introduce alternative measures of portfolio performance. The Fama & French Model, the Grinblatt & Titman Model and Sharpe's Asset Allocation and Style Analysis Model will be described. The Sharpe Model will then be explained in further detail, as it will be the core subject of this master's thesis. Chapter 4 will comprehend a regression analysis according to Sharpe's Model. It will be performed on 6 Austrian investment funds. The investment funds will be: Raiffeisen Global Mix Fund Appollo 4 Fund3 SparInvest Fund Generali Mixfund Global Securities Trust Fund Constantia Privat Invest Fund Through constrained quadratic programming the composition of the specific funds will be determined and the performance of each of them evaluated. In the end of this chapter the findings will be compared to traditional measures of performance and its influence on rankings illustrated. In Chapter 5 I will conclude the findings of this work and critically evaluate the initially addressed question, whether Sharpe's portfolio evaluation model is a good and useful model in assessing a portfolio's performance based on evidence from Austrian and US investment funds.4 2. Traditional measures of portfolio performance evaluation and its implications.

2.1. Fundamentals The traditional evaluation of investment management is based on a few key concepts. In many cases the framework therefore is provided by the CAPM. In some other cases it is the risk return relationship of an individual portfolio, its total risk, that provides the environment for portfolio performance evaluation. On this basis the essential concepts will be explained in this chapter, as they will be indirectly relevant in applying and explaining some investment management evaluation tools. 2.1.1. The Concept of Efficient Markets The efficient market concept assumes that all investors have free access to currently available information about the future. All investors are capable of processing the information as well as adjusting their holdings according to the information appropriately. 1 This concept guarantees that security prices fully reflect the investment value of the security. This further implies that there exists no possibility to generate abnormal return - in a systematic way - with generally available information. Eugene Fama 2 classified the efficient market hypothesis into 3 forms: The weak form of market efficiency is defined by Fama as reflecting all historical prices in the value of a security. According to this definition it should be impossible for a technical analyst to systematically make profits by looking at past prices.

1 SHARPE, ALEXANDER, BAILEY (1998), p. 93 2 FAMA (1970), p. 383 - 4175 The semi-strong form of market efficiency is defined as incorporating all publicly available information. This is the form currently assumed to hold, although there is a discussion if maybe only the weak form of market efficiency may hold. The strong form of market efficiency is defined as including all publicly and privately available information. If this form of market efficiency held true one could in no circumstances make abnormal profits by using either of the three above mentioned sources of information. Market efficiency is of importance to CAPM, because one of its underlying assumptions is the competitive investor. This means that prices of securities are in equilibrium and the expected security return tomorrow based on the information today will be zero. Security price changes are assumed to follow a random walk, as positive "surprises" are assumed to be as likely as negative "surprises". If a pattern can be found to detect mispriced securities on a systematic basis, it would mean that returns are not random walk any more and that CAPM would not hold and therefore evaluation measures based on CAPM would be inaccurate. The paradox that arises with the efficient markets hypothesis is that if there aren't investors that do not believe in the efficient market hypothesis, efficient markets can not exist. If information is free for all participants in the market than none of

the participants has an incentive to gather information. But if no one gathers information, the market price can not reflect the information. This problem can be overcome if the cost of gathering information (supporting a squad of analysts) is the same as the excess return generated through their analysis. 3 The short discussion above indicated the importance of efficient markets on portfolio management and in the same way on its evaluation.

3 SHARPE, ALEXANDER, BAILEY (1998), p. 966 2.1.2. Return and Risk as Determinants of the Market Return can be defined as the rate of change in the value of an asset in a defined time interval. The mean return, which is interesting if one looks at the prices of an investment at the beginning and the end of the investment horizon, covers several time periods and can be measured geometrically or arithmetically. Using geometric mean calculation is preferable when the "calculation basis" is changing and has the additional advantage of being additive in every case. Arithmetic mean calculation is useful when the "calculation basis" remains constant during the observation period. Arithmetic mean computation returns the average increase in wealth of a constant investment and does not regard reinvestments of its proceeds. When analyzing financial time series the basis often varies and proceeds are reinvested and thus making geometrical mean calculation more suitable. Risk is the uncertainty in what a security price - and in consequence the return -

will be at a certain point in the future. Another term would be volatility. Volatility is equal to the statistical measure of standard deviation. Generally one uses historical volatility when introducing risk into a financial model. There is also an alternative way to determine volatility - calculating it implicitly by using the BlackScholes Formula. 4 The Chicago board of trade provides several implied volatility indexes for different commodity futures and options. This should help market participants formulating their trading strategies. The entire CAPM universe is described by risk and return where risk is characterized through variance. Through different combinations of risk and return, the combination of securities with different risk - return characteristics, an investor can reach every point on the security market line. 5 These two determinants are positively correlated in the CAPM-world. The more risk one takes the more "reward" he should expect. The linear relationship between systematic risk and return is at the core of the CAPM. The graph on the next

4 HULL (1997), p. 246 5 REILLY, BROWN (1997), p. 247 page shows the relationship between risk-return and the derivation of the security market line. The formula for the CAPM is:

jf [M ]fj E(r ) = r + E(r ) r E(rj ) = Average expected return of security (j) r(f) = Average risk free rate (f) E(rM) = Average return of the market (m) (j ) = Sensitivity of the expected return of security (j) to changes in the expected return of the market (m) Figure 1: Capital Market Line, Security Market Line and the linear risk return relationship 8 The relationship between beta and the expected return is known as the SML. The slope of the line is given by (Rm-Rf), in other words the units of return over the risk-free rate per unit of systematic risk. This linear relationship shows that an investor can increase his expected return by increasing the risk as according to CAPM securities with higher risk must have a higher return in order to compensate the investor for the risk. This goes along with the risk aversion assumption put forth in the CAPM. The question of utility functions of investors will not be treated here but it should be mentioned that investors are assumed to have convex indifference curves. This means that for the more risk they take they demand an even higher return. 6 (The marginal rate of substitution, return for risk, increases as risk increases.)

Another important outcome of CAPM for the risk return relationship is that the risk for which the investor can demand to be rewarded is the systematic risk of a security as the unsystematic risk can be diversified away. This systematic risk is reflected in a securities beta i.e. a securities co-movements with the market. The beta reflects the systematic risk for which the investor can expected to be rewarded for through return. Questions concerning the validity and the testability of CAPM shall not be addressed in this work as they are of minor importance to the central object of this work - the evaluation of portfolio management through Sharpes' asset allocation and style analysis framework. 2.2. Portfolio Management Portfolio management or in other words investment management is the process by which money is managed. 7 The way portfolios are managed has severely changed over the last 100 years. Traditionally portfolio management was strongly based on fundamental analysis of securities or assets which were to be included

6 FISCHER (1996), p. 40 - 43 7 SHARPE, ALEXANDER, BAILEY (1998), p. 7929 in the portfolio. 8 Fundamental analysis researches the capabilities of a company to generate future cash flows. This system was by far not as elaborate in terms of

mathematical analysis as it is performed in modern portfolio management. Also the belief in the possibility of "beating the market" had more acceptance than today. With the tremendous rise in the US equity market in the nineties the issue of beating the index (e.g. S&P 500) has become more and more difficult. 9 The controversy over the possibility to outperform the market through active portfolio management has been reinforced. 2.2.1. Active Portfolio Management Active portfolio management aims to beat an index by detecting securities that are under-priced. Securities are under-priced to a certain investor who takes an active position because his view about the future, his forecast of the securities price in the future, differs from that of the market. This in turn implies that an investor or portfolio manager of this sort disregards the conclusion of CAPM that securities are priced accurately. Active portfolio management is only worthwhile if the additional return realized through active management is higher than the cost of maintaining the necessary staff. Costs incurred through active management are manager fees, analyst reimbursement and higher turnover of securities held in the portfolio. Manager fees are typically in a range from 0.2 - 1.5 % of the assets under management. 10 Another cost an active fund is more prone of is the potentially higher turnover of investment managers who, if not reaching their predetermined returns, are fired quickly. Different styles and beliefs of different managers will cause (conditioned by high "manager turnover) additional turnover

cost. The cost of turnover depends on the size of the trade and the liquidity of a title.

8 comp. GRAHAM (1949) 9 SORENSON, MILLER, SAMAK (1998), p. 18 10 SORENSON, MILLER, SAMAK (1998), p 1810 Size of Trade Number of $100 $300 $500 Portfolio Universe Salornon Smith Barney large-cap /growth 50 Stocks Million MillionMillion

36 bps 53 bps 64 bps

Salomon Smith Barney large-cap/value 50 26 37 44 Salomon Smith Barney small-cap /growth 50 131 196 246 Salomon Smith Barney small-cap /value 50 113 183 239 S&P large-cap /growth 162 27 38 45 S&P large-cap/value 338 27 34 44 S&P small-cap /growth 234 136 187 226 S&P small-cap /value 366 132 189 234

Note: Costs estimated at a point in time using Salomon Smith Barney's impact-cost model. Figure 2: Typical turnover cost for different trade sizes and different asset classes Active managers can be categorized in three groups: market timers, sector selectors and security selectors. Market timers change the beta of their portfolio according to their forecast on how

the market will do. 11 Market timers will increase the beta on their portfolio above the beta of the market portfolio if their forecast is bullish. Securities with a higher beta than the market will result in the higher appreciation of the specific security than the appreciation of the market. The reverse will be true if their forecast is bearish. There were multiple tests on market timing ability. Treynor and Mazuy conducted the first study on market timing. 12 They found that the management of mutual funds did not exhibit any market timing ability.

11 ELTON, GRUBER (1992), p. 708 12 TREYNOR , MAZUY (1966), p. 131 - 13611 Figure 3: Characteristic line for a mutual fund that has outguessed the market. Mutual fund managers with market timing ability show above than average performance through detecting when the market will be bullish and when it will be bearish. This is essentially what the graph above shows. Further studies on market timing abilities of mutual fund managers were conducted, showing little evidence of successful market timing. 13 Sector Selectors increase their exposure to a certain sector when they believe it will perform above average in the future and decrease their exposure to a sector

when their belief is that it will under-perform. Sectors can be classified by industries, products, or particular perceived characteristics like size, cyclical, growth etc. The sector selection idea is very prominent in the investment industry. Investment managers often specialize in sectors. The investor in turn can choose from different "specialists" and from a portfolio of managers that he

13 IPPOLITO, (1993), p. 4612 considers most appropriate for his investment strategy. Sector selection additionally exerts influence on the later on of discussed style analysis. The third type of active manager is the security selector. Security selection is the most traditional form of active portfolio management. By security selection the investment manager tries to identify securities with higher expected returns than suggested by the market. By identifying and getting exposure to them the active manager will realize a higher than market performance if his judgment was right. Security selection, like all active strategies, neglects the concept of equilibrium prices on CAPM. There are numerous tests on the ability of active managers to detect mispriced securities and through that generating excess returns. Excess return is the return realized above the one with the same risk predicted by CAPM. An early and notable study on the performance of mutual funds was conducted by William Sharpe. 14 He concluded that mutual funds did not show better performance than the Dow Jones Industrial Index and that corollary mutual fund managers did not have stock picking ability. Jensen

15 also conducted a study on mutual fund performance and confirmed the findings of Sharpe. There was positive evidence found in favor of stock picking by Grinblatt & Titman. 16 After all it remains still an open issue if stock-picking ability exists. 2.2.2. Passive Portfolio Management Index funds have seen a remarkable rise in the past five to seven years. 17 Elton & Gruber also aknowledged: "One of the major companies evaluating manager performance estimated in 1989 that during the past 20 years the S&P 500 has outperformed more than 80 % of active managers." 18 Portfolio managers who try to replicate the return pattern of a predetermined index are said to pursue passive portfolio management. The simplest way to

14 SHARPE, (1966), p. 119 - 138 15 JENSEN, (1968), p. 389 - 416 16 GRINBLATT, TITMAN (1989), p. 393 - 416 17 SORENSON, MILLER, SAMAK (1998), p. 18

18 ELTON, GRUBER (1992), p. 70513 follow passive portfolio management is to exactly replicate the index or benchmark. Replicating an index can be very tricky and expensive. Replicating the S&P 500 may still be feasible without incurring excessive cost but replicating a Russell 3000 may almost be unfeasible due to excessive turnover cost and little liquidity in small stocks. This highlights the tradeoff between accuracy and turnover cost in duplicating an index for a passively managed portfolio. There are two alternative ways to reproduce an index. By finding a predetermined number of stock which best tracked the index historically or by finding a set of stocks that represents all the industry segments in the portfolio in the same portion as present in the index. A mixture of the three approaches may very well be found as well as the benefits of the different methods can be realized. The main benefit of exactly replicating the index is that the tracking error will be relatively low compared to the other measures. In that sense an index fund may hold exactly the same weight of large stocks in its fund as represented in the index. Applying one of the alternative measures presented above, therefore realizing the benefit of lower transaction cost can solve the problem with small and illiquid stocks. Cash holdings caused by dividend payments and cash inflows from investors will also make it harder to track an index due to the different risk-return characteristics of cash compared to the index. 2.2.3. What Index to use Portfolio performance evaluation traditionally involves the application of a benchmark or index to which the portfolios return is compared. If indices are used as benchmarks the method used to measure the market return needs to be

considered. Friend, Blume and Crockett found in their study that the average performance of an equally weighted NYSE index differed from the one obtained when applying a value weighted NYSE index by 2.5 %. The equal weighed NYSE index yielded 12.4 % whereas the value weighed index yielded only 9.9 % on average. 19 The difference may be attributed to the size effect. The size effect

19 FRIEND, BLUME, CROCKETT (1970) in IPPOLITO (1993), p. 4414 or small firm effect states that small firms stocks tend to have higher returns than large firms. There are three commonly used weighting methods in computing a market index the price weighting method, the value weighting method and the equal weighting method. A price-weighted index is computed by summing up the prices of the securities that are included in the index and dividing them by a constant. This returns the average price of the securities at time t and when divided by the average price at time 0 and added to the base of the index, it will return the value of the index at time t. In the case of stock splits, the constant is adjusted in order to reflect the price changes due to the stock split. The prestigious Dow Jones Industrial Average is a price weighted index. The value weighting method is the most common. Indices like the S&P 500, Russell 1000, Russell 3000 and the ATX are value weighted. In calculating the index one simply takes the market value of the securities included in the index at

time t and divides it by the market value of the securities at time 0 and adds the value to the index base at time 0. An equal-weighted index is calculated by multiplying the level of the index at time t-1 with the price relatives at time t. The price relatives are calculated by dividing the price of every single security in the index at time t by its price at t-1 and then dividing the sum these price relatives by the number of securities included herein. An example for an equal weighted index would be the Value Line Composite Index. When evaluating the performance of a portfolio and applying an index as the benchmark one has to make sure that the return measurement method for the index is the same as for the portfolio under evaluation. Using general market indices as benchmarks has been criticized as being to general and not representative for a manager's "habitat" or his style. More elaborate and15 specialized measurements of portfolio performance have been developed. They will be introduced in the following chapters. 2.3. Traditional Measures of Performance The foundation of these performance measures is that the return of a portfolio is adjusted for the risk it bore over the time period under consideration. Traditionally the adjustment was either based on the security-market-line or on the capital market line. The security market line based performance measures are Jensen's Alpha and the Treynor Index. Traditional capital market line based measures of portfolio performance are the Sharpe Ratio and the RAP (Risk-Adjusted Performance) Ratio proposed by Modigliani. Morningstar's RAR (Risk-Adjusted Rating) falls also into this category. 2.3.1. Security-Market-Line based performance measures

In 1965 Jack L. Treynor 20 introduced a risk-adjusted measure to rank mutual fund performance. As a measure of risk he used the beta. Beta reflects the nondiversifiable portion of a securities total risk and can be calculated from CAPM. The equation is the following: () ()() () p RpRf TR p = R(p) = Average return of portfolio (p) R(f) = Average risk free rate (f) (p) = Sensitivity of portfolio (p) to market return changes

20 TREYNOR (1965), p. 63 - 7516 The Treynor Ratio gives the slope of the security market line. The higher the TR the better a portfolio will rank. That can be seen if one introduces indifference curves of a risk-averse investor. Through a greater TR higher indifference curves of a risk-averse investor can be reached and the greater will be his utility.

Beta Return r2 r1 2 1 SML1 SML2 rf Beta Return r2 r1 2 1 SML1 SML2 rf Indifference Curves Figure 4: Relationship between TR and an investors' utility. The second measure that uses the CAPM as the underlying concept is Jensen's Alpha. 21 Jensen's Alpha measures the positive or negative abnormal return relatively to the return predicted by the CAPM. With the subsequent formula the value for Alpha can be calculated. ( p) = R( p) R( f ) + R(m) [ ] ( ) R( f ) ( p)

R(p) = Average return of portfolio (p) R(f) = Average risk free rate (f) R(m) = Average return of the market (m) (p) = Sensitivity of portfolio (p) to market return changes

21 JENSEN (1968), p. 389 - 41617 Alpha represents the return differential between the return of the portfolio and the return predicted by the CAPM adjusted for the systematic risk of portfolio (p). The following table shows the popularity of Jensen's Alpha. 1971-75 1976-80 1981-85 1986-90 Total Sharpe 54 63 38 36 191 Jensen 51 81 36 52 220 Total 105 144 74 88 411 Treynor-Mazuy 6 10 8 10 34 Friend II 37 31 7 5 80 Contradictory Studies* 0 11 11 21 43 Grossman-Stiglitz 0 0 78 117 195 Source: Institute for Scientific Informaion, Social Science Citation Index , annual. *Studies by McDonald (1974), Mains (1977), Kon and Jen (1979) and Shawky (1982) Figure 5: Citations for the SR and the Jensen Alpha and some additional studies. The Treynor Ratio and Jensen's Alpha are related to the systematic risk component implied by the Sharpe-Lintner Model. There are 2 problems with the application of these two performance measures: 1) Is the systematic risk the appropriate risk measure for an investor?

2) Does the Sharpe-Lintner Model regard all relevant information in predicting a securities or portfolios expected return? The answer to question 1 will depend on whether the investor holds a single security or a portfolio of securities. In the case that he holds a portfolio of securities the systematic risk may well be the relevant measure of risk. In the case of holding a single security the total risk of the specific security will be the just measure of risk. 22 The second question will be addressed in point 2.4.

22 SARPE, ALEXANDER, BAILEY (1998), p. 83518 2.3.2. Capital-market-line based performance measures When risk-adjusted portfolio performance measures are grounded on the capitalmarket-line, the risk adjustment is accomplished by using the total risk of a portfolio or security. The main difference to security-market-line based performance measures is, that a capital asset pricing model is not required and thus alleviating the problem of making assumptions concerning a certain model. The sole measure of risk is total risk which is equivalent to the statistical measure of standard deviation or . The two traditional measures based thereon are the Sharpe Ratio and the RAP (Risk-Adjusted Performance) measure. Another popular measure to rank investment funds in the United States is Morningstar's RAR (Risk-Adjusted Rating) and as it is also based on a portfolios total risk adjustment although using a special procedure to adjust for it, it will be briefly described too.

The Sharpe Ratio 23 essentially measures a portfolios average performance over the risk-free rate per unit of total risk of the portfolio. () ()() () p RpRf SR p = R(p) = Average return of portfolio (p) R(f) = Average risk free rate (f) (p) = Ex post standard deviation of portfolio (p) The Sharpe Ratio's simplicity may be of major appeal to ranking agencies. Even the Austrian periodical "trendINVEST" 24 reports the SR although the funds are not ranked according to it. Modigliani & Modigliani mention it to be "probably the

23 SHARPE (1966), p. 119 - 138 24

trendINVEST (2000), p. 56 - 9019 most popular measure of risk-risk adjusted return" 25 Following SR the portfolio . with the highest SR can be considered to be performing best. Franco Modigliani and Leah Modigliani 26 propose a modified version of Sharpe's measurement approach. They call the ratio they calculate RAP but it is also referred to as M. In opposite to Sharpe who ranks funds according to the slope of the capital market line, they lever or un-lever, depending if the sigma of the portfolio is higher or lower than that of the market, the portfolios risk to equal the market risk and present the resulting risk-adjusted return as the ranking variable. This procedure produces the exact same ranking as obtained by applying the Sharpe Ratio. They justify their approach with the argument that the average investor who is not familiar with advanced finance techniques can easier understand RAP. Analytically their approach is the following: ()()()()* () () ()RpRfRf p m RAP p = +

 R(p) = Average return of portfolio (p) R(f) = Average return of the risk-free rate (f) (m) = Ex post standard deviation of market (m) (p) = Ex post standard deviation of portfolio (p) The relationship between SR and RAP can be shown to be the following: RAP( p) = SR( p) * (m) + R( f ) The benefit of RAP is that it can be readily compared to the market index yield. The portfolio with the highest value of RAP is corollary the best performing one.

25 MODIGLIANI, MODIGLIANI (1997), p. 51 26 MODIGLIANI, MODIGLIANI (1997), p. 45 - 5420 Morningstar's risk-adjusted rating (RAR) is one of the most popular ratings in the United States. 27 In 1995 90 % of new money invested in stock funds went into four-star or five-star ratings awarded by Morningstar. I will not pursue the exact procedure and its implications on traditional concepts in this project as it is very complex and lengthy and therefore may be the subject of another work. Rather I would like to mention the paper 28 in which Sharpe analyzed RAR and summarize his findings.

Sharpe compared the ranking of mutual funds calculated on the basis of RAR to the ranking obtained through calculating the excess return sharpe ratio. The excess return sharpe ratio takes the return of a portfolio over the risk free rate and divides it by the standard deviation differential between the risk-free rate's standard deviation and the portfolio's standard deviation. Sharpe finds that if funds have good average historical returns the excess return sharpe ratio ERSR and RAR are closely related with a correlation coefficient of 0.985. Figure 6: Correlation between Morningstar's RAR and Excess Return Sharpe Ratio (ERSR).

27 SHARPE (1998), p. 21 28 SHARPE (1998), p. 21 - 3321 He further concludes that RAR should be view as an attempt to determine a best single fund and assumes that the investor holds only one single fund. The findings lay out that also in the case of poor overall market performance RAR is appropriate in determining which fund is best performing assuming an investor holds only one fund. The weakness Sharpe specifies is that RAR fails to capture an important property of investors preferences - the desire for portfolios that are neither the least nor most risky available. He finally concludes that if the only choice for a measure by which to select funds is between RAR and ERSR, the evidence favors selecting the ERSR but he acknowledges also that a more appropriate choice would be to use either a different measure or none at all. 2.4. Weaknesses of Traditional Measures of Performance The main problem with traditional performance measures is the usage of a

benchmark, especially in estimating the security market line. Whenever the security market line is incorrectly estimated that means the market index is inefficient, it can have severe impacts on the outcomes of the Treynor Index and Jensen's Alpha. The incorrect positioning of the security market line can have two reasons, neither of which is related to statistical variation: 29 1) The true risk free return is different from the risk-free return used in the model. This problem can be caused by the circumstance that the investor under consideration can not borrow at the assumed risk-free rate used in the model. This problem is not only limited to the Treynor Index and Jensen Alpha as will be explained later on.

29 ROLL (1980), p. 5 - 1222 2) A non-optimized market index has been employed that means an index whose expected return differs from the expected return of the optimized index appropriate for the true risk-free return. These factors cause the security market line to be positioned incorrectly as shown below. Figure 7: Possible performance measurement errors due to mis-specification of the benchmark. On the basis of these evaluations it can be seen that the Teynor Ratio and Jensen's Alpha rate funds take on more risk relatively better compared to the market. Lehmann and Modest 30 concluded further that the application of a

specific factor model has major implication on the performance measures yielded by benchmarks thus fueling the discussion over what is a proper model to describe return characteristics of securities. At this point it becomes clear that the relevant problem in determining performance of mutual funds is finding and providing the correct input measures for the model and assumptions in models about risk reflection parameters may often not be as clear cut as seeming. The problem of defining the appropriate risk-free rate has also implications on the Sharpe Ratio and therefore on RAP. The Sharpe ratio assesses performance in assuming a linear relationship between total risk and excess return over the risk-

30 LEHMANN, MODEST (1987), p. 233 - 26523 free rate. If an investor has to pay higher interest rates the higher the presumed level of risk than that will also lead to a misclassification of funds as his investment universe compared to the benchmark differs.24 3. Alternative Measures of Portfolio Performance Traditional measures have shown several points of concern when applied in performance evaluation. In this chapter I will introduce alternative approaches to determine a portfolios required return. 3.1. The Fama and French three & five Factor APT-Model The Fama and French 31 model is built on the Arbitrage Pricing Theory Model developed by Ross in 1976. 32

It states that in an equilibrium market the arbitrage portfolio must be zero or in other words an arbitrage portfolio can not exist. If this condition did not hold market participants would sell assets whose expected return is lower than implied by the detected common risk factors of the market and buy assets whose expected return is higher than implied by the risk factors. This process of arbitrage ensures equilibrium market as market participants engage in it until there is no further possibility in making a riskless profit through trading one security for another. On this basis Fama and French tried to define the factors which are relevant in predicting a securities expected return. The equation to measure a security's expected return is given below: i ik k R(i) = 0 +1 F1 + ... + F R(i) = Return on security (i) (0) = The risk-free rate or zero beta portfolio (ik ) = Factor sensitivity of security (i) to factor (k) F(1-k) = Factors that explain a security's return

31 FAMA, FRENCH (1993), p. 3 - 56 32 ROSS (1976), p. 341 - 36025

Through regression analysis the factors responsible for a security's variation can be detected. One setback of APT-model is that the model does not specify the specific risk factors. Fama and French detected three risk factors for stock portfolios and two risk factors for bond portfolios. The factors for stock portfolios are The excess return of the market over the risk free rate The size of the firm The book-to-market equity ratio and for bond portfolios they are The time to maturity The default risk premium Fama and French propose their findings as being useful for portfolio performance evaluation but did not pursue it per se. Lehmann and Modest 33 conducted an extensive study on different benchmarks. They use the CRSP 34 equally weighted and value weighted returns to construct the different benchmarks. The number of securities they used in the construction of their benchmarks was 750. The fund returns were taken from 130 mutual funds over the period of 15 years that is from January 1968 to December 1982. They compared the Sharpe-Lintner Model's excess return predictions with the APT-Model's excess return predictions over the above mentioned time period. They found that the Sharpe-Lintner model produces alphas that are less negative

and less statistically significant than the APT-Models alpha predictions. See table below.

33 LEHMANN MODEST (1987), p. 233 - 265 34 University of Chicago Center for Research in Security Prices (It's files contain complete data on NYSE listed stocks since July 1962)26 Values in % except for t-value (absolute) APT-M Alpha S-L-M Alpha Difference APT - SLM Alpha VWER EWAR VWER Jan. 1968 to Dec. 1972 -4,85 -1,41 -0,15 -3,44 (Standard deviation) 3,86 4,37 4,23 (t-value) 14,33 3,68 0,40 Jan. 1973 to Dec. 1977 -5,45 -0,79 -6,32 -4,66 (Standard deviation) 3,6 4,54 4,91 (t-value) 17,26 1,98 14,68 Jan. 1978 to Dec. 1982 -3,85 1,4 -3,19 -5,25 (Standard deviation) 3,3 3,98 3,27 (t-value) 13,30 4,01 11,12 Figure 8: S-L-M is the Sharpe-Lintner-Model. VWER denotes the excess return when using the

value weighted CRSP and EWAR denotes the excess return when using the equally weighted CRSP as the benchmark. I calculated the t-value the following: (i)/((i)/130). 130 is the number of funds they used in their study. They found that the Sharpe-Lintner model and APT benchmarks "differ more than they agree on the Treynor-Black benchmarks over all three periods" 35 (they split the 15 year period in three 5-year periods). On the application of Jensen's Alpha on the Sharpe-Lintner model benchmark they conclude that this is more similar to no risk-adjustment at all than it is to the application on the APT benchmark. The typical rank difference between the APT based Jensen Alpha and no risk-adjustment was twenty two, nineteen and forty seven positions for the three 5-year periods. In contrast, the typical rank difference between the Sharpe-Lintner model based Jensen Alpha and no risk-adjustment are seven, seven and twelve positions for the three 5-year periods. They conclude that inferences about mutual fund performance are dramatically affected by the choice between an APT model benchmark and a Sharpe-Lintner model benchmark. Their tests do not say anything about the basic validity of the Sharpe-Lintner model and the APT mode. The explanation they give for the significant negative abnormal returns is that their benchmarks, the Sharpe-Lintner model benchmark

35 LEHMANN, MODEST (1987), p. 26027 and the APT model benchmark, are possibly not mean-variance efficient. They

further acknowledge that the APT model could explain anomalies involving dividend yield and own variance but could not account for size-effect. Beyond that they tested different numbers of factors in the APT-Model and found, that between five, ten and fifteen factors the result-changes were very small. This can be considered as support for the Fama-French APT approach using five factors to represent market risk. Kothari and Warner 36 conducted another study that shows the difference in Jensen Alphas when applying the Sharpe-Lintner model and APT-Model in defining the benchmark. Kothari and Warner built a 50 stock portfolio through randomly drawing from the population of the NYSE/AMEX securities. They repeated this procedure at the beginning of every month over 336 month that is from January 1964 to December 1991. The portfolio's returns were than tracked for 36 months. This formed the basis for their benchmark. They found that when they compared the performance of their randomly selected stock portfolios to a Sharpe-Lintner model benchmark their random portfolios showed a Jensen Alpha of over 3 %. The Fama-French APT model performed better as setting a benchmark by which it only had a Jensen Alpha of -1.2 %. These empirical results are very similar to the ones found in Lehmann and Modest as their average performance difference was (3.44% + 4.66% + 5.25%)/3 that is -4.45 % (APT-M minus SL-M). They conclude that standard mutual fund performance measures are unreliable and mis-specified. 3.2. The Grinblatt & Titman no Benchmark Model The encountered problems with benchmarks have led to alternative approaches

to determine a portfolio's performance. Grinblatt and Titman 37 pursued one

36 KOTHARI, WARNER (1997), p. 1 - 44 37 GRINBLATT, TITMAN (1993), p. 47 - 6828 where no benchmark is needed and thus alleviating several problems associated with the use of a benchmark. Their analysis in turn is only applicable if the evaluator has knowledge about the exact composition of the portfolio under evaluation. This is in strong contrast to the portfolio performance measures introduced earlier since they allowed portfolio performance evaluation without apprehending a portfolio's composition. The underlying concept of their measure, they call it the "Portfolio Change Measure" 38 , is that an informed investor will hold securities that will have a higher return when they are included in the portfolio than when they are not included. Further, an informed investor will tilt his portfolio weights towards assets with expected returns higher than average and away from assets with expected returns lower than average. This will cause a positive covariance between portfolio weights and the return of a security for an informed investor whereas it should not be any covariance between portfolio weights and the return of an asset for the uninformed investor. The way Grinblatt and Titman propose to

measure this covariance is the following: PCM [R w( ) w ] T N j T t jt jt j t k / 11 , == = PCM = Portfolio Change Measure R(jt) = Return of security (j) at time (t) w(jt) = Weight of security (j) at time (t) w(j,t-k) = Weight of security (j) at time (t - k) T = Number of time periods under consideration

38 GRINBLATT, TITMAN (1993), p. 5129 Under the null hypothesis of no superior information, both current and past weights are uncorrelated with current returns and thus the PCM measure should be indistinguishable from zero. Potential problems with this measure can arise from the violation of the key

assumption to this concept namely that mean returns of assets are constant over the sample period. Portfolios that specialize in takeover targets or bankrupt stocks will realize positive performance with this measure because they include assets whose expected returns are higher than usual. The same holds true for managers who are exploiting serial correlation in stock returns. One must also keep in mind that this measure can only be applied if the evaluator knows the exact composition of the portfolio over time, which may be the cause for its sparse use. Despite that the PCM approach overcomes the problems of measuring the SML as described in 2.4. Grinblatt and Titman applied the PCM measure on 155 mutual funds over a 10year time period from December 31 st 1974 to December 31 st 1984 on quarterly holdings. On this basis they formed two portfolios, the first lagged one quarter and the second lagged 4 quarters. These differenced weights where then multiplied by CRSP monthly stock returns where the weights were held constant over 3 months and therefore a time series of monthly portfolio returns was created for the one quarter and four quarter lagged PCM. For example with the one quarter lag, the April, May and June returns were multiplied by the difference between the portfolio weights held on March 31 st 1975 and the weights held on

December 31 st 1974 and so forth. They found that for the one quarter lagged PCM measure the value was statistically indistinguishable from zero which indicates that informed investors can not realize the benefits of their information in one quarter. The 4 quarters lagged PCM showed statistically significant abnormal returns indicating that investors do have superior information and that it is revealed with a one-year lag.30 The average abnormal returns of the entire sample are about 2% per year. The table below shows the abnormal returns for different mutual fund categories and its level of significance. Performance Measure Lagged 1 Quarter No. of Mean Wilcoxon Mean Wilcoxon Funds a Probability b Performance a Probability b Total sample 155.37 1.47 .233 2.04 3.16* .004 Aggressive growth funds 45 . 39 .98 .475 3.40 3.55* .004 Balanced funds 10 -.48 -1.87 .057 .01 .03 .902 t_statistic Performance t-statistic Lagged 4 Quarters

Growth funds 44 .66 2.01* .017 2.41 2.94* .009 Growth-income funds 37 .14 .61 .095 .83 1.75 .107 Income funds 13 .54 1.54 .475 1.33 2.64* .002 Special purpose funds 3 -.10 -.16 .233 .21 .19 .711 Venture capital/special situation funds 1.43 .035 3 1.26 1.07 .812 2.66

Fl-statistic (Abnormal performance in every category = 0) F = 3.1438* Prob > F = .0028 c F2-statistic (Abnormal performance across categories is equal) F ~ 3.6590* Prob > F = .0014 c a) The mean over all months divided by the standard error of mean. b) The probability that the absolute value of the Wilcoxon-Mann-Whitney Rank z-statistic is greater than the absolute value of the observed z-statistic under the null. c) The probability of the F-statistic being greater than the outcome shown, tinder the null hypothesis (Type 1 error). *) Type I error < .05.

Figure 9: Performance estimates for 155 surviving mutual funds grouped by investment objective categories (Return in % per year). Grinblatt and Titman report that the PCM measure results in smaller standard errors than approaches that use the security market line. They attribute the

increased estimation precision to the higher correlation between their "benchmark" (the current returns of a funds historical portfolio) and the returns of the current portfolio than any traditional benchmark portfolio.31 Their final conclusion was that mutual funds on average achieved positive abnormal performance during the 10-year period under estimation but that after considering transaction cost and fund expenses the net abnormal average performance is close to zero. They further conclude that traditional measures of performance add noise to true performance and thus bias the measure towards finding no performance. This is because outside evaluators are not measuring the true performance of a fund but only the performance of some hypothetical portfolio that is correlated with the fund instead of evaluating holdings that correspond to each transaction. Consequently they found that managers who performed well in one period were likely to do so in a following period thus inferring manager skill. 3.3. The Sharpe Approach: Asset Allocation and Style Analysis The portfolio evaluation models described in this master's thesis does not require the knowledge of the exact composition of the portfolio except for the Grinblatt and Titman model described in 3.2. For an outside evaluator this is of practical importance as it is the condition for making portfolio evaluation feasible. The inconvenience is that the resulting portfolio measures are of general nature. In light of that Sharpe 39 developed an "evaluation system" that reflects a higher degree of specification and regards an investment manager's universe also

labeled his specific "investment style". He argued that it would be more adequate to measure an investment manager by the asset class returns he invested in instead of comparing his return to a universal benchmark. This idea of "grouping" funds was put forth first time by LeClair 40 Brinson, Hood and Beebower . 41 found in their study in 1986 that the staggering part of the portfolio performance of 91 pension plans came from asset allocation. In 1988 Sharpe introduced a method

39 SHARPE (1992), p. 7 - 19 40 LeCLAIR (1974), p. 220 - 224 41 BRINSON, HOOD, BEEBOWER (1986), p. 39 - 4432 to determine a funds "effective asset mix" 42 through constrained regression analysis and thereon he grounded his renowned paper of 1992 titled "Asset Allocation: Management Style and Performance Measurement". 3.3.1. Determinants of the Model The main input in Sharpe's asset class factor model is the single asset classes. Sharpe defined certain standards that an asset class should meet in order to

assure the usefulness of the model. This is not found to be strictly necessary, but it is desirable for the usefulness of the model. The qualitative exigencies on an asset class are 1. Mutually exclusive 2. Exhaustive 3. Have returns that differ The asset class should represent a capitalization-weighted portfolio of securities in order to mimic return variation created by different weights of asset classes in the returns of the portfolio under evaluation. Sharpe pointed out further that asset class returns should either have low correlations with one another or, in cases where correlations are high, different standard deviations. 43 If independent variables are highly correlated, as two indexes representing different approaches to investing with the same asset class, the reliability of the estimated coefficients in meaningfully describing the underlying relationship is very much in doubt. 44 The problem of multicollinearity can reduce the explanatory power of a model and therefore the asset classes should show low correlation, possibly none, following Sharpe's qualification mentioned above. The number of asset classes Sharpe uses in his proposed model is twelve. Each of the twelve indexes is supposed to represent a strategy that could be followed

42 SHARPE (1988), p. 59 - 69

43 SHARPE (1992), p. 8 43 LOBOSCO, DiBARTOLOMEO (1997), p. 8033 passively and at low cost using an index fund. The possibility of investing in the index at low cost is of importance as this is the alternative the manager is measured against. If the benchmark we apply is not a feasible investment alternative it will be a biased measure. The twelve classes he uses are 1. T-Bills Cash equivalents with less than 3 months to maturity. Index: Salomon Brothers' 90-day Treasury Bill Index. 2. Intermediate-Term Government Bonds Government bonds with less than 10 years to maturity. Index: Lehman Brothers' Intermediate-Term Government Bond Index 3. Long-Term Government Bonds Government bonds with more than 10 years to maturity. Index: Lehman Brothers' Long-Term Government Bond Index 4. Corporate Bonds Corporate bonds with ratings at least Baa by Moody's or BBB by Standard & Poor's. Index: Lehman Brothers' Corporate Bond Index 5. Mortgage Related Securities Mortgage-backed and related securities. Index: Lehman Brothers' Mortgage-Backed Securities Index 6. Large-Capitalization Value Stocks Stocks in S&P 500 stock index with high book-to-price ratios (50% of the stocks in the S&P 500 index). Index: Sharpe/BARRA Value Stock Index 7. Large-Capitalization Growth Stocks Stocks in the S&P 500 stock index with low book-to-price ratios (remaining 50% of the stocks in the S&P 500 index).

Index: Sharpe/BARRA Growth Stock Index 8. Medium-Capitalization Stocks Stocks in the top 80% of capitalization in the US equity universe after the exclusion of stocks in the S&P 500 stock index. Index: Sharpe/BARRA Medium Capitalization Stock Index 34 9. Small-Capitalization Stocks Stocks in the bottom 20% of capitalization in the US equity universe after the exclusion of stocks in the S&P 500 stock index. Index: Sharpe/BARRA Small Capitalization Stock Index 10. Non-US Bonds Bonds outside the US and Canada. Index: Salomon Brothers' Non-US Government Bond Index 11. European Stocks European and non-Japanese Pacific Basin stocks. Index: FTA Euro-Pacific Ex Japan Index 12. Japanese Stocks Index: FTA Japan Index Every six months the equity categories are reclassified. The S&P 500 stocks are reviewed and if the change in book-to-price ratios implies a change in the classification, for example a stock that falls from the top 50% (relatively high book-to-price ratio) into the bottom 50% (relatively low book-to-price ratio) than the stock is regrouped. Non-S&P stocks, stocks in the medium-cap and smallcap class, are classified in order that 80% of these stocks are in the medium-cap class and 20% in the small-cap class. To avoid excessive turnover in the composition of these indexes of relatively illiquid stocks and an associated high cost for index tracking, any stock that has "recently crossed over the line" 45 a relatively small distance is allowed to remain in its former index. A relatively small

distance is defined with 20% within the boundary value. The remaining eight asset classes are self-explanatory all together the twelve asset classes were constructed to cover the investment universe from which portfolio managers chose their assets. The explained variables will be the individual fund returns, which can be observed in newspapers or bought from specialized research companies.

45 SHARPE (1992), p. 935 3.3.2. The Procedure After asset classes have been defined and the desired history of returns corresponding to them has been obtained, data analysis is put to work. The objective is to determine the weights of the previously defined asset classes in the portfolio of an individual mutual fund through quadratic programming. Quadratic programming is set to minimize the variance of the residuals under certain constraints. The usefulness of minimizing the variance and not using standard regression or constrained regression to determine a portfolios "asset class exposures" can be seen in the table below. Regression and Quadratic Programming Results Trustees' Commingled Fund-U.S. Portfolio Januarv 1985 through December 1989 Unconstrained Regression Constrained Regression

Quadratic Programming Bills 14.69 42.65 0 Intermediate Bonds -69.51 -68.64 0 Long-Term Bonds -2.54 -2.38 0 Corporate Bonds 16.57 15.29 0 Mortgages 5.19 4.58 0 Value Stocks 109.52 110.35 69.81 Growth Stocks -7.86 -8.02 0 Medium Stocks -41.83 -43.62 0 Small Stocks 45.65 47.17 30.04 Foreign Bonds -1.85 -1.38 0 European Stocks 6.15 5.77 0.15 Japanese Stocks -1.46 -1.79 0 Total 72.71 100.00 100.00 R-squared 95.20 95.16 92.22 Figure 10: Resulting asset class weights through unconstrained and constrained regression and through quadratic programming. The constraints are that the sum of the weights of the different asset classes in the portfolio must be 1 and that no short positions are allowed as common36 mutual funds policies do not allow short positions 46 Analytically, the program . looks the following: i ij j

[ ] ik K i i RwRwR Var Objective Function +++= ... min ( ) : 01 1 : 1 = = ij K j

iK w w subject to Var( (i)) = Variance of residuals of security (i) R(i) = Return of portfolio (i) R(j) = Return of asset class (j) w(ij) = Weight of asset class (j) in portfolio (i) (i ) = Residual return of portfolio (i) Sharpe defines the residual return of a portfolio as the portfolios "tracking error" and its variance as the funds "tracking variance" 47 In other words, it represents . the value contributed to the total return of a portfolio by a managers stock picking ability. The other part is explained by the employed asset classes. The style determined through this method can be regarded as an average of the potentially changing styles over the examined period. This indicates that the longer the examination period the more inaccurate this method becomes. To obtain a

46 SHARPE (1992), p. 11 47 SHARPE (1992), p. 1137 clearer picture and especially to see how a style changes over time one needs to roll a time window over the examination and run the quadratic program for every

time window. The result will be a series of asset class weights that reflect if the manager changed his "style" or if he kept weights constant over time. The style weights can now be used to produce a time series of excess returns by subtracting the "style benchmark" from the actual portfolio return at each single point in time. The excess returns would be generated by the formula p t p t pj t j t [ ] pK t K t , R, w, R, w, R, = + ... + (p, t ) = Excess return or return due to selection of portfolio (p) at time (t) R(p,t) = Absolute return of portfolio (p) at time (t) R(j,t) = Return of asset class (j) at time (t) w(p,t) = Weight of asset class (j) in portfolio (p) at time (t) The method of separating a portfolios return in a "style return" and in a "selection return" makes it possible to distinguish between the performance of the portfolio manager and the investor. Knowing the styles of investment an investor can create his individual asset class portfolio. The investment manager on the other hand will be measured accordingly to his class benchmark and will not have to bear responsibility for overall unsatisfying returns due to asset allocation. 3.3.3. Criticisms and Improvements The basic style analysis model averages the styles of an investment manager

over the period under consideration and returns the estimated weights. If an investment manager changes his investment styles, style analysis will return an average of his styles and not the accurate composition of his investment portfolio38 at a time. 48 This problem can be overcome through rolling a window over the period under consideration and thus partly offset the problem of changing styles of the investment manager. 49 Trzcinka 50 acknowledges the problem of inaccuracy but concludes that the strengths of Sharpe's style analysis are its objectivity, low cost and its practical application. Lobosco and DiBartolomeo 51 have researched the problem of determining the confidence intervals of Sharpe's style weights. They found that the confidence interval for a style weight of a particular market index increases with the standard error of the style analysis, decreases with the number of returns used in the style analysis and also decreases with the "independence" of the market indexes used in the analysis. The formula 52 they derived to calculate the confidence intervals is shown below:

 1 = Bi nk a wi (wi ) = Standard deviation of the amount of error in the estimate of the style weight for index (i) through style analysis (a) = Standard deviation of the residuals from determining the style weights through quadratic programming (Bi ) = Standard deviation of the portion of return on index (i) not attributable to other market indexes n = Number of data points in the return time series k = Number of market indexes with nonzero style weights

48 CHRISTOPHERSON (1995), p. 38 49 SHARPE (1992), p. 11 50 TRZCINKA (1995, p. 46 51

LOBOSCO, DiBARTOLOMEO (1997), p. 80 - 85 52 LOBOSCO, DiBARTOLOMEO (1997), p 84 -8539 Through Monte Carlo simulations on a portfolio of market index weights with an arbitrarily chosen value for the standard error they tried to approximate the true index weights. The repetition of Monte Carlo simulation generated a probability distribution for each of the style weights with the mean values showing approximately the true values chosen in the beginning (before taking an arbitrary value for the standard error and simulating the different outcomes of style weights). Lobosco and DiBartolomeo concluded that the predicted values and the simulated values converge. The confidence interval measure can help to determine whether different asset classes should be used due to excessive collinearity and for which situations style analysis through quadratic programming may not be well suited. Furthermore they suggest using daily returns in order to reduce the confidence intervals. The problem of multicollinearity in the chosen asset classes can be coped with by using less asset classes. 53

53 LOBOSCO, DiBARTOLOMEO (1997), p. 8240 4. Applied Style Analysis 4.1. The Data 4.1.1. Austrian Investment Funds I will be evaluating six Austrian investment funds using style analysis. The six

funds I choose are all open-end funds. I selected them randomly from a list of mixed international investment funds published in trendINVEST 54 The reason for . choosing international funds was to examine the general validity of style analysis for Austrian funds and not only for a specific subcategory like stock funds. The larger number of funds in the international category proved also useful in regard to obtaining sufficient historical data as such data is often not available. The funds initially selected were: Raiffeisen Global Mix Fd (Raiffeisen KAG) Appollo 4 (Capital Invest KAG - BA) SparInvest (Erste SparInvest KAG) Gernerali Mixfond (3-Banken-Generali Invest) Global Securities Trust (Carl Spngler KAG) Constantia Privat Invest (Constantia Privatbank KAG) Volksbanken Inter Invest (Volksbanken KAG) Aquila International (Gutmann KAG) The latter two asset management companies, Volksbanken KAG and Gutmann KAG, did not provide any historical data, resulting in the elimination of these

54 trendINVEST (2000), p. 76 - 7741 funds in my final "examination group". The return histories gathered from the remaining asset management companies included reinvested dividends, thus avoiding possible interruptions in fund return data due to dividend outpayments

made by the fund. The mutual fund data covers the period from 4/95 to 12/99. Fund data for Austrian investment funds beyond a five-year history often does not exist and in turn it was the main parameter for choosing an approximate fiveyear history. The fact that there are only 56 monthly returns instead of 60, is due to the data series of Constantia Privat Invest, which had only a history of 56 month by December 31 st 1999. Monthly return data was used to enhance the statistical significance compared to quarterly data and constrained to the relatively short time period. Although daily data would be preferable due to the previously mentioned statistical significance of the estimated style weights 55 , it was not feasible as daily return histories for the necessary asset classes could not be obtained. The advantage of this "data tradeoff" is a reduced computation time especially when "rolling a window" as described later in 4.2.2. Returns were computed for all funds and asset classes using the natural logarithm (ln). Exchange rate problems associated with investments in different currency areas did not cause any specific difficulty as the individual asset management companies provided fund return histories in local (Austrian) currency terms. The returns were not corrected for management fees or any other administrative cost incurred by the fund. In the following the descriptive statistics of the investment funds are displayed. By that a first glance may be gathered concerning the potential composition of a

particular investment fund. Figure 12 shows the return history of Constantia Privat Invest. I will refer to it as Con fund. The relatively low mean return of Con fund accompanied by an also

55 LOBOSCO, DiBARTOLOMEO (1997), p. 8442 low standard deviation is characteristic to this fund indicating a high portion of fixed income securities. 0 2 4 6 8 10 -0.01 0.00 0.01 0.02 Series: CONS Sample 1995:05 1999:12 Observations 56 Mean 0.005105 Median 0.005561 Maximum 0.027207 Minimum -0.016894 Std. Dev. 0.009842 Skewness -0.116157 Kurtosis 2.498004

Jarque-Bera 0.713930 Probability 0.699797 Figure 12: Descriptive statistics of Constantia Privat Invest fund. Figure 11 exhibits the descriptive statistics for Appollo 4. The descriptive statistics reveal a moderate mean monthly return of 0.76% per month with a relatively small standard deviation of 1.8%, potentially indicating a substantial share of fixed income securities. The Jarque-Bera test indicates that we cannot reject the null hypothesis of normal distribution for Appollo 4. 0 2 4 6 8 10 12 14 -0.04 -0.02 0.00 0.02 0.04 Series: A4 Sample 1995:05 1999:12 Observations 56 Mean 0.007585 Median 0.010455 Maximum 0.051477 Minimum -0.035200 Std. Dev. 0.018146

Skewness -0.250747 Kurtosis 3.153286 Jarque-Bera 0.641651 Probability 0.725550 Figure11: Descriptive statistics of Appollo 4 fund43 Below the descriptive statistics of Generali Mixfund, in short Gen fund, are displayed. The histogram reflects a relatively larger range of realized returns indicating greater volatility. 0 2 4 6 8 10 12 -0.06 -0.04 -0.02 0.00 0.02 0.04 0.06 0.08 Series: GEN Sample 1995:05 1999:12 Observations 56 Mean 0.011441 Median 0.013952 Maximum 0.072833 Minimum -0.063160 Std. Dev. 0.029523 Skewness -0.271016

Kurtosis 2.795971 Jarque-Bera 0.782664 Probability 0.676156 Figure 13: Descriptive statistics of Generali Mixfund. The histogram in figure 14 reflects the realized returns of Raiffeisen Global Mix Fund, referred to as Rai Fund. Distinct is the relatively high mean return. 0 2 4 6 8 10 12 -0.06 -0.04 -0.02 0.00 0.02 0.04 0.06 0.08 Series: RAI Sample 1995:05 1999:12 Observations 56 Mean 0.013887 Median 0.016291 Maximum 0.075101 Minimum -0.054117 Std. Dev. 0.028372 Skewness -0.195006 Kurtosis 2.604408 Jarque-Bera 0.720073

Probability 0.697651 Figure14: Descriptive statistics of Raiffeisen Global Mix fund. The descriptive statistics of SparInvest from Erste Bank capital asset management, denominated Ers, reveal a relatively high third and fourth moment and are therefore at the 100 % level not normally distributed. The Jarque-Bera44 test for normality follows a Chi-square statistic with two degrees of freedom and is based on skewness and kurtosis. The high mean and standard deviation indicate strong exposure to stocks and potentially derivative instruments. 0 2 4 6 8 10 -0.10 -0.05 0.00 0.05 Series: ERS Sample 1995:05 1999:12 Observations 56 Mean 0.014591 Median 0.019496 Maximum 0.064690 Minimum -0.107150 Std. Dev. 0.031988 Skewness -1.277064 Kurtosis 5.410110

Jarque-Bera 28.77513 Probability 0.000001 Figure 15: Descriptive Statistics of SparInvest Fund. In Figure 16 the descriptive statistics of Global Securities Trust from Carl Spngler asset management (referred to as Spa) are exhibited. The relatively low mean and standard deviation could indicate significant exposure to bonds. 0 2 4 6 8 10 -0.03 -0.02 -0.01 0.00 0.01 0.02 0.03 0.04 Series: SPA Sample 1995:05 1999:12 Observations 56 Mean 0.010508 Median 0.012990 Maximum 0.038068 Minimum -0.029623 Std. Dev. 0.016710 Skewness -0.554665 Kurtosis 2.706236 Jarque-Bera 3.072791 Probability 0.215155

Figure 16: Descriptive statistics of Global Securites Trust fund.45 4.1.2. Asset Classes The primary question I faced was how many asset classes to include in the analysis and what markets to cover. Sharpe specifies that all markets should be covered and that the resulting asset classes should be mutually exclusive 56 It . was not feasible to obtain asset class data for all markets, especially concerning bond asset classes. In trying to determine the investment universe from which a typical Austrian investment fund selects its securities, I gathered fund composition data from some of the funds under evaluation. The fund data revealed that the funds showed strong exposure to European, US and Japanese equities and to European bonds. Knowing the approximate exposure, a restriction to lesser asset classes seemed feasible without endangering the meaningfulness of the results. 4.1.2.1. Equity Asset Classes Morgan Stanley Capital International (MSCI) provides historical data on numerous equity asset classes. MSCI asset classes are constructed to cover at least 60% of an entire equity market. Extended asset classes offered by MSCI cover at least 70% of a specific market. The market is consequently split into value and growth securities. The specification into value stocks or growth stocks is subject to the Price/Book ratio of the specific security. Those 50% of securities with the relatively higher Price/Book ratio are grouped into the growth stock class and the remaining 50% with relatively lower Price/Book are grouped into the value stock class. MSCI provides semi-annual re-balancing of the growth and

value categories. If Price/Book ratios change in a manner that they would qualify for the other category, they would have to surpass the 50% separation line by more than 10% before being reclassified in the other category. This policy reduces asset turnover and consequently provides a more appropriate benchmark.

56 SHARPE (1992), p. 846 MSCI selects stocks with sufficient liquidity until 60% of the market capitalization is reached. The indexes are capital-weighted indexes using the Laspeyres price index formula to calculate the price change. Furthermore, these equity indexes are also calculated using net and gross dividends reinvested. The constructed indexes reinvest dividends when they are paid. The net dividend index seems more apt for investment fund evaluations as it corrects for certain taxation aspects. MSCI subtracts from gross dividends any withholding tax retained at the source for foreigners who do not benefit from a double taxation treaty. 57 MSCI indicates further that as withholding taxes may vary according to the shareholders domicile the most conservative rates are applied. This master's thesis will use net dividend reinvested indexes as equity indexes representing the most viable investment alternative available and thus alleviating some of the problems discussed in chapter 2. To reflect investment alternatives, asset class indexes had to be converted into local currency terms. To achieve this, I gathered the necessary exchange rate

data from the homepage of sterreichische Kontrollbank 58 Converting the USD . indexes and the JPY index with the appropriate exchange rate series resulted in the final asset class index of the applied foreign asset classes. Asset class returns were calculated applying the natural logarithm. The formula for the return calculation was rt = ln(Pt ) - ln(Pt-1). The equity asset classes employed in this master's thesis are: Austrian Trading Index Source: Reuters European Value Stocks Net Dividends Reinvested Source: MSCI Europe Value Index.

57 INDEX CALCLATION (MSCI 2000), p. 44 58 www.oekb.at, June 200047 European Growth Stocks Net Dividends Reinvested Source: MSCI Europe Growth Index. Japanese Standard Stocks Net Dividends Reinvested Source: MSCI Japan Standard Index. North America Standard Stocks Net Dividends Reinvested Source: MSCI North America Standard Index. The term "Standard" indicates that the Japanese equity universe was not split

into the subgroups value and growth hence the index represents 60% of the Japanese equity universe. Although Austrian stocks are already included in the European value and growth index it seems useful to employ a separate asset class covering liquid Austrian stocks. The problem of redundancy is of minor importance since Austrian equities weight only 2.9 % in the MSCI Standard European Stock Index. In addition this could only cause stronger collinearity, but could not result in a biased estimation. The possible loss of information when evaluating Austrian investment funds justifies this compromise. Besides there is the problem of neglecting dividends paid when using the ATX as an asset class. The problem would be especially severe if the funds under evaluation showed significant exposure to the ATX asset class. It was found later that this was not the case leading to the use of the ATX as an asset class that provides an interesting insight in how much of an Austrian portfolio, classified as being internationally diversified, is invested in Austrian securities. The problem is also partly mitigated by using net dividends for reinvestment since the dividend-factor does not influence the return history as severe as when gross dividends are used. 4.1.2.2. Fixed Income Asset Classes Unfortunately, it was not possible to gather sufficient bond index data to cover the entire bond universe. Thus resulting in an unsatisfying coverage of the bond48 universe by only two indexes that could be obtained. Extensive bond indexes with sufficient histories are generally provided by investment services. Unlike equity indexes, fixed income indexes are not for free. The two fixed income asset classes chosen are the following: Austrian Government Bond Index Interest Reinvested Source:

sterreichische Kontrollbank. European Government Bond Index Source: Salomon Brothers G7 Government Bond Index. The Austrian government bond index is called API 59 This index includes all . Austrian government bonds and is also corrected for interest and bond discount proceeds. These payments are reinvested. This property serves well for this work as this property makes the index a potential investment alternative and thereby reduces some of the inaccuracies of a benchmark. The data series was provided by sterreichische Kontrollbank. The European Government Bond Index was provided in the tutorial "Kapitalmarktforschung" at the University of Vienna. Unfortunately, it does not incorporate interest and other proceeds provided by bonds. The index represents the government bond market of the seven largest European nations. I was not able to obtain data on European corporate bonds. After contacting all renowned providers of such data no response was received. Nevertheless it should not be crucial to this work either. 4.1.2.3. Statistical Properties of the Employed Asset Classes Asset classes should be mutually exclusive, exhaustive and have returns that differ 60 The aspects of mutual exclusivity and exhaustiveness were discussed in . subchapters 4.1.2.1 and 4.1.2.2. The property of different returns will be examined in this part. The asset-class return series descriptive statistics are shown below.

59 Anleihen Performance Index 60 SHARPE (1992), p. 849 API ATX EGROWTH EVALUE G7GOV JPSTAND NASTAND Mean 0.0056 0.0040 0.0226 0.0222 0.0120 0.0074 0.0265 Median 0.0072 0.0129 0.0282 0.0277 0.0095 0.0138 0.0334 Maximum 0.0212 0.1241 0.1219 0.1161 0.0725 0.1553 0.1312 Minimum -0.0171 -0.1925 -0.1133 -0.1642 -0.0390 -0.1245 -0.1572 Std. Dev. 0.0082 0.0618 0.0484 0.0496 0.0272 0.0678 0.0545 Skewness -0.6088 -0.6526 -0.7907 -1.2184 0.2862 -0.0164 -0.8685 Kurtosis 2.7356 3.8168 3.7970 5.5491 2.3414 2.1438 4.0103 Jarque-Bera 3.62 5.53 7.32 29.02 1.78 1.71 9.42 Probability 0.1635 0.0629 0.0258 0.0000 0.4114 0.4246 0.0090 Observations 56 56 56 56 56 56 56 Figure 17: Descriptive statistics of selected asset classes. Figure 17 shows that except for the European growth asset class and the European value asset class where the mean return is similar, the preferred property of different returns is accomplished. Consequently standard deviations also differ except for the above mentioned asset classes where they are very close. For the remaining asset classes the problem of multicollinearity should not be of major concern. One asset class could probably represent the European growth and European value asset class but for the sake of possible additional information, resulting from the constrained regression, they will be applied

individually. Intuitively one would expect correlations between the different asset classes to be moderate except for the European value and growth classes. Figure 18 displays the cross-correlations of the individual asset classes. API ATX EGROWTH EVALUE G7GOV JPSTAND NASTAND API 1.00 0.09 0.20 0.18 0.48 0.07 0.28 ATX 0.09 1.00 0.71 0.82 0.37 0.46 0.63 EGROWTH 0.20 0.71 1.00 0.88 0.51 0.55 0.80 EVALUE 0.18 0.82 0.88 1.00 0.48 0.56 0.79 G7GOV 0.48 0.37 0.51 0.48 1.00 0.31 0.67 JPSTAND 0.07 0.46 0.55 0.56 0.31 1.00 0.56 NASTAND 0.28 0.63 0.80 0.79 0.67 0.56 1.00 Figure 18: Cross-Correlations of selected asset classes.50 The cross-correlogram shows the expected higher correlation between the European growth and value asset classes and interestingly also a relatively high correlation of these asset classes with the North American asset class. However Sharpe mentions that in cases where correlations between asset classes are high, these classes should have different standard deviations 61 which is the case when the European asset classes are compared to the North American asset class. 4.2. Determining the Funds Style and Selection Return 4.2.1. The Funds Average Composition The constrained regression procedure described in 3.3.2 was employed on the return series introduced above. The calculation of style weights was performed in

Excel using Solver. This was necessary since EVIEWS does not allow constrained regressions involving inequality parameters and does further not include an explicitly addressable optimizer. Nevertheless it did not cause any problem concerning the accuracy of the estimates as Solver computes the style weights to the fourth decimal point. Setting up a quadratic program in Excel is relatively uncomplicated. The optimizer Solver in Excel can be used to solve three common optimization problems: minimizing, maximizing and equalizing a certain parameter. In this case the minimization feature is used.

61 SHARPE (1992), p. 851 Figure 19: Solver set-up to calculate Sharpe style weights. Figure 19 displays the Solver mask programmed to calculate style weights for Gen fund. The target is to minimize the variance of the residuals. Thus, one first needs to calculate the residuals using arbitrary weights plugged into the fields below the asset class line (C3:I3). Now the variance formula for the residuals can be inserted into the target cell defined in Solver (in this case K3). The only task left to calculate the style weights is defining of the constraints, which can be done easily by clicking on the add button on the Solver surface. In figure 20 style weights were calculated setting up Solver as described above and using the selected asset classes.52 Fund EVALUE EGROWTH NAVALUE NAGROWTH JPSTAND G7GOV API ATX R adjusted R Con 0% 1% 0% 0% 0% 3% 89% 7% 0.7899 0.7642

A4 7% 16% 3% 1% 2% 13% 58% 0% 0.8221 0.8004 Gen 4% 35% 0% 7% 0% 9% 38% 7% 0.8446 0.8256 Rai 1% 8% 8% 2% 13% 32% 27% 8% 0.8247 0.8032 Ers 0% 0% 0% 0% 0% 0% 88% 12% -0.0366 -0.1635 Spa 0% 0% 0% 13% 2% 2% 75% 8% 0.5511 0.4961 Fund EVALUE EGROWTH NASTAND JPSTAND G7GOV API ATX R adjusted R Con 0% 1% 0% 0% 3% 89% 7% 0.7899 0.7642 A4 8% 15% 4% 2% 13% 58% 0% 0.8218 0.8000 Gen 3% 38% 5% 0% 10% 37% 6% 0.8418 0.8224 Rai 3% 6% 10% 13% 32% 27% 9% 0.8243 0.8028 Ers 0% 0% 0% 0% 0% 88% 12% -0.0366 -0.1635 Spa 0% 0% 15% 3% 1% 75% 6% 0.5376 0.4809 Fund EVALUE EGROWTH NAVALUE JPSTAND G7GOV API R adjusted R Con 7% 1% 0% 0% 3% 89% 0.7164 0.6817 A4 6% 17% 4% 2% 14% 58% 0.8219 0.8001 Gen 11% 40% 2% 0% 12% 35% 0.8347 0.8144 Rai 8% 9% 11% 13% 31% 27% 0.8150 0.7923 Ers 11% 0% 0% 0% 0% 89% -0.0639 -0.1941 Spa 0% 5% 13% 4% 3% 74% 0.4927 0.4305 Figure 20: Style weights using different asset classes. The data above reveals that style weights do not differ significantly when the North American asset class is split in a value and a growth class. Thus inferring that a North American composite asset class is sufficient to explain variations in the returns of the individual funds. Yet when dropping the ATX asset class weights change notably. It can be regarded as evidence that the investment

funds under evaluation do have exposure to the ATX asset class and that inclusion in the analysis is essential. The analysis shows that using the seven asset classes introduced in 4.2.2.1 is reasonable. However, introducing a European corporate bond asset class may have improved the results. This is consistent with intuition that Austrian investment funds classified as "International Mixfunds" should have at least exposure to the asset classes in the middle panel of figure 20. Figure 15 reveals that Ers fund should be strongly invested in stocks. The constrained regression analysis over the entire sample period53 indicates no exposure to stocks at all. The results must be questioned and the usefulness of a constrained regression for Ers fund is seriously in doubt 62 . The R-squared values are reasonable except for Ers fund. The likely reasons are missing asset classes, changes in style and/or a high asset turnover 63 The . analysis of changing styles will be put forth at a later point. Besides, R-squared values are relatively stable when using different combinations of asset classes. Notwithstanding a notable difference exists in R-squared between the six assetclass model and the seven and eight asset-class model thus favoring one of the latter. It is useful to mention that the objective is not to maximize R-squared but to infer as much as possible about the fund's exposures to variations in the returns of asset classes during the period studied 64 .

According to the evidence the seven asset-class model will be used in the subsequent analysis. Residual Series Analysis The resulting residual series from the constrained regression performed on the six investment funds using Solver were exported to EVIEWS and their statistical properties examined. The accuracy of the following analysis is somewhat limited due to the constraints employed in the regression analysis and thus may lead to residual properties different to the ones from standard regression analysis. However the analysis is performed in order to gather an approximation of the true results. Plotting the residuals in a histogram and applying a Jarque-Bera test revealed that most residuals were distributed normal at about the same level as the underlying fund returns presented in figure 11 to 16. Jarque-Bera test analysis for Ers fund's return distribution unveiled non-normality at the 100% level. Residual analysis for normal distribution revealed the same result.

62 LOBOSCO, DiBARTOLOMEO (1997), p. 84 63 comp. CHRISTOPERSON (1995), p. 32 - 43 64 SHARPE (1992), p. 1154 A Ljung-Box (LB) test was applied to test for auto-correlation in the residuals. The LB test follows a Chi-square distribution with k degrees of freedom where the k degrees of freedom are equal to the number of auto-correlations. The analysis was performed on the first 10 lags but only results for the first lag are

reported, as probability values concerning auto-correlation at a greater lag were less significant. AC PAC Q-Stat Prob Con -0.218 -0.218 2.8098 0.094 A4 -0.048 -0.048 0.1339 0.714 Gen 0.045 0.045 0.117 0.732 Rai -0.244 -0.244 3.5254 0.06 Ers -0.167 -0.167 1.6458 0.2 Spa 0.006 0.006 0.0024 0.961 Figure 21: Test statistic of first-lag auto-correlation of residuals. The values in the probability column are all greater than 0.05 revealing no auto correlation at a level of 95%. The null hypothesis of the LB statistic is that the time series is White Noise thus inferring that the regression residuals are White Noise in regard to auto-correlation and the null can not be rejected at the 95% significance level. Finally the mean expected values of the residuals were tested for significance from zero. This was accomplished with a standard t-test. The t-values are displayed in figure 22. E(resid) STDV(resid) t-value Con -0.00055 0.00452 -0.91294 A4 -0.00359 0.00766 -3.51108 Gen -0.00276 0.01174 -1.75742 Rai 0.00281 0.01190 1.77016 Ers 0.00922 0.03257 2.11946 Spa 0.00184 0.01136 1.20879

Figure 22: T-values of the estimated residual's mean value for selected Austrian investment funds.55 The critical t-value at the 95% level is (+ -) 1.67 for an approximately normally distributed variable with k-1 degrees of freedom. Figure 22 shows that residuals of A4, Gen, Rai and Ers fund are statistically significantly different from zero at the 95% level. The style analysis for Ers fund returned unlikely results, consequently the t-value is likely improper. One should keep in mind that the calculated style weights represent an average over the estimation period leading to inaccuracies in cases where portfolio management changes its style and securities are frequently turned over. 4.2.2. Rolling a Window The problem of changing styles can be overcome by rolling a time window during the estimation period. In the following, the impact of this operation on styles estimated in 4.2.1 and the corresponding R-squared values will be disclosed. I used a 20-month time window hence estimating the style composition of a portfolio on 36 consequential periods. The resulting style changes are 20-month average style changes. Estimate 1: min for the time interval t.t+20 Estimate 2: min for the time interval t+1.t+21

Estimate 36: min for the time interval t+35.t+55 Besides, the same procedure as described in 3.3.2 was applied for every single estimate. In general the R-squared values increased, as one would expect due to the shorter estimation periods. Con funds style changes from January 1997 to December 1999 are shown below.56

Con Style Changes 0% 20% 40% 60% 80% 100% J-97 A-97 J-97 O-97 J-98 A-98 J-98 O-98 J-99 A-99 J-99 O-99 Months Style Weights API G7GOV ESTAND ATX Figure 23: Style changes of Con fund. When examining the return properties of Con fund in 4.1.1, a low mean return and a low standard deviation were specific to it. The assumption that Con fund is mainly invested in fixed income securities was confirmed. Striking 89% of the funds assets are invested in Austrian government bonds. The style weights from the 56-month constrained regression were 1% EGROWTH, 3% G7GOV, 89% API and 7% for the ATX. The corresponding R-squared value was 79%. Thus inferring that almost 80% of the return generated by Con fund are attributable to the asset allocation decision of Con fund. The graph in figure 23 reveals no material changes in the composition of the fund over the estimation period. In the course of the analysis it turned out that the weights estimates for EVALUE and EGROWTH were relatively small. Thus the European growth and value index were combined in the graph for a better perception. The similar mean and standard deviation of these two asset classes have occasionally caused slightly

erratic style weight allocations between the two asset classes. The problem was of minor importance though. The combined index is termed ESTAND. The only slightly higher R-squared of 82.4% when taking the average R-squared of the 36 estimations compared to the 79% computed initially provides evidence57 for a stable investment style of Con fund. When performing style change analysis the R-squared value climbed to about 90 % for the period from April 98 to July 90 and fell to around 70% by December 99. This may either indicate superior selection skill of the fund management or a shift in asset allocation towards an asset class not represented in the analysis. A4 Style Changes 0% 20% 40% 60% 80% 100% J-97 A-97 J-97 O-97 J-98 A-98 J-98 O-98 J-99 A-99 J-99 O-99 Months Style Weights API G7GOV ESTAND NASTAND JPSTAND ATX Figure 24: Style changes of A4 fund. A4 fund kept a steady 70:30 allocation policy between fixed income assets and equity assets. Austrian government bonds although were steadily replaced by European government bonds, reaching about 20% by the end of 1999. The composition of equity shows diversification to all four equity-classes applied. The

strongest equity exposure is to European stocks with about 15% of total fund value. Interestingly ATX values were eliminated by the end of 1998 maybe reflecting the inferior development of ATX-values compared to other asset classes. Generally when looking at A4 funds descriptive statistics one would have expected a relatively strong fixed income portion in the portfolio as the mean return was around 9% and standard deviation was relatively low. These58 expectations are confirmed here. The composition of the fund can be regarded as stable and therefore making it especially suitable for the style analysis approach put fourth by Sharpe. 65 R-squared increased when using the 20-month window technique to an average of about 89% compared to 82% computed initially. Again, this reveals that rolling a window enhances the explanatory power of style analysis. Figure 25 shows the composition change for Gen fund. Gen Style Changes 0% 20% 40% 60% 80% 100% J-97 A-97 J-97 O-97 J-98 A-98 J-98 O-98 J-99 A-99 J-99 O-99 Months Style Weights

API G7GOV ESTAND NASTAND ATX Figure 25: Style changes of Gen fund. Distinct is the large share of ATX securities in the beginning of the evaluation period and its reduction to about zero by the end of 1997, in favor of European stocks. Furthermore the stable split of about 45:55 between bonds and stocks is striking. In the period form April 1998 to April 1999 the R-squared value was approximately 95% indicating little asset rotation and/or the application of asset classes resembling viable passive investment alternatives. The average Rsquared value using the window technique augmented by about 6%, in line with the findings in the A4 fund analysis. The reduction in Austrian government bonds

65 CHRISTOPHERSON (1995), p. 4159 in favor of European government bonds somewhat resembles the development of the fixed income asset classes of A4 fund over the time period studied. Rai Style Changes 0% 20% 40% 60% 80% 100% J-97 A-97 J-97 O-97 J-98 A-98 J-98 O-98 J-99 A-99 J-99 O-99 Months Style Weights

API G7GOV ESTAND NASTAND JPSTAND ATX Figure 26: Style changes of Rai fund. Remarkable for Rai fund is the abrupt change out of European stocks into European government bonds and North American stocks in the third quarter of 1997. Rai fund splits its securities at a 55:45 ratio between fixed income securities and equities. In contrary to Gen fund, Rai fund increased its exposure to ATX-securities by the end of 1997 but steadily reduced it thereafter. The cumulative return on the ATX from July 1997 until December 1998 was circa negative 15%, marking a possible reason for the reduction in exposure to the ATX. Overall the styles reflected in the graph above are relatively smooth except for the significant changes in 1997. The style weights estimated for Ers fund in figure 20 did not seem plausible because of the almost 90% exposure to the Austrian government bond index. Ers had an average return of around 17% over the estimation period compared to a 6% average return of the API over the same period thus indicating that the real style weights are misrepresented. The negative R-squared value is further60 evidence that the estimated style weights for Ers fund are not representative for the true style weights. The reason for this severe mis-specification may be the lack of specific asset classes. This example shows the indispensability of representing the entire investment universe when selecting asset classes. Notwithstanding the composition of Ers fund will be displayed below. Ers Style Changes 0% 20% 40%

60% 80% 100% J-97 A-97 J-97 O-97 J-98 A-98 J-98 O-98 J-99 A-99 J-99 O-99 Months Style Weights API G7GOV ESTAND ATX Figure 27: Style changes of Ers fund. The consecutive style estimates for Spa fund are exhibited in figure 28. With the Spa fund the significant increase in R-squared is striking. Compared to the estimation of style weights over 56 months, R-squared raised by 17% from about 53% to 70% when applying the 20-month time window over the estimation period. This could reflect a relatively high asset class rotation that could not be detected with the "static" model. The near disappearance of European bonds and equities could be doubted and may be the result of a missing asset class. Unfortunately Spa fund did not provide any composition data in order to confirm the findings.61 Spa Style Changes 0% 10% 20% 30% 40% 50% 60%

70% 80% 90% 100% J-97 A-97 J-97 O-97 J-98 A-98 J-98 O-98 J-99 A-99 J-99 O-99 Months Style Weights API G7GOV ESTAND NASTAND JPSTAND ATX Figure 28: Style changes of Spa fund. 4.2.3. Comparison of real and estimated style weights Raiffeisen capital asset management, Bank Austria capital asset management and 3-Banken-Gernerali capital asset management provided detailed composition data for the requested funds. The findings in the preceding analysis will be compared to the "true" composition of the funds of these 3 asset management services. The individual securities will be assigned to the corresponding asset class used in the constrained regression analysis. Problems arise with European corporate bonds and foreign bonds. European corporate bonds were assumed in the G7GOV asset class, as a more specific index (asset class) was unattainable. Therefore the G7GOV is assigned all European bonds corporate and government. Non-European bonds were classified according to their country-assignment by the capital asset management company. Two asset classes are added in figure 29 to represent the true exposure of the individual funds to them. Rai fund split European stocks in the supplied composition data into EUR for the participating Euro countries and the remaining European stocks according to their country. Hence the explicit portion of ATX securities in the EUR

composite weight provided by Rai fund could not be determined and was set to62 zero. The data was supplied for December 1999. When comparing the data one must keep in mind that he will be comparing the "true" composition at the end of December 1999 with the average composition of each fund over the 20-month period from May 1998 to December 1999. TRUE CALC TRUE CALC TRUE CALC ESTAND 12% 22% 43% 48% 18% 4% NASTAND 16% 4% 10% 5% 25% 16% ATX 3% 0% 0% 0% 0% 8% JPSTAND 4% 1% 0% 0% 10% 10% API 19% 48% 10% 24% 0% 6% G7GOV 33% 25% 34% 23% 15% 55% NABOND 9% 0% 0% 0% 21% 0% JPBOND 0% 0% 0% 0% 8% 0% CASH 4% 0% 3% 0% 0% 0% A4 Gen Rai Figure 29: True and calculated weight comparison of A4, Gen and Rai fund. Figure 29 unveils a relatively close estimation of Gen funds true weight exposures. The application of the appropriate asset classes in the constrained regression analysis may very well be the substantial contributor to this result. Except for the lack of a non-European bond asset class and a European corporate bond asset class the passive benchmark asset classes utilized were exhaustive. The relatively stable style over the period from the end of 1997 to the end of 1999 may have assisted the close estimation of the true style. These points refer exactly to what was discussed in 4.1, namely the properties that

asset classes should be exhaustive, mutual exclusive and have low correlations. The estimated style weights for A4 fund resemble the true allocations to fixed income assets and to equities reasonably close. An estimated 73% invested in fixed income assets and the remainder in equity compared to the true 65% in fixed income assets and 35% invested in equities by December 1999. The style weight allocations to the single equity asset classes and bond asset classes are unsatisfactory. The lack of certain bond asset classes may cause significant63 misallocations in the applied asset classes. For a similar discussion see LOBOSCO and DiBARTOLOMEO (1997). With Rai fund the problem is very much the same. Striking 29% of the funds total asset value was not represented in the constrained regression analysis leading to the previously discussed misallocations. Interestingly the JPSTAND asset class was not affected by that problem. Possibly the low correlation of the JPSTAND asset class with the other asset classes caused the stability of the estimated weight despite the named obstacles. Now, at the latest, the importance of carefully and exhaustively specified asset classes becomes evident. 4.2.4. Contribution through Selection So far the discussion of style analysis revolved around defining an investment funds style, neglected the skill evaluation of the individual portfolio manager. Detecting superior and inferior performance will be at the core in this section. Style analysis qualifies asset allocation performance as variance of portfolio performance explained. By that means, the R-squared ratio determines the amount of variance in the returns of a portfolio explained and attributable to asset allocation. Thus an R-squared value of 80% suggests that 80% of a portfolio's return is attributable to the asset allocation decision of the investor or the

investment manager. The remaining part (in this case 20%) is what the investment manager contributed to the overall portfolio return through active stock selection. In Sharpe's words: "A passive fund manager provides an investor with an investment style, while an active manager provides both style and selection." 66 Hence, an active manager is only worth the money if his contribution through stock selection exceeds the higher management fees. In the following the cumulative selection returns for five of the six funds are displayed. Ers fund was not considered due to the improper style weight estimates resulting from the restricted number of asset classes.

66 SHARPE (1992), p. 1664 Cumulative Excess Return of Con Fund -0.04 -0.03 -0.02 -0.01 0.00 0.01 0.02 M-95 N-95 M-96 N-96 M-97 N-97 M-98 N-98 M-99 N-99 Months Cumulative Excess

Return Figure 30: Cumulative selection return of Con fund. Asset allocation accounts for 79% of Con funds return. The rest is attributable to the above displayed selection return, which is negative. The average selection return for Con fund was negative 0.055% per month with a standard deviation of 0.452% per month. The corresponding t-value is -0.91. The graph reveals that the investment management may not have been worth its money. Especially in the first year and a half of the examination period the underperformance is persistent. From the end of 1997, a more erratic pattern evolves resembling white noise instead of skill. One drawback is that it was not possible to verify the estimated style weights by actual composition data since Constantia asset management did not provide the data. The possible lack of an asset class may influence the analysis in this paragraph too. However, this has no impact on the effectiveness of the residual evaluation provided style weights are estimated correctly.65 Cumulative Excess Return of A4 Fund -0.23 -0.18 -0.13 -0.08 -0.03 0.02 M-95 N-95 M-96 N-96 M-97 N-97 M-98 N-98 M-99 N-99 Months Cumulative Excess

Return Figure 31: Cumulative excess return of A4 fund. In opposition to Con fund A4 fund's performance is relatively stable but also negative. The average under performance is negative 0.36% per month with a standard deviation of 0.766% per month and a t-value of -3.51. The critical tvalue at the 95% level for 55 degrees of freedom is 1.67, thus indicating that the under performance is significant. The contribution through security selection to the overall return of A4 fund was a negative 18%. The return contribution through asset allocation to the overall return was 82%. A4 funds management provided composition data for 12/1998 and 12/1999. Subsequently the data will be used and the weights and results will be referred to as "true". The process applied was the following: The weights computed for A4 fund when rolling the window, were roughly steady. It was assumed that the "true" average portfolio weights would be stable in the same manner. Therefore, the supplied composition data for December 1998 and December 1999 was averaged and the resulting weights calculated. Since asset class data for US bonds and cash holdings were not included in the analysis the average 11% US bonds between December 1998 and December 1999 were split between the asset classes G7GOV and API assuming that these two asset classes somewhat resemble the US-bond market. The 4% average cash were assumed to behave similar to API and attributed to it. Figure 32 displays the cumulative excess return using the66 estimation residuals from style analysis termed "cumresestim" and the "true" cumulative excess return applying the supplied data for A4 fund. -0.35 -0.30

-0.25 -0.20 -0.15 -0.10 -0.05 0.00 0.05 M-95 N-95 M-96 N-96 M-97 N-97 M-98 N-98 M-99 N-99 Months n Cumulative Excess Retur Cumrestrue Cumresestim Figure 32: Comparison of performance development of A4 fund using "true" style weights and estimated style weights. The average performance when utilizing "true" weights was -0.586% per month with a standard deviation of 1.4% per month. In comparison, the average under performance using estimated data was -0.36% per month with a standard deviation of 0.77% per month. The t-values were -3.1 and -3.5 for the "true" and the estimated weights hence both show statistical significance at the 95% level. The comparison shows that in this case, although the estimated weights do not exactly resemble "true" weights, the residual analysis still provides reasonable approximations for the true performance.67 Cumulative Excess Return of Gen Fund -0.23 -0.18 -0.13

-0.08 -0.03 0.02 M-95 N-95 M-96 N-96 M-97 N-97 M-98 N-98 M-99 N-99 Months Cumulative Excess Return Figure 33: Cumulative excess return of Gen fund. Gen fund shows an average negative performance of 0.276% per month. Substantial under performance occurred between May 1995 and December1996. The fund underperformed by approximately -15% cumulatively over that period. From there on the under performance was not as severe but still present. The monthly standard deviation for the overall period was 1.174% and the figure for the t-value was -1,74. The computed style weights were shown to comply especially well with what the fund really invested in. This is exhibited in figure 29. Gen fund did provide composition data but only for December 1999, thus the "true" composition of Gen fund can not be reasonably defined especially since style changes occurred as revealed by rolling the 20-month window through the estimation period. Furthermore figure 28 indicated that the style of Gen fund was well estimated and thus the residuals plotted in figure 33 should be representative. Over the evaluation period 84% of Gen funds return was accounted for by asset allocation. The remaining 16% were the selection return described above. The data leads to the conclusion that the security selection ability of the fund management is not sufficient to justify active asset management fees, even

worse, the contribution through active stock selection rather corresponds to a negatively sloped trend line. An investor who invested the equivalent portions of68 the portfolio in the overall index instead of selected securities of the index, would have outperformed Gen fund's management by approximately 15.5% over the 56-month period. Cumulative Excess Returns of Rai Fund -0.05 0.00 0.05 0.10 0.15 0.20 M-95 N-95 M-96 N-96 M-97 N-97 M-98 N-98 M-99 N-99 Months Cumulative Excess Return Figure 34: Cumulative excess returns for Rai fund. According to the initial style analysis Rai fund's overall return is to 82% attributable to Rai fund's the asset allocation decision. However, residual analysis for Rai fund unveils significant abnormal positive returns, particularly over the last three years. The t-value for the entire sample period is 1.75. The average excess return is 0.28% per month with a standard deviation of 1.19% per month. These findings must be used cautiously. Figure 29 shows that by December 1999 Rai fund was invested in US and Japanese bonds with 29% of its total fund value. These two asset classes were not represented in

the style analysis computations, hence style weights may be inaccurately estimated. The relatively high mean return of Rai fund of 1.39% per month or about 16% p.a. (see Figure 14) may indicate that the portion of fixed income securities is not 59% but somewhat lower. This would mean that the cumulative excess return plot is upward biased.69 To see how sensitive Rai fund's cumulative excess return is to changes in the style weights two additional residual series are generated using different weight settings. The impacts are demonstrated in Figure 35. -0.05 0.00 0.05 0.10 0.15 0.20 M-95 N-95 M-96 N-96 M-97 N-97 M-98 N-98 M-99 N-99 Months Cumulative Excess Return Testres1 Testres2 Raires Figure 35: Sensitivity of Rai fund's selection return to style weight changes. Testres1 is the cumulative excess return of a conducted style analysis for Rai fund reducing the initially calculated fixed income weights of G7GOV and API by 5% each and increasing ESTAND and NASTAND by 5% thus reducing fixed income asset classes by 10% and increasing equity asset classes by 10%. It is assumed that JPSTAND is stable due to the distinct mean and standard deviation characteristics.

In Testres2 the style weight change between the fixed income asset classes and the equity asset classes was set to 5%. The API asset class was reduced by 3% and the G7GOV asset class by 2%, while ESTAND was increased by 2% and NASTAND by 3%. Even when fixed income asset classes are reduced by 10% in favor of equity asset classes the valuation reveals above zero cumulative excess returns. The average excess return for Testres1 is 0.1% per month with a standard error of 1.26%. Testres2 shows an average excess return of 0.17% and a standard deviation of 1.21%. In both cases the t-statistic is not significant with a t-value70 below 1.1 and it can not be concluded that Rai's fund management exhibits stock selection skill. For reasons stated earlier a more detailed analysis of this point is not possible. Cumulative Excess Return of Spa Fund -0.04 0.00 0.04 0.08 0.12 0.16 M-95 N-95 M-96 N-96 M-97 N-97 M-98 N-98 M-99 N-99 Months Cumulative Excess Return Figure 36: Cumulative excess return of Spa fund. Spa funds asset allocation accounted for only 54% of its overall return, which

may be an indicator for missing asset classes. The computed style weights in turn are also seriously in doubt as European bonds and equities are estimated to be zero. Nevertheless the average excess return estimated is 0.18% per month with a standard error of 1.14% and a t-value of 1.2 thus inferring insignificance from zero. For Ers fund no residual analysis will be conducted as the estimated style weights are unlikely to be good estimates of the "true" style weights. 4.2.5. Summary of Findings A comparison of the findings obtained through style analysis to common benchmark measures like the Jensen Alpha, the Sharpe Ratio or the Traynor Ratio does not seem to be useful due to distinct differences. The previously mentioned measures are all based on a single benchmark, contrary to style71 analysis, which splits the benchmark in an asset allocation and a style selection return. Style analysis is most suited to define a funds composition and an investment management's stock picking abilities and thereby provides a more confined and detailed analysis of how the overall return was obtained. Comparing selection return findings with general return ratios would be comparing two different sets of information and thus would not be appropriate. Nevertheless a general overview of the findings is provided below. 56m CumR Avg TR/m SR Avg B/MR/m Avg SelR/m T-V SelR Con Fund 28.59% 0.51% 0.42 0.57% -0.055% -0.91 A 4 Fund 42.47% 0.76% 0.83 1.12% -0.360% -3.51 Gen Fund 64.07% 1.14% 1.13 1.42% -0.276% -1.74 Rai Fund 77.77% 1.39% 1.35 1.11% 0.280% 1.75 Ers Fund 81.71% 1.46% 1.12

Spa Fund 58.84% 1.05% 1.31 0.87% 0.180% 1.2 56m CumR: Cumulative total return over the observed 56 months Avg TR/m: Average total return per month over the observed 56 months SR: Sharpe Ratio from trendInvest for the last 36 months using the 12-months Euribor of 3.459% p. a. Avg B/MR/m: Average benchmark return per month over the observed 56 months Avg SelR/m: Average selection return per month over the observed 56 months T-V SelR: T-value of the average selection return per month Figure 37: Summary of findings for Austrian investment funds. 4.3. Some additional insight using US Mutual Funds The analysis of Austrian investment funds disclosed some critical points, for example the specification of asset classes or multicollinearity. Thus some additional evidence is sought using a different investment universe: The US investment world. Four US mutual funds are analyzed using style analysis. The funds are displayed below.72 Acorn Fund Dreyfuss Growth Opportunity Fund Fidelity Magellan Fund 20th Century Ultra Investors Fund Figure 38: Selected US mutual funds. According to the denomination Dreyfuss Growth Opportunity fund should be mainly invested in equities and Fidelity Magellan fund should have strong exposure to equities too, if no sever change in style occurred since Sharpe's analysis. Especially interesting is Fidelity Magellan Fund as its style analysis data estimated by Sharpe for the period from January 1985 to December 1989 were

displayed in his paper. 67 And the time period studied will be from January 1990 to December 1995 thus revealing possible changes over the entire period. Asset class data for the period under examination was supplied by the Carlson School of Management and in particular by Professor Maheswaran. The returns for the asset classes as well as for the above-mentioned funds were provided monthly. The returns were computed geometrically. The asset classes are: US Treasury bills (Cash equivalents with less than 3 month to maturity) US Intermediate-term government bond. (Government bonds with less than 10 years to maturity) US Long-term government bonds (Government bonds with more than 10 years to maturity) US Corporate bonds US Value stocks (Russel 1000 value index) US Growth stocks (Russel 1000 growth index)

67 SHARPE (1992), p. 7 - 1973 US Small stocks (Russel 2000, which are the 2000 smallest stocks of Russel 3000) To gather a comprehension of the level of the multicollinearity dimension a correlation summary is shown. CORPBDS GRSTCKS IMBDS LTBDS SMSTCKS TBILLS VLSTCKS CORPBDS 1.00 0.56 0.92 0.98 0.43 0.04 0.64

GRSTCKS 0.56 1.00 0.41 0.53 0.82 0.05 0.87 IMBDS 0.92 0.41 1.00 0.91 0.22 0.14 0.50 LTBDS 0.98 0.53 0.91 1.00 0.37 0.01 0.62 SMSTCKS 0.43 0.82 0.22 0.37 1.00 -0.15 0.82 TBILLS 0.04 0.05 0.14 0.01 -0.15 1.00 -0.12 VLSTCKS 0.64 0.87 0.50 0.62 0.82 -0.12 1.00 Figure 39: Correlogram of selected US asset classes. Interestingly the correlation between US growth and value stocks is about the same as between European growth and value stocks. A high correlation is also striking between different bond asset classes. This is what one would anticipate due to the common sensitivity to interest rate changes and maybe similar duration characteristics. T-bills in turn almost indicate no correlation at all.74 CORPBDS GRSTCKS IMBDS LTBDS SMSTCKS TBILLS VLSTCKS Mean 0.0069 0.0083 0.0061 0.0070 0.0093 0.0039 0.0075 Median 0.0091 0.0073 0.0058 0.0067 0.0197 0.0034 0.0127 Maximum 0.0436 0.1413 0.0270 0.0581 0.1122 0.0069 0.0838 Minimum -0.0383 -0.0959 -0.0258 -0.0450 -0.1338 0.0021 -0.0879 Std. Dev. 0.0176 0.0406 0.0135 0.0230 0.0483 0.0015 0.0347 Skewness -0.3873 0.3758 -0.4347 -0.2582 -0.4443 0.6691 -0.2612 Kurtosis 2.8024 4.3267 2.4504 2.7475 3.1198 2.1130 3.0743 Jarque-Bera 1.60 5.81 2.64 0.83 2.01 6.44 0.70 Probability 0.4499 0.0547 0.2665 0.6616 0.3661 0.0399 0.7061 Observations 60 60 60 60 60 60 60 Figure 40: Descriptive statistics of selected US asset classes. Asset classes used in the analysis of US mutual funds are shown above. The

mean return of the overall equity universe has sharply increased in the period form January 1995 to December 1999 compared to the period from January 1990 to December 1994. If one looks at the average return of growths, value and small stocks - representing the entire US equity universe - than the mean return is somewhere between 0.75% per month to 0.93% per month for the 1990 to 1995 period. The analysis of the 1995 to 1999 period displayed in figure 17 shows a mean return for North American equities of about 2.65% per month about three times the average return of the 1990 to 1995 period. Corporate bonds and long-term bonds are the only two asset classes showing similar mean returns but standard deviations are different. The correlogram in figure 38 already revealed this information. Striking is also the substantial difference between median and mean for small and value stocks. For small stocks the median is more than double the value of the mean marking fewer but larger negative returns relatively to positive ones.75 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% TBILLS IMBDS LTBDS CORPBDS VLSTCKS GRSTCKS SMSTCKS R-squared -0.2 -0.1

0 0.1 0.2 0.3 J-90 J-91 J-92 J-93 J-94 n Cumulative Excess Retur Figure 41: Style weights and cumulative selection contribution of Akorn fund. Akorn fund returned on average 1.13% per month with a standard deviation of 4.41% per month. The asset allocation decision of the fund management accounted for 88.2% of the overall return. Akorn fund experienced substantial exposure to small stocks, which returned about 0.93% per month from January 1990 to December 1994 hence possibly revealing stock selection skill. The volatility of small stocks over that period was 4.83% per month. The residual analysis shows that Akorn's fund management did contribute value through stock selection of approximately 0.24% per month and a standard deviation of 1.51% per month over the studied period. These figures are not significant at the 95% level as the t-value of 1.25 is below the required 1.67. The Jarque-Bera test for normality is 0.7 with an associated 70% probability for the normal distribution assumption under the null hypothesis of Jarque Bera.76 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% TBILLS IMBDS LTBDS CORPBDS VLSTCKS

GRSTCKS SMSTCKS R-squared -0.2 -0.1 0.0 0.1 J-90 J-91 J-92 J-93 J-94 n Cumulative Excess Retur Figure 42: Style weights and cumulative selection contribution of Dreyfuss Growth Opportunity Fund. Dreyfuss Growth Opportunity fund's composition data unveils an almost sole exposure to small and growth stocks. The fund's mean return was 0.53% per month which somewhat pales when compared to the average returns of the two asset classes of 0.93% per month for small stocks and 0.83% per month for growth stocks. The standard deviation of Deryfuss Growth Opportunity fund's return series is about 4.46% per month, slightly lower than that of small stocks of 4.83% and higher than the 4.1% of the growth stock asset class. About 81% of Dreyfuss Growth Opportunity fund's return are attributable to asset allocation. Stock selection accounted for 19% of Dreyfuss Growth Opportunity fund's return - in this case a negative stock selection return averaging 0.31% per month with a volatility of 1.94%. The erratic graph of the cumulative excess return suggests no stock selection skill over the analyzed period. The adjacent t-value is negative 1.25 thus not significant at the 95%. A Jarque-Bera test returned a value of 0.16 with a probability for normal distribution of the residuals of 92%.77

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% TBILLS IMBDS LTBDS CORPBDS VLSTCKS GRSTCKS SMSTCKS R-squared -0.05 0.00 0.05 0.10 0.15 0.20 J-90 J-91 J-92 J-93 J-94 n Cumulative Excess Retur Figure 42: Style weights and cumulative selection contribution of Fidelity Magellan fund. Fidelity Magellan Fund is substantially invested in value and growth stocks. This is not surprising as the fund managed about $14 billion at the end of 1989, making substantial investments in small stocks difficult. 68 Sharpe found in his study that the management of Fidelity Magellan fund reduced the portion of small stocks successively from 1985 to about mid 1987 and kept it constant thereafter

at a 15 to 18 percent level. Sharpe found an R-squared for Fidelity Magellan fund of 97.3% for the period from January 1985 to December 1989. The R-squared value for the period studied here is 93.6% thus asset allocation accounted for more than 90% of Fidelity Magellan fund's generated return of the last 10 years. The mean return of Fidelity Magellan fund was 1.03% per month with a standard deviation of 4.08%. Remarkable is Magellan fund's stock selection contribution. Although only 6.4% relative to its asset allocation decision but 0.23% per month in absolute terms with a volatility of 1.04% per month. Over the period studied by Sharpe the selection return was 0.57% per month with a standard deviation of 1.05% per month. Testing the residuals for normality resulted in a 76% probability using the Jarque Bera test. The t-value for this period was 1.7 indicating significant

68 SHARPE (1992), p. 1378 outperformance and the t-value found by Sharpe was 3.76. 69 This shows Fidelity Magellan fund's remarkable performance. 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% TBILLS IMBDS LTBDS CORPBDS VLSTCKS

GRSTCKS SMSTCKS R-squared -0.2 0 0.2 0.4 0.6 0.8 J-90 J-91 J-92 J-93 J-94 n Cumulative Excess Retur Figure 43: Style weights and cumulative excess return of 20 th Century Ultra Investors fund. 20 th Century Ultra Investors fund generated a mean return of 1.71% per month during the time period studied. This impressive return was achieved by taking on substantial risk, namely 6.75% per month. Compared to the previous funds asset allocation accounts for remarkable smaller part of the overall return. 73.7% of the overall fund return are attributable to asset allocation. Style analysis reveals significant stock picking skill of 20 th Century Ultra Investors management. The average excess return was 0.81% per month with a standard

deviation of 3.46. Although the excess return exhibits a considerable standard deviation the t-value of 1.82 is significant at the 95% level. The fact that the residuals are only normally distributed with a probability of 43% somewhat mitigates the aptness of the t-value.

69 SHARPE (1992), p. 1879 5. Conclusion and Final Remarks Generally there are two broad ways to approach portfolio performance evaluation. One is based on knowing the exact composition of the target portfolio. If access to this information is provided the Grinblatt & Titman model may be well suited to detect manager skill. Furthermore, the procedure will produce very accurate results and conventional benchmark problems are irrelevant, as no benchmark is needed. The alternative is that no knowledge about an investment fund's composition exists. This was the subject this master's thesis explored. The main problem arising from the uncertainty of the investment funds composition is the selection of an appropriate benchmark. Especially when asset allocation decisions of an investment management are restricted by investment policies imposed by the investor. In such cases a "generic" benchmark like the S&P 500 will be notoriously non-reached by a fixed income fund but likely beaten by a fund taking on sufficiently high risk like a small stock fund. Traditional measures of performance do take risk into account but do not regard investment style and reveal only a relatively small part of the information incorporated in the return series of funds.

The analysis of six Austrian investment funds using style analysis unveiled strength and weaknesses of style analysis. Most crucial for obtaining sound results is the proper choice of asset classes. The fact that asset classes were not exhaustive as required by Sharpe 70 turned out to be very demonstrative in terms of limitations of the model. When asset classes, the fund is invested in, are not represented in the constrained regression analysis the estimated weights are seriously in doubt. Furthermore asset classes with very similar return histories, similar mean return and standard deviation are also prone to cause erratic style weight estimates when rolling a time window over the sample period. This

70 SHARPE (1992), p. 880 problem was occasionally present with the EVALUE and EGROWTH asset classes, but was of minor impact. This infers that a correlation of about 0.87 does not pose a significant problem even when potential asset classes are missing. Another point of concern is high asset turnover as well as high asset class turnover because style weights may not be stable and be insufficient estimates of the "true" style weights. However, rolling a window can mitigate this problem. When asset classes are specified appropriately the information content revealed with style analysis is remarkable. Particularly practical is the division of portfolio returns into an asset allocation contribution and a security selection contribution. By that, an active investment manager's skill can be isolated from obligations imposed by an investment policy or independent asset allocation decisions made

by the manager. On this basis the investor has a tool to select a manager with a style he considers apt for his investment strategy. Furthermore sufficiently large investment funds can construct a "portfolio manager matrix". Thus hiring investment managers for the asset allocation decision, who have shown to do especially well in that field and stock selection managers who were detected to do well in the stock selection field. An additional advantage of style analysis is its cost effectiveness and simplicity. The sole input are return series. One problem the style analysis approach developed by Sharpe does not solve either is the benchmark problem. Style analysis breaks the benchmark down into separate benchmarks for each asset class. By that the benchmark problem has only been broken down into separate "smaller" benchmark inaccuracies, but the initial problem persists namely that that a mispecified riskless rate and a mispecified market portfolio (individual asset class portfolios) can lead to the inaccuracies exhibited in Figure 7. Overall it seems that style analysis is very useful in cases where composition data for specific investment fund is not available. Thus, referring to the question addressed in the beginning about the usefulness of Sharpe's style analysis model for portfolio performance evaluation, the conclusion was reached that81 when asset classes are specified carefully, impressive information can be revealed. Furthermore portfolio evaluation can be very specific resulting in a fair classification and evaluation of a portfolio management's performance.I Figures Figure 1: Haugen Robert A., "Modern Investment Theory", Third Edition, Prentice Hall/Upper Saddle River, NJ (1993), p. 207. Figure 2: Sorenson Eric H., Miller Keith L., Samak Vele, "Allocating between

Active and Passive Management", Financial Analyst Journal, Sept./Oct. (1998), p. 19. Figure 3: Treynor Jack L., Mazuy Kay K., "Can Mutual Funds Outguess the Market?", Harvard Business Review, July/Aug. (1966), p. 133. Figure 4: "Relationship between the TR and an investors' utility", Created by Johann Aldrian Figure 5: Ippolito Richard A., "On Studies of Mutual Fund Performance, 1962 1991", Financial Analysts Journal, Jan./Feb. (1993), p. 44. Figure 6: Sharpe William F., "Morningstar's Risk-Adjusted Ratings", Financial Analyst Journal, July/Aug., (1998), p. 30. Figure 7: Roll Richard, "Performance Evaluation and Benchmark Errors (I)", The Journal of Portfolio Management, Summer (1980), p.6. Figure 8: Lehmann Bruce N., Modest David M., "Mutual Fund Performance Evaluation: A Comparison of Benchmarks and Benchmark Comparisons", Journal of Finance, June, (1987), p. 251.II Figure 9: Grinblatt Mark, Titman Sheridan, "Performance Measurement without Benchmarks: An Examination of Mutual Fund Returns", Journal of Business, vol. 66 no. 1, (1993), p. 56. Figure 10: Sharpe, William F., "Asset Allocation: Management Style and Performance Measurement", Journal of Portfolio Management, Winter (1992), p.10. Figure 11: Descriptive statistics of Appollo 4 fund. Figure 12: Descriptive statistics of Constantia Privat-Invest fund. Figure 13: Descriptive statistics of Generali Mixfund. Figure 14: Descriptive statistics of Raiffeisen Global Mix fund.

Figure 15: Descriptive statistics of SparInvest fund. Figure 16: Descriptive statistics of Spngler Securities Trust fund. Figure 17: Descriptive statistics of selected asset classes. Figure 18: Cross-Correlogram of selected asset classes. Figure 19: Solver set-up to calculate Sharpe style weights. Figure 20: Style weights using different asset classes. Figure 21: Teststatistic of first-lag auto-correlation of residuals.III Figure 22: T-values of the estimated residual's mean value for selected Austrian investment funds. Figure 23: Style changes of Con fund. Figure 24: Style changes of A4 fund. Figure 25: Style changes of Gen fund. Figure 26: Style changes of Rai fund. Figure 27: Style changes of Ers fund. Figure 28: Style changes of Spa fund. Figure 29: True and calculated weight comparison of A4, Gen and Rai fund. Figure 30: Cumulative selection return of Con fund. Figure 31: Cumulative excess return of A4 fund. Figure 32: Comparison of performance development of A4 fund using "true" style weights and estimated style weights. Figure 33: Cumulative excess return of Gen fund. Figure 34: Cumulative excess return of Rai fund. . Figure 35: Sensitivity of Rai fund's selection return to style weight changes. Figure 36: Cumulative excess return of Spa fund.IV

Figure 37: Summary of findings for Austrian investment funds. Figure 38: Selected US mutual funds. Figure 39: Correlogram of US asset classes. Figure 40: Descriptive statistics of US asset classes. Figure 41: Style weights and cumulative selection contribution of Akorn fund. Figure 42: Style weights and cumulative selection contribution of Dreyfuss Growth Opportunity fund. Figure 42: Style weights and cumulative selection contribution of Fidelity Magellan fund. Figure 43: Style weights and cumulative excess return of 20 th Century Ultra Investors fund.V References Brinson Gary P., Hood Randolph L., Beebower Gilbert L., "Determinants of Portfolio Performance", Financial Analysts Journal, July/August (1986). Christopherson Jon A., "Equity Style Classifications", The Journal of Portfolio Management, Spring (1995). Elton Edwin J., Gruber Martin J., "Modern Portfolio Theory and Investment Analysis", Fourth Edition, John Wiley & Sons Inc./NY (1992). Fama Eugene F., French Kenneth R., "Common Risk Factors in the Returns on Stocks and Bonds", Journal of Financial Economics, February, (1993). Fama Eugene F., "Efficient Capital Markets: A Review of Theory and Empirical Work", Journal of Finance, May (1970). Fischer, Edwin O., "Finanzwirtschaft fr Fortgeschrittene", Oldenburg Verlag,

Wien - Mnchen, (1996). Friend Irwin, Blume Marshall E., Crockett Jean, "Mutual Funds and other Institutional Investors", Mc Graw Hill/NY (1970). Graham Benjamin, "The Intelligent Investor", HarperBusiness NY, (1949). Grinblatt Mark, Titman Sheridan, "Performance Measurement without Benchmarks: An Examination of Mutual Fund Returns", Journal of Business, vol. 66 no. 1, (1993).VI Grinblatt Mark, Titman Sheridan, "Mutual Fund Performance: An Analysis of Quarterly Portfolio Holdings", Journal of Business, 62 (1989). Hull John C., "Options Futures and other Derivatives", Third Edition, Prentice Hall/Upper Saddle River, NJ (1997). Ippolito Richard A., "On Studies of Mutual Fund Performance, 1962 - 1991", Financial Analysts Journal, Jan./Feb. (1993). Jensen Michael C., "The Performance of Mutual funds in the Period 1945 1964", Journal of Finance, May, (1968). Kothari S. P., Warner Jerold B., "Evaluating Mutual Fund Performance", Working Paper SLOAN School of Management (1997); MIT, 50 Memorial Drive, Cambridge, MA 02142; email:Kothari@MIT.edu. LeClair Robert T., "Discriminant Analysis and the Classification of Mutual Funds", Journal of Economics and Business, Spring (1974). Lehmann Bruce N., Modest David M., "Mutual Fund Performance Evaluation: A Comparison of Benchmarks and Benchmark Comparisons", Journal of Finance, June, (1987). Lobosco Angelo, DiBartolomeo Dan, "Approximating the Confidence Intervals for Sharpe Style Weights", Financial Analysts Journal, July/August (1997).

Modigliani Franco, Modigliani Leah, "Risk-Adjusted Performance", The Journal of Portfolio Management, Winter (1997). MSCI, "Index Calculations", www.msci.com/cover/index.html, June 2000.VII sterreichische Kontrollbank, "Index Downloads", www.oekb.at, June 2000. Roll Richard, "Performance Evaluation and Benchmark Errors (I)", The Journal of Portfolio Management, Summer (1980). Ross Stephen A., "The Arbitrage Theory of Capital Asset Pricing", Journal of Economic Theory, December, (1976). Sharpe William F., "Morningstar's Risk-Adjusted Ratings", Financial Analyst Journal, July/Aug., (1998). Sharpe William F., Alexander Gordon J., Bailey Jeffery V., "Investments", Sixth Edition, Prentice Hall/Upper Saddle River, NJ (1998). Sharpe, William F., "Asset Allocation: Management Style and Performance Measurement", Journal of Portfolio Management, Winter (1992). Sharpe William F., "Determining a Fund's Effective Asset Mix", Investment Management Review, December (1988). Sharpe William F., "Mutual Fund Performance", Journal of Business, January (1966). Sorenson Eric H., Miller Keith L., Samak Vele, "Allocating between Active and Passive Management", Financial Analyst Journal, Sept./Oct. (1998). trendINVEST, "Investment & Fonds", No. 1/Jnner 2000. Treynor Jack L., Mazuy Kay K., "Can Mutual Funds Outguess the Market?", Harvard Business Review, July/Aug. (1966).VIII Treynor Jack L., "How to Rate Management of Investment Funds", Harvard Business Review, Jan./Feb., (1965).

Tzcinka Charles A., "Equity Style Classifications: Comment", The Journal of Portfolio Management, Spring (1995).IX Monthly data with dividends reinvested of the analyzed Austrian investment funds in EUR. Con BA Gen Rai Ers Spa A-95 39.39 145.31 82.48 344.70 88.77 68.06 M-95 40.48 148.51 86.33 353.58 91.03 69.89 J-95 40.48 147.79 85.09 351.13 93.20 72.20 J-95 40.79 150.19 86.55 359.51 93.17 73.14 A-95 41.00 151.71 86.11 370.61 96.02 75.53 S-95 41.14 151.23 84.95 363.28 97.25 75.62 O-95 41.07 150.75 82.77 360.55 98.65 75.84 N-95 41.91 152.66 85.97 373.79 98.49 77.67 D-95 42.44 153.51 87.22 382.20 101.65 76.98 J-96 43.46 156.48 93.25 394.66 104.35 79.55 F-96 43.07 155.97 93.32 392.08 107.55 80.70 M-96 43.31 157.30 93.57 396.83 106.59 82.30 A-96 43.63 160.53 93.99 410.08 108.53 85.23 M-96 43.84 160.89 93.89 412.06 111.17 87.10 J-96 43.70 160.41 92.95 411.52 112.59 86.82 J-96 43.46 157.81 90.48 395.97 113.69 84.62 A-96 43.95 159.91 91.70 400.76 109.06 85.62 S-96 44.54 162.81 93.24 415.57 110.29 88.50 O-96 44.86 163.07 93.37 416.79 115.12 87.67 N-96 45.52 166.59 96.11 439.02 116.96 89.51 D-96 45.94 167.84 97.95 445.54 123.51 90.20

J-97 46.43 173.02 101.76 465.60 123.13 93.21 F-97 47.10 177.11 105.43 485.84 128.59 95.26 M-97 46.68 176.01 105.84 481.12 131.22 95.43 A-97 46.61 178.69 107.47 489.77 130.37 96.68 M-97 47.03 182.78 109.68 512.75 134.76 98.20 J-97 47.52 189.14 114.39 531.22 139.24 99.77 J-97 48.54 199.13 121.18 572.65 147.52 103.64 A-97 47.87 192.24 115.28 558.34 156.04 101.24 S-97 48.54 194.34 119.18 555.36 146.60 102.04 O-97 47.87 187.67 114.13 526.10 152.57 100.01 N-97 48.12 191.34 117.09 530.21 146.39 102.10 D-97 48.68 194.55 120.10 535.73 149.16 102.19 J-98 49.41 198.38 123.19 558.00 154.88 104.53 F-98 49.94 202.42 127.73 575.30 159.03 107.34 M-98 50.57 206.40 133.87 589.90 167.59 107.86 A-98 50.39 204.37 131.65 583.96 175.09 106.53 M-98 51.13 203.89 133.42 580.17 175.36 106.58 J-98 51.38 207.16 137.75 584.84 173.39 108.09 J-98 51.66 207.47 137.24 574.19 175.32 107.62 A-98 51.94 201.41 128.84 547.19 175.87 104.48 S-98 51.83 196.99 123.89 533.62 158.00 105.45X Con BA Gen Rai Ers Spa O-98 51.76 199.71 125.57 545.52 153.47 109.10 N-98 52.50 208.91 133.57 579.48 161.16 111.17 D-98 52.88 207.39 135.21 576.47 171.93 113.39

J-99 53.58 211.01 135.14 601.91 174.97 116.31 F-99 53.58 208.64 134.89 613.58 179.13 117.80 M-99 53.34 209.52 135.64 636.46 179.04 119.67 A-99 54.39 213.93 137.93 667.54 187.04 120.90 M-99 53.48 212.35 134.85 655.00 195.58 117.97 J-99 53.34 213.73 138.01 680.58 190.54 119.74 J-99 53.06 210.67 133.48 671.50 196.12 119.14 A-99 52.95 214.08 136.58 685.09 191.35 120.20 S-99 52.39 209.56 133.53 672.57 190.99 119.37 O-99 52.15 210.51 138.45 675.95 186.23 120.09 N-99 52.57 218.79 148.91 724.56 192.34 122.29 D-99 52.43 222.21 156.53 750.20 200.97 122.60XI Asset class data with net dividends reinvested in USD applied in Austrian fund's style analysis. ESTAND EVALUE EGROWTH NASTAND NAVALUE NAGROWTH JPSTAND G7GOV API A-95 180 105 M-95 0.0203 0.0242 0.0163 0.0380 0.0391 0.0369 -0.0640 190 107 J-95 0.0094 -0.0040 0.0227 0.0235 0.0143 0.0327 -0.0490 186 107 J-95 0.0508 0.0515 0.0501 0.0322 0.0360 0.0282 0.0766 187 108 A-95 -0.0394 -0.0480 -0.0313 -0.0003 0.0074 -0.0082 -0.0410 200 109 S-95 0.0298 0.0279 0.0342 0.0410 0.0313 0.0505 0.0084 196 110 O-95 -0.0047 -0.0067 -0.0028 -0.0012 -0.0137 0.0108 -0.0576 196 111 N-95 0.0071 0.0113 0.0034 0.0423 0.0482 0.0366 0.0575 205 113 D-95 0.0312 0.0357 0.0276 0.0144 0.0212 0.0072 0.0499 205 115 J-96 0.0065 0.0010 0.0116 0.0355 0.0313 0.0395 -0.0132 214 116

F-96 0.0181 0.0183 0.0179 0.0090 0.0062 0.0119 -0.0180 209 115 M-96 0.0119 0.0100 0.0142 0.0102 0.0179 0.0025 0.0347 210 116 A-96 0.0072 0.0101 0.0037 0.0157 0.0150 0.0163 0.0553 218 117 M-96 0.0077 0.0079 0.0071 0.0255 0.0108 0.0402 -0.0528 218 118 J-96 0.0110 0.0083 0.0136 0.0038 -0.0034 0.0109 0.0053 220 117 J-96 -0.0126 -0.0101 -0.0150 -0.0446 -0.0445 -0.0444 -0.0458 213 118 A-96 0.0292 0.0322 0.0263 0.0229 0.0281 0.0174 -0.0457 215 119 S-96 0.0208 0.0145 0.0265 0.0534 0.0402 0.0662 0.0341 226 121 O-96 0.0230 0.0197 0.0254 0.0276 0.0369 0.0171 -0.0694 228 122 N-96 0.0494 0.0534 0.0458 0.0724 0.0732 0.0712 0.0189 236 124 D-96 0.0192 0.0221 0.0170 -0.0203 -0.0189 -0.0216 -0.0716 235 125 J-97 0.0027 0.0082 -0.0018 0.0650 0.0506 0.0792 -0.1152 252 126 F-97 0.0131 0.0210 0.0067 0.0059 0.0057 0.0062 0.0231 260 127 M-97 0.0318 0.0316 0.0320 -0.0464 -0.0364 -0.0567 -0.0335 255 126 A-97 -0.0050 -0.0029 -0.0070 0.0613 0.0394 0.0836 0.0356 268 127 M-97 0.0418 0.0491 0.0346 0.0562 0.0561 0.0562 0.1048 265 127 J-97 0.0488 0.0407 0.0568 0.0429 0.0355 0.0504 0.0721 274 129 J-97 0.0458 0.0465 0.0451 0.0752 0.0818 0.0686 -0.0309 295 130 A-97 -0.0588 -0.0579 -0.0597 -0.0611 -0.0482 -0.0745 -0.0907 288 129 S-97 0.0926 0.0929 0.0922 0.0510 0.0544 0.0475 -0.0152 287 130 O-97 -0.0504 -0.0322 -0.0670 -0.0289 -0.0259 -0.0320 -0.0978 282 130 N-97 0.0152 0.0167 0.0138 0.0433 0.0355 0.0513 -0.0633 291 131 D-97 0.0359 0.0362 0.0358 0.0149 0.0242 0.0054 -0.0589 299 132 J-98 0.0408 0.0391 0.0424 0.0112 -0.0103 0.0328 0.0855 307 134 F-98 0.0753 0.0685 0.0818 0.0682 0.0644 0.0720 0.0052 306 135

M-98 0.0688 0.0949 0.0438 0.0514 0.0493 0.0535 -0.0705 314 135 A-98 0.0192 0.0208 0.0176 0.0111 0.0204 0.0018 -0.0041 306 135 M-98 0.0201 0.0221 0.0181 -0.0201 -0.0248 -0.0152 -0.0565 307 137 J-98 0.0109 -0.0008 0.0222 0.0382 0.0071 0.0684 0.0139 313 138 J-98 0.0196 0.0324 0.0074 -0.0128 -0.0184 -0.0075 -0.0133 310 139 A-98 -0.1344 -0.1607 -0.1099 -0.1538 -0.1746 -0.1350 -0.1211 313 141 S-98 -0.0408 -0.0409 -0.0407 0.0620 0.0551 0.0690 -0.0277 304 143 O-98 0.0770 0.0683 0.0856 0.0751 0.0787 0.0715 0.1550 301 143XII ESTAND EVALUE EGROWTH NASTAND NAVALUE NAGROWTH JPSTAND G7GOV API N-98 0.0518 0.0543 0.0494 0.0644 0.0529 0.0760 0.0447 308 144 D-98 0.0428 0.0197 0.0648 0.0555 0.0262 0.0834 0.0380 302 145 J-99 -0.0065 -0.0183 0.0046 0.0433 0.0249 0.0597 0.0072 315 147 F-99 -0.0257 -0.0105 -0.0400 -0.0297 -0.0101 -0.0472 -0.0222 321 146 M-99 0.0109 0.0428 -0.0217 0.0404 0.0252 0.0555 0.1299 330 146 A-99 0.0294 0.0665 -0.0105 0.0375 0.0859 -0.0120 0.0409 339 149 M-99 -0.0492 -0.0589 -0.0385 -0.0240 -0.0201 -0.0282 -0.0580 342 147 J-99 0.0167 0.0175 0.0159 0.0517 0.0273 0.0775 0.0904 341 145 J-99 0.0092 0.0258 -0.0102 -0.0317 -0.0270 -0.0366 0.0952 328 144 A-99 0.0101 0.0053 0.0154 -0.0070 -0.0313 0.0177 -0.0070 332 143 S-99 -0.0077 -0.0110 -0.0042 -0.0282 -0.0463 -0.0109 0.0589 331 143 O-99 0.0361 0.0191 0.0540 0.0632 0.0528 0.0728 0.0420 336 142 N-99 0.0266 -0.0053 0.0594 0.0217 -0.0049 0.0451 0.0420 351 143 D-99 0.0976 0.0776 0.1168 0.0699 0.0202 0.1107 0.0602 352 143XIII Monthly exchange rate data from April 1995 to December 1999

ATS-JPY ATS-USD RetJPY RetUSD A-95 11.549 9.707 M-95 11.765 10.094 0.019 0.039 J-95 11.47 9.736 -0.025 -0.036 J-95 11.05 9.719 -0.037 -0.002 A-95 10.62 10.315 -0.040 0.060 S-95 10.127 9.976 -0.048 -0.033 O-95 9.742 9.944 -0.039 -0.003 N-95 9.94 10.065 0.020 0.012 D-95 9.842 10.088 -0.010 0.002 J-96 9.776 10.48 -0.007 0.038 F-96 9.87 10.335 0.010 -0.014 M-96 9.74 10.382 -0.013 0.005 A-96 10.3 10.757 0.056 0.035 M-96 9.964 10.801 -0.033 0.004 J-96 9.838 10.731 -0.013 -0.007 J-96 9.651 10.34 -0.019 -0.037 A-96 9.578 10.418 -0.008 0.008 S-96 9.652 10.747 0.008 0.031 O-96 9.376 10.649 -0.029 -0.009 N-96 9.496 10.801 0.013 0.014 D-96 9.423 10.954 -0.008 0.014 J-97 9.466 11.495 0.005 0.048 F-97 9.872 11.905 0.042 0.035 M-97 9.583 11.819 -0.030 -0.007

A-97 9.61 12.166 0.003 0.029 M-97 10.272 11.962 0.067 -0.017 J-97 10.739 12.283 0.044 0.026 J-97 11.068 12.99 0.030 0.056 A-97 10.615 12.634 -0.042 -0.028 S-97 10.25 12.436 -0.035 -0.016 O-97 10.12 12.148 -0.013 -0.023 N-97 9.748 12.418 -0.037 0.022 D-97 9.767 12.633 0.002 0.017 J-98 10.117 12.837 0.035 0.016 F-98 10.094 12.729 -0.002 -0.008 M-98 9.777 13.001 -0.032 0.021 A-98 9.548 12.627 -0.024 -0.029 M-98 9.02 12.552 -0.057 -0.006 J-98 9.093 12.732 0.008 0.014 J-98 8.692 12.531 -0.045 -0.016 A-98 8.811 12.488 0.014 -0.003 S-98 8.675 11.803 -0.016 -0.056XIV ATS-JPY ATS-USD RetJPY RetUSD O-98 9.97 11.616 0.139 -0.016 N-98 9.758 11.995 -0.021 0.032 D-98 10.290 11.747 0.053 -0.021 J-99 10.417 12.087 0.012 0.029 F-99 10.478 12.489 0.006 0.033 M-99 10.766 12.810 0.027 0.025

A-99 10.843 12.985 0.007 0.014 M-99 10.820 13.160 -0.002 0.013 J-99 11.024 13.323 0.019 0.012 J-99 11.170 12.867 0.013 -0.035 A-99 11.911 13.015 0.064 0.011 S-99 12.213 12.902 0.025 -0.009 O-99 12.556 13.164 0.028 0.020 N-99 13.360 13.628 0.062 0.035 D-99 13.395 13.697 0.003 0.005XV Monthly US Mutual fund data from January 1990 to December 1994 20th cent. Ultra Investor Akorn Dreyfuss Fidelity Magellan J-90 -0.11020 -0.06480 -0.04640 -0.06450 F-90 0.03690 0.01250 0.01240 0.02050 M-90 0.03680 0.03030 0.02150 0.02560 A-90 -0.02450 -0.02890 -0.02910 -0.02530 M-90 0.17090 0.07130 0.07840 0.08890 J-90 0.01610 0.01630 -0.00190 0.00430 J-90 -0.02530 -0.01440 -0.01050 -0.01130 A-90 -0.08880 -0.13460 -0.08910 -0.09800 S-90 -0.05590 -0.10630 -0.05850 -0.06350 O-90 -0.02640 -0.02350 0.00960 -0.01240 N-90 0.13200 0.03970 0.04300 0.07570 D-90 0.06610 0.03310 0.01480 0.03100 J-91 0.15270 0.05960 0.04260 0.06990 F-91 0.08210 0.08170 0.07540 0.08680

M-91 0.12840 0.04050 0.04770 0.03400 A-91 -0.05120 0.03220 -0.02790 0.00370 M-91 0.08370 0.04710 0.04210 0.05700 J-91 -0.08770 -0.04310 -0.04860 -0.05880 J-91 0.12540 0.04620 0.07710 0.06210 A-91 0.06010 0.03790 0.03670 0.03070 S-91 -0.00610 0.00090 0.00180 -0.00380 O-91 0.06660 0.03160 0.04940 0.01340 N-91 -0.04570 -0.02840 -0.01400 -0.04940 D-91 0.17000 0.09670 0.15620 0.11800 J-92 0.01730 0.05360 -0.02040 0.00040 F-92 -0.01640 0.03640 -0.01860 0.02030 M-92 -0.06970 -0.00710 -0.05300 -0.02710 A-92 -0.07370 -0.03030 -0.04800 0.01480 M-92 0.02470 0.00430 0.02610 0.00960 J-92 -0.06270 -0.02440 -0.05000 -0.01760 J-92 0.05710 0.03760 0.05260 0.02810 A-92 -0.05140 -0.01600 -0.02290 -0.02170 S-92 0.02360 0.01770 0.01170 0.01150 O-92 0.04880 0.05280 0.02150 0.00710 N-92 0.07700 0.05800 0.05600 0.02530 D-92 0.05470 0.04140 0.01080 0.01940 J-93 0.02790 0.04300 -0.00080 0.02630 F-93 -0.07590 -0.00280 -0.07010 0.02090 M-93 0.05160 0.05410 0.01060 0.03670

A-93 -0.01770 -0.02510 -0.04380 0.00980 M-93 0.11670 0.08240 0.06860 0.03940 J-93 0.03950 0.01140 -0.00240 0.01390 J-93 -0.00850 -0.00510 -0.00400 0.01100XVI 20th cent. Ultra Investor Akorn Dreyfuss Fidelity Magellan A-93 0.08120 0.06600 0.06070 0.05880 S-93 0.02850 0.02920 0.03690 0.01080 O-93 -0.02000 0.03810 -0.00870 0.00070 N-93 -0.05090 -0.03780 -0.04660 -0.03290 D-93 0.04290 0.03720 0.02700 0.02990 J-94 0.05940 0.00500 0.02610 0.03950 F-94 -0.01240 -0.01210 -0.01090 -0.00730 M-94 -0.06170 -0.04840 -0.06970 -0.04640 A-94 -0.00570 0.00830 0.00690 0.01000 M-94 -0.02920 -0.01130 0.00980 -0.01150 J-94 -0.04980 -0.03420 -0.02720 -0.04340 J-94 0.01140 0.03230 0.01790 0.03350 A-94 0.05850 0.04610 0.02250 0.04740 S-94 -0.01790 -0.01250 -0.01440 -0.02600 O-94 0.04490 -0.00370 0.01550 0.03380 N-94 -0.04060 -0.03890 -0.05000 -0.05480 D-94 0.01560 -0.00360 0.01320 0.01410XVII Monthly US asset class returns from January 1990 to December 1994 Tbills IMBDS LTBDS CORPBDS VLSTCKS GRSTCKS SMSTCKS J-90 0.0057 -0.0105 -0.0343 -0.0191 -0.0623 -0.0804 -0.0873

F-90 0.0057 0.0007 -0.0025 -0.0012 0.0252 0.0071 0.0310 M-90 0.0064 0.0002 -0.0044 -0.0011 0.0102 0.0398 0.0392 A-90 0.0069 -0.0077 -0.0202 -0.0191 -0.0390 -0.0130 -0.0327 M-90 0.0068 0.0261 0.0415 0.0385 0.0830 0.1039 0.0708 J-90 0.0063 0.0151 0.0230 0.0216 -0.0227 0.0108 0.0026 J-90 0.0068 0.0174 0.0107 0.0102 -0.0087 -0.0091 -0.0438 A-90 0.0066 -0.0092 -0.0419 -0.0292 -0.0879 -0.0959 -0.1338 S-90 0.0060 0.0094 0.0117 0.0091 -0.0484 -0.0539 -0.0889 O-90 0.0068 0.0171 0.0215 0.0132 -0.0137 0.0040 -0.0611 N-90 0.0057 0.0193 0.0402 0.0285 0.0693 0.0674 0.0763 D-90 0.0060 0.0161 0.0187 0.0167 0.0254 0.0354 0.0393 J-91 0.0052 0.0107 0.0130 0.0150 0.0450 0.0512 0.0901 F-91 0.0048 0.0048 0.0030 0.0121 0.0665 0.0794 0.1122 M-91 0.0044 0.0023 0.0038 0.0108 0.0148 0.0394 0.0701 A-91 0.0053 0.0117 0.0140 0.0138 0.0074 -0.0047 -0.0026 M-91 0.0047 0.0059 0.0000 0.0039 0.0373 0.0446 0.0476 J-91 0.0042 -0.0023 -0.0063 -0.0018 -0.0421 -0.0474 -0.0578 J-91 0.0049 0.0129 0.0157 0.0167 0.0419 0.0536 0.0350 A-91 0.0046 0.0247 0.0340 0.0275 0.0182 0.0334 0.0369 S-91 0.0046 0.0216 0.0303 0.0271 -0.0074 -0.0174 0.0078 O-91 0.0042 0.0134 0.0054 0.0043 0.0166 0.0156 0.0264 N-91 0.0039 0.0128 0.0082 0.0106 -0.0513 -0.0255 -0.0463 D-91 0.0038 0.0265 0.0581 0.0436 0.0838 0.1413 0.0800 J-92 0.0034 -0.0195 -0.0324 -0.0173 0.0016 -0.0242 0.0811 F-92 0.0028 0.0022 0.0051 0.0096 0.0245 0.0015 0.0292

M-92 0.0034 -0.0079 -0.0094 -0.0073 -0.0145 -0.0273 -0.0338 A-92 0.0032 0.0098 0.0016 0.0016 0.0431 0.0072 -0.0351 M-92 0.0028 0.0222 0.0243 0.0254 0.0050 0.0074 0.0133 J-92 0.0032 0.0177 0.0200 0.0156 -0.0062 -0.0252 -0.0470 J-92 0.0031 0.0242 0.0398 0.0308 0.0386 0.0448 0.0348 A-92 0.0026 0.0150 0.0067 0.0090 -0.0306 -0.0122 -0.0283 S-92 0.0026 0.0194 0.0185 0.0099 0.0138 0.0116 0.0230 O-92 0.0023 -0.0182 -0.0198 -0.0156 0.0009 0.0150 0.0316 N-92 0.0023 -0.0084 0.0010 0.0069 0.0328 0.0435 0.0766 D-92 0.0028 0.0146 0.0246 0.0228 0.0238 0.0100 0.0348 J-93 0.0023 0.0270 0.0280 0.0250 0.0290 -0.0115 0.0338 F-93 0.0022 0.0243 0.0354 0.0256 0.0352 -0.0158 -0.0231 M-93 0.0025 0.0043 0.0021 0.0025 0.0295 0.0193 0.0324 A-93 0.0024 0.0088 0.0072 0.0052 -0.0128 -0.0400 -0.0275 M-93 0.0022 -0.0009 0.0047 0.0020 0.0201 0.0350 0.0442 J-93 0.0025 0.0201 0.0449 0.0293 0.0221 -0.0092 0.0062 J-93 0.0024 0.0005 0.0192 0.0100 0.0112 -0.0179 0.0138XVIII Tbills IMBDS LTBDS CORPBDS VLSTCKS GRSTCKS SMSTCKS A-93 0.0025 0.0223 0.0434 0.0287 0.0361 0.0410 0.0432 S-93 0.0026 0.0056 0.0005 0.0043 0.0016 -0.0075 0.0282 O-93 0.0022 0.0018 0.0096 0.0051 -0.0007 0.0278 0.0258 N-93 0.0025 -0.0093 -0.0259 -0.0188 -0.0206 -0.0066 -0.0326 D-93 0.0023 0.0032 0.0020 0.0067 0.0190 0.0173 0.0342 J-94 0.0025 0.0138 0.0257 0.0202 0.0378 0.0231 0.0313 F-94 0.0021 -0.0258 -0.0450 -0.0286 -0.0342 -0.0182 -0.0036

M-94 0.0027 -0.0257 -0.0395 -0.0383 -0.0372 -0.0483 -0.0527 A-94 0.0027 -0.0105 -0.0150 -0.0097 0.0192 0.0048 0.0059 M-94 0.0032 -0.0002 -0.0082 -0.0062 0.0115 0.0151 -0.0113 J-94 0.0031 -0.0028 -0.0101 -0.0081 -0.0240 -0.0295 -0.0337 J-94 0.0028 0.0169 0.0363 0.0309 0.0311 0.0342 0.0164 A-94 0.0037 0.0026 -0.0086 -0.0031 0.0287 0.0557 0.0557 S-94 0.0037 -0.0158 -0.0331 -0.0265 -0.0332 -0.0137 -0.0034 O-94 0.0038 -0.0023 -0.0025 -0.0050 0.0139 0.0236 -0.0040 N-94 0.0037 -0.0070 0.0066 0.0018 -0.0404 -0.0320 -0.0404 D-94 0.0044 0.0053 0.0161 0.0157 0.0115 0.0168 0.0268

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