University of St. Mark & St.

John

Port-Folio Management
Module Code: MBA 721
Talha Ali

Port-Folio Management

Portfolio Management

Port-Folio Management
Table of Contents
Task- 1 ............................................................................................................................................ 3
Introduction to country economy .................................................................................................... 3
Task- 2 ............................................................................................................................................ 4
International fund evaluation based on techniques of portfolio management: a case of Harbor
funds................................................................................................................................................ 4
Overview: .................................................................................................................................... 5
Investment objective: ..................................................................Error! Bookmark not defined.
Principal Investment Strategy:..................................................................................................... 5
Principal Risks: ............................................................................................................................ 5
Risk: ............................................................................................................................................. 6
Dividend distribution: .................................................................................................................. 7
Performance: ................................................................................................................................ 8
Portfolio Management: ................................................................................................................ 8
Buying and Selling Fund Shares: ................................................................................................ 9
Tax Information: .........................................................................Error! Bookmark not defined.
Portfolio Turnover: .................................................................................................................... 10
Equity Portfolio Management Strategy: .................................................................................... 10
Asset Allocation Strategy: ......................................................................................................... 12
Task- 3 Performance of harbor capital appreciation fund with its benchmark: .......................... 14
OUTLOOK AND STRATEGY: ............................................................................................... 16

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Task- 4 its analysis and evaluation using port-folio technique ..................................................... 18
Conclusion & Recommendation: .................................................................................................. 27
Reference ...................................................................................................................................... 28

Task- 1

Introduction to country economy

Fiscal Year 2008-09 can easily be regarded as one of the most challenging years that Pakistan
has ever witnessed. Exogenous shocks such as commodity price escalation and the global
financial crisis, coupled with domestic political and economic challenges, led Pakistan to the
verge of default on its foreign debt obligations.
The ownership structure is most essential in the unit to know the portfolio management and
future leverage on the business. The financial feasibility can be easily obtained by the knowing
the types of ownership structure in the business houses. The capital structure is most important
sources of company. The capital structure refers to the proportion of different types of securities
or capital to be issue and proportionate amount that makes up the capitalization.
There are three type of capital structure that is borrowed capital, owned capital and combination
of borrowed and owned capital. For the large companies it is always feasible for choosing the
third type of capital structure that is combination of borrowed and owned capital. The third
structure holds the wide effects on the company capital. It is more beneficial, because the
borrowed capital is always had to interest which is tax free. So the huge part of tax is reduce
while paying, and it further makes the companys net profit raised high.
Using the technique of portfolio management and risk return analysis one can understand in
more clear way that a combination of borrowed capital and owned capital helps to attain the
optimum profits.

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Task- 2

International fund evaluation based on techniques of portfolio management: a

case of Harbor funds

Harbor funds are categorized in many funds which includes the sub-classes also.

Port-Folio Management
Overview:
Harbor Funds - Harbor Capital Appreciation Fund is an open-ended equity mutual fund launched
and managed by Harbor Capital Advisors, Inc. It is co-managed by Jennison Associates LLC.
The fund primarily invests in the growth stocks of the mid-cap and large-cap companies with a
market capitalization of least $1billion. It employs a fundamental analysis with the bottom-up
stock picking approach focusing on strong market position, unique marketing competence,
strong research and development leading to superior new product flow, and capable and
disciplined management to create its portfolio. The fund benchmarks the performance of its
portfolio against the Russell 1000 Growth Index and the S&P 500 Index.

Principal Investment Strategy:

Here we know that debt is always lower than equity, but using debt increases the risk in terms of
default to the lenders and higher volatility for equity investors thus, using more debt can increase
the value for some firms and decrease value for others, and for the same firm debt can be
beneficial up to a point and destroy value beyond that point. So here we have to find out that
peak point where the debt is beneficial for the company and going beyond that point it can
destroy the value of the firm. In this way it represents the value of the investors/shareholders. In
our study we explore two ways to find an optimal mix. The first approach is to choose the debt
ratio that minimizes the cost of capital. The second approach is to view leverage as a way of
maximizing the return differential between the returns made by equity investors on the
investments taken by the firm and the cost of equity (Donaldson, 2004).
The cost of capital is the weighted average of the cost, of the different components of financing
including debt, equity, and hybrid securities use by a firm to fund its financial requirements. By
altering the weights of the different components, firms might be able to change their cost of
capital. In the cost of capital approach we estimate the of debt and equity at different debt ratios,
use this cost to compute the cost of capital, and look for the mix of debt and equity that yields the
lowest cost of capital for the firm. At this cost of capital, we will argue that firm value is
maximized (Downs, 2001).

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Risk:

The company is using the full cost plus profit pricing techniques but instead of that they should
start using the market skimming pricing methods. This pricing technique helps to gain more
customer, as the prices are high in the initial stage and with time pricing will be falling, so the
customer should be increasing. The costs at initial stages are high, so price set high that will not
make any burden on company. The production will increase when prices start falling in the
markets so with increasing in the production the cost per unit will also decrease. The variable
cost will only increase with production but the fixed cost remains same; so over all the cost will
drop. The market skimming pricing helps, to crab customer, no financial burden created on
company and cost is maintained as well. There are various costing concepts but combination of
variable cost and fixed is better because there are 5 improved products in the company, so each
product had different cost per unit. The combined cost is better in unit. Cost factor looks to what
are futures expenses that will incur in the product such as marketing cost, advertising cost etc.
apart the investment of product can be recognized when the total cost if analyses it is known that
much of investment is needed in the unit.
The research report of the Harbor Funds hold the theory of portfolio theory which was useful in
order to acknowledge that how the profits and risk are inter linked with each other as there
various cases of Harbor Funds investment used as one such case was harbor capital .
Port-folio theory
When many assets are held together, assets decreasing in value can often be offset by other
assets increasing in value, thus the decreasing risk the total variance of the portfolio is therefore
almost always lower than a simple weighted average of the individual variances. If the number of
assets is large enough, the total variance does in fact stem more from the covariances than from
the variances of the assets. It is in other words more important how the assets tend to move
together than how much each individual asset fluctuates in value.

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Dividend distribution:
Ideally this should be all the budget heads relating to the area of service for which they have
management accountability. Too frequently, budget heads such as those relating to pay or
income are not included in the range of budgets managed by the manager who is directly
responsible for the service area. This can result in financial decisions being made by others who
may not appreciate the impact on the service or have to manage the consequences.
The council's scheme of delegation should make clear any limits to the amounts the responsible
manager can commit within their budgets. If expenditure needs to be authorized by managers (or
members) at a higher level, then the budget management accountabilities need to be explicitly
stated. For example, if a budget for community care services for older people is the responsibility
of a team but the manager is only authorized to agree the cost of packages of services up to
10,000, responsibilities will need to be clarified as both the team manager and a more senior
manager will be committing expenditure against it.

Principal Style Characteristics: Mid to large cap growth stocks

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Performance:
As of Quarter-Ended 06/30/2010

YTD

1 Year

5 Year

10 Year

Since Inception

-10.83%

10.21%

0.42%

N/A

4.39%

The harbor capital appreciation fund comprises of 3 sub-classes that is investor class,
institutional class and administrative class. The Funds average annual total returns for certain
time periods compared to the returns of a broad-based securities index. The Russell 1000
Growth Index is an unmanaged index generally representative of the U.S. market for larger
capitalization growth stocks.

The Funds best and worst calendar quarters during this time period were:

Portfolio Management:
Investment Adviser: Harbor Capital Advisors, Inc. Harbor Capital Advisors employs a
manager-of-managers approach by selecting and overseeing subadvisers responsible for the
day-to-day management of the assets of the Funds. Pursuant to an exemptive order granted by
the SEC. Harbor Capital Advisors, subject to the approval of Harbor Funds Board of Trustees, is

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able to select subadvisers and to enter into new or amended subadvisory agreements without
obtaining shareholder approval.
Subadviser: Jennison Associates LLC. Jennison Associates LLC has subadvised the Fund since
1990.
Portfolio Manager: Spiros Segalas. Jennison Associates LLC

Buying and Selling Fund Shares:

By analysing the financial information of Habour Funds, it is revealed that the UKLPI, a
subsidiary of Habour Funds, has 120 million loss in 2010-11 financial years (annual report,
2010-11).
In the preparation of budgets, this subsidiary of Habour Funds should get highest allocation for
expanding their business. And the other should not get much and these should be critically
monitored for finding out the costing problem and problem of profitability.

Port-Folio Management

Portfolio Turnover:
The return from the individual stock performs the very significant job of portfolio manager in an
investment. Useful risk return analysis in the trade workplace is difficult to optimistic investor
inspiration and high confidence (Calori, 2005).

Equity Portfolio Management Strategy:

According to Battese and Coelli (2003), because the functions of risk management are not
certain regarding their location in the company, the strategies of risk managements are written
and dignified the safe mode. Therefore risk management permits having a small common method
explanation, the objective of the rule and after that an extensive explanation of every exclusions,
which can happen (Battese and Coelli, 2003). The easy rules of risk managements are the
obvious symbol of the positive Risk managements. The functions of risk management
department does not require to include a rule after and this is sure to offer a better clarification to
executives and stocks, which is received, then the strategies of risk managements is not required
at all (ONeill and Clarke, 2000).
In the view of Crystal (2002), the experts of risk managements have not fret in relation to its
compromise and arrangement abilities. When the executives comprehend the standard at the
back of the rules of risk managements, executives can admit it and they can pursue the strategies
of risk managements employing a general vision. On the other hand Weiss, (2002) argued that
the stock market has no remembrance to consider whole features of the strategy, they require an
essential principle and when the exclusion happens, they can discuss through the function of risk
management regarding it. The policies of risk management have to be easy. The stocks require
an essential routing and stock can forever request for the data, when stocks require need. While
their associates inquire them regarding perform in their corporation, they can give details about a

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normal story; stocks are not talented to converse in relation to tons of situations to be achieved
previous to they are got into report (Weiss, 2002).

Si

Ri R f

The Sharpe ratio will be the predominant measure in the analyses, but a description of other
measures is due.
Another risk measure suggested in the literature is the Treynor measure. This measure is not as
straightforward and intuitive as the Sharpe ratio and requires an understanding of CAPM, the
Capital Asset Pricing Model. The model was put forth in the 1960s and answers what the
expected return should be for an asset of certain risk.
The model states that the return of an asset should equal the risk-free rate added together with
some risk premium multiplied by the assets sensitivity to market movements, called beta.
The risk premium is defined as the return of a market portfolio minus the return of the risk-free
asset, where the market portfolio in theory is a portfolio consisting of all risky assets in the
market.

Ri R f i Rm R f
CAPM is however not a generally accepted model and the debate regarding it has raged ever
since its inception almost 40 years ago. Finding the market portfolio is a difficult task, as it is
supposed to include all risky assets in their relative proportion, of which only a fraction are
traded and quoted with up-to-date prices. Proxies may of course be used but it is not clear what
the scope of the proxy should be, whether the portfolio can be taken as domestic-only for a US-

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based investor or how much one would depart from the real market portfolio if the S&P 500 or
DJIA were used as proxies.
The Treynor measure and all other measures (i.e. the Jensen differential performance index
among others) based on betas, rely on a correctly defined market portfolio, but such a portfolio
does obviously not exist. With CAPM evidence being inconclusive and the market portfolio nonexistent, no beta-based performance measures will be used in the analyses.

Asset Allocation Strategy:

Harbor use Integrated Asset Allocation strategy, because The stock market along with the
investment strategies provides a clear path for the investors to understand the equity investment
risk over their transaction. The growth in the equity market encouraged the investor to invest by
using the most effective tools which can also enable the investor to manage the equity risks they
might face. Risk assessment is an approach to risk management, which uses financial
instruments to neutralize the systematic risk of price changes or cash flows. For several market
participants, portfolio investors, bank investors, pension fund investors and corporate treasurers,
hedging is an important tool, but they each have a different return for hedging. By reducing risk
exposure, hedging allows companies to focus on their core business. The evolving role of risk
management function in the organization has played a significant contribution for enhancing the
competitive advantage of investment of the firm.

Annualized Total Returns as of the Month-Ended 07/31/2010

YTD

Month Return

1 Yr

3 Yr

5 Yr

10 Yr

Since

Expense

Incp.

Ratio

Net

12

Gross

Port-Folio Management
Harbor
Capital

Appreciation 8.38%

-5.38%

8.64%

-1.06%

13.65%

-0.11%

13.84%

3.25%

0.43% N/A

5.15% 1.07%

1.07%

N/A

Fund

Russell
1000

Growth

6.49%

4.25%

0.80%

4.08%

Index

S&P

500 -

Index

6.69%

6.78% 0.17% 0.76%

N/A

As of Year-Ended 12/31:

2005

2006

2007

2008

2009

13.51%

1.91%

11.83%

-37.36%

41.39%

5.26%

9.07%

11.81%

-38.44%

37.21%

4.91%

15.79%

5.49%

-37.00%

26.46%

Harbor
Capital
Appreciation
Fund

Russell
1000
Growth Index

S&P

500

Index

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The Russell 1000 Growth Index is an unmanaged index generally representative of the U.S.
market for larger capitalization growth stocks. The S&P 500 Index is an unmanaged index
generally representative of the U.S. stock market.

Task- 3 Performance of harbor capital appreciation fund with its

benchmark:
Pugliesi (2009) argued that one of the main aspects in influencing risk managements to create the
mainly is establish during return enticements. While the mainly clear return for rising stock
efficiency is frequently consideration to be supported on wage and endorsements, this is not
forever the case. Actuality, current consideration on the accurate character of best risk
management has completed that in a huge amount of cases, dividends has fewer to do among
inspiration than accomplish further significant aspects (Mount, Ilies and Johnson, 2006).

As of April 30, 2010:

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As the appreciation fund has its sub-classes, we choose an investor class.

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The graph shows the variation in the investment held by harbor with respect to its benchmark.

The Mechanisms of APV valuation:

We estimate the value of the firm in three steps. We begin by estimating the value of the firm
with no leverage. We then consider the present value of the interest tax savings generated by

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borrowing a given amount of money. Finally, we evaluate the effect of borrowing the amount on
the probability that the firm will go bankrupt, and the expected cost of bankruptcy (Ball and
Brown, 2001).

Value of unlevered firm:

The first step in this approach is the estimation of the value of the unlevered firm. This can be
accomplished by valuing the firm as if it had no debt, i.e., by discounting the expected free cash
flow to the firm at the unlevered cost of equity. In the special case where cash flows grow at a
constant rate in perpetuity, the value of the firm is easily computed.
Value of Unlevered Firm =FCFFo (1+g)/ Bu-g

Where FCFF0 is the current after-

is the unlevered cost of

equity and g is the expected growth rate. In the more general case, you can value the firm using
any set of growth assumptions you believe are reasonable for the firm.
The inputs needed for this valuation are the expected cash flows, growth rates and the unlevered
cost of equity. To estimate the latter, we can draw on our earlier analysis and compute the
unlevered beta of the firm.
Bunlevered= (Bcurrent) / 1+(1-t)D/E
Where,
Bunlevered

Unlevered beta of the firm

Bcurrent

Current equity beta of the firm

Tax rate for the firm

D/E

Current debt/equity ratio

This unlevered beta can then be used to arrive at the unlevered cost of equity.

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OUTLOOK AND STRATEGY:
Given easy comparisons against last years weak first half, continued rigorous cost controls, and
recovering revenue gains, corporate profit growth looks to be strong in the remainder of calendar
2010. A rebound in consumer spending, particularly for cars and other durable goods, also
appears to be gathering momentum, spurred by sales incentives and pent-up demand. Although
unemployment remains high, we believe that income growth, too, is in the early stages of
recovery, as furloughs end and modest annual salary adjustments resume. Housing starts may
have bottomed out, but overall weakness in the housing sector persists.
In Europe, sovereign debt issues have caused major concern. Although Greece has been the
epicenter of the crisis, Spain, Ireland, Portugal, and Italy face similar issues. In Asia, there are
indications that take steps to tighten lending and bank reserve requirements in light of rapidly
rising real estate activity and prices.
The revenue gains of companies held in our portfolio have continued to accelerate, and we
remain confident that our holdings will achieve better-than-average revenue growth for calendar
2010. Accommodative monetary policy is providing an additional tailwind for equity prices. We
would view the eventual (and approaching) return to higher interest rates as another sign of
overall economic strength.

Task- 4 its analysis and evaluation using port-folio technique

HARBOR CAPITAL APPRECIATION FUND
Portfolio Characteristics (As of Quarter-Ended 06/30/2010)

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Port-Folio Management
Harbor

Capital

AppreciationRussell

Fund

Index

66

631

60,596.00

68,262.85

Median Market Cap ($Mil)

24,672.28

4,571.66

Price/Book Ratio

4.58

4.97

Adj. Trailing P/E Ratio

19.21

17.07

Forecasted P/E Ratio

16.48

15.13

Earnings Growth Rate (%)

19.20

14.08

Proj. Earnings Growth Rate (%) 15.45

13.14

Return on Equity (%)

18.82

22.86

Beta vs. Russell 1000 Index

0.94

Beta vs. Russell 3000 Index

0.88

Number of Holdings
Weighted Avg. Market Cap
($Mil)

1000

Growth

The harbor capital appreciation fund performed far better than Russell 1000. We calculated the
statistical analysis from July 2009- June 2010.

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Index Name: Russell 1000 Growth
Index

20

IndexStyle

Month

Return

Large-Cap Indexes

9-Jul

7.1

Large-Cap Indexes

9-Aug

2.07

Large-Cap Indexes

9-Sep

4.25

Large-Cap Indexes

9-Oct

-1.35

Large-Cap Indexes

9-Nov

6.14

Large-Cap Indexes

9-Dec

3.09

Large-Cap Indexes

10-Jan

-4.36

Large-Cap Indexes

10-Feb

3.44

Large-Cap Indexes

10-Mar

5.78

Large-Cap Indexes

10-Apr

1.12

Large-Cap Indexes

10-May

-7.63

Large-Cap Indexes

10-Jun

-5.51

Port-Folio Management

Harbor

Russell 1000 Growth

Fund

Index

Standard Deviation

14.58%

11.78%

Sharpe Ratio

-0.19

-0.24

Beta

1.12

Alpha

0.04%

Treynor Ratio

-0.02

-0.03

Jenson

0.01

0.01

Standard deviation:
As the data shows the volatility of harbor funds is more than Russell 1000, which means that its
returns are more dispersed than its mean because the Standard Deviation is a measure of
dispersion from mean.
Sharpe ratio:
The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a
result of excess risk. This measurement is very useful because although one portfolio or fund can
reap higher returns than its peers, it is only a good investment if those higher returns do not come
with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted
performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform
better than the security being analyzed.

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Port-Folio Management
The numerator in its formula is the portfolios risk premium. -0.19 includes the total risk of the
portfolio by including standard deviation of returns. Thus -0.19 indicates the risk premium return
earned per unit of total risk.

Treynor Ratio:
T-ratio applies to all investors, irrespective of their risk preferences. Treynor predicted that
rational and risk-averse investors would prefer portfolio possibility lines with larger slopes as
that would place them on a higher indifference curve.
Harbor Fund illustrates the example of a very poor performance portfolio with a negative t-ratio
of 0.02, calculated for a period of 12 months from July 2009 to June 2010. The reason is that
Harbor Fund produced a lower average rate of return compared to the treasure bill rate of return,
for the period under consideration. Thus, such performance is most likely to be plotted below the
Security Market Line (SML).
In simple words, T-ratio indicates harbor funds risk premium per unit of risk. Since Harbor
Funds T value (-0.02) is slightly above that of Russell growth index of -0.03, we say the former
has performed better than the market in the period under consideration.
Jenson Ratio:
The Alpha indicates whether the portfolio manager is superior or inferior in market timing or
/and stock selection. A positive alpha means positive residuals (actual rate of return> expected
rate of return) and therefore, a superior manager and vice versa.

The alpha for Harbor Funds for a period of 12 months came out to be 0.04 percent which is
significantly close to zero and thus indicating poor ability of the manager to derive aboveaverage returns adjusted for risk. In other words, the manager seems incapable to predict
appropriate market turns, or selecting undervalued issues for portfolio, or both.

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120.00%
100.00%
80.00%
60.00%
40.00%

Harbor Fund

20.00%

Russell 1000 Growth Index

0.00%
-20.00%
-40.00%

UBL Fund Managers is a wholly owned subsidiary of United Bank Limited, making it the first
Asset Management Company to be launched by a bank in Pakistan. UBL Fund Managers has
been operating since the year 2002 and ranks amongst one of the leading asset management
companies in Pakistan. UBL Fund Managers has been awarded a Management Quality Rating of
AM2 (High Management Quality) by JCR-VIS Credit Rating Company Limited.

UNITED STOCK ADVANTAGE FUND

23

Minimum investment as low as Rs.500 with subsequent

investments of Rs.500 only.

Encashment within six working days (earlier for UBL

account holders)

Port-Folio Management

With our Systematic Investment Plan your USF investment

can be increased directly from your Bank Account on a
customized basis

Tax free investment under Government regulations

Tax rebate benefit up to Rs. 60,000 for individual investors

Can be used as collateral for availing bank financing

Exemption from Zakat on submission of Affidavit

United Stock Advantage Fund (USF) is managed by UBL Fund Managers Limited, a 100% own
subsidiary of United Bank Limited (UBL)

United Stock Advantage Fund (USF)

Inception Date

July 27, 2006

Sales Load

2.5% front-end sales load

Minimum Investment

Rs 500/-

Management Company Rating AM2 by JCR-VIS Credit Rating Company Limited

Rating

4 Star (JCR-VIS)

Fund Size

Rs 1,042 Million as of June 2010

Trustee

Central Depository Company of Pakistan Ltd

Auditor

KPMG-Taseer Hadi & Co.

UNIT HOLDERS' FUND RISK MANAGEMENT-(Capital Risk)

Capital risk is the risk that the capital of the fund changes significantly and causes adverse
effects on the Funds existence as going concern. The capital of the Fund is represented by the
net assets attributable to unit holders.

Portfolio details:
USF is an open ended Equity Fund that will aim to provide investors long-term capital
appreciation by investing primarily in a mix of equities that offer capital gains and dividend yield
potential. This blend of equities will help to maximize the expected returns for given levels of
risk tolerance while enhancing portfolio stability.
The following categories of stocks are maintained in USFs portfolio:

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Value Stocks: Such stocks are of those companies, which are undervalued, and their share value
is higher than the market quoted price of such shares.
Growth Stocks: Such stocks are of those companies with the greatest potential for long-term
growth and are expected to see high growth in sales and profits in the coming few years.
Dividend Stocks: Such stocks are of those companies, which provide above average dividend
yields, thereby providing a regular income stream to the Fund.
The portfolio of USF is attractive for any investor looking for a broadly diversified investment
with built-in rebalancing.

USF FUND

Index Name:Kse-100
Month
9-Jul
9-Aug
9-Sep
9-Oct
9-Nov
9-Dec
10-Jan
10-Feb
10-Mar
10-Apr
10-May
10-Jun

Standard Deviation
Sharpe Ratio
Beta
Alpha
Treynor Ratio
Jenson

25

Beta:

Return
7.88
12.29
7.76
-2.04
0.52
1.96
2.65
0.45
5.87
2.45
-10.56
4.24

USF
18.37%
0.66
0.91
-9.45%
2.03
1.80

USF(UBL)
Return
8.83
10.36
9.35
-2.15
1.7
0.89
0.97
-0.08
4.34
0.41
-10.57
-0.43

KSE-100
19.31%
1.24
1
0.039167
2.79

Port-Folio Management

26

The beta of USF is positive because in that time period the USF gives good returns.
The beta is the systematic risk of the market and it tells us the volatility in the market
when compared with its benchmark.
Standard Deviation:
Standard Deviation is a measure of dispersion from mean. The standard deviation of
USF is 18.37%.
Sharpe ratio:
The sharpe ratio is positive i-e, it has a better risk-adjusted performance then a riskless security. Sharpe ratio for USF and kse-100 turned out to be 0.66 and 1.24,
respectively. Portfolio for USF will be seen to be plotted below the CML, indicating
inferior risk-adjusted performance and this may be due to lower standard deviation
for USF comparatively.
Treynor ratio:
T-ratio of 2.03 of USF compared to that of KSE-100 of 0.04 indicates a larger slope
and better portfolio for all investors. This maybe due to the difference in risk
premium. But we cannot call it an appropriate equity performance measure because it
assumes a completely diversified portfolio, which means that systematic risk is the
relevant risk measure. USF beat market portfolio and in terms of SML, it will be
plotted above the line.
Jenson Ratio:
The alpha for USF showed a value of negative 0.0945 indicating that manager
generated a return of -9.45 percent per period, lesser than was expected during the 12
months under consideration given the portfolios risk level. Manager did not show the
ability to generate above-average returns, casting doubts over his forecasting ability.
In short, portfolio manager can be said be to inferior in market timing and/or stock
selection.

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500.00%
400.00%
300.00%
200.00%
KSE-100
100.00%

USF

0.00%
-100.00%

Conclusion & Recommendation:

Pakistan's domestic economy was shielded from the global collapse due to its lack of dependence
on international demand. However, the domestic economic problems led to a fiscal crisis in the
1HFY09. Trade deficit and Current Account Deficit rose by 20%YoY and 44%YoY during the
first half of the year, putting immense pressure on foreign exchange reserves which declined to
USD6bn - leading to a sharp depreciation in PkR parity versus USD to a weakest level of
PkR84.4/USD. Despite relative improvement in 2HFY09, the economic growth stayed under
pressure due to tight monetary policy. Fiscal Year 2009 was a very volatile period for both
International and domestic capital markets. The KSE100- index declined by 42% during the year
from 12,289 at the beginning of the year to 7,162 at year-end. The daily average trading volumes
during the year also declined to 75mn shares from 168mn shares last year.
The both international and domestic fund provides great opportunities to investors. Comparing
the risk profile of both the funds international fund is less risky than domestic fund because
Pakistani economy is more volatile than international market. The Average Sharpe ratio or the
risk premium factor per unit of risk in an investment for the USF funds is positively reflecting
the fact that both investments have lesser risk than the market portfolio.

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Port-Folio Management
On the basis of relative valuation, KSE is at a substantial discount to regional and international
markets. While relative valuations signals Pakistani equities to deliver positive performance in
2010, for the market to show substantial recovery, the economy needs to come out of its somber
state and critically GDP growth should pick up pace in continuing fall in domestic interest rates
and global economic recovery should help in improving the prospects of relatively better GDP
growth in the second half of the current fiscal year. Most importantly, the government needs to
bring the domestic security situation under control as prolonged conflict and war like situation in
the tribal belt will make it extremely difficult to attract any sizeable investments inflows in the
country.
Hence due to the riskiness and volatility in Pakistani economy a better portfolio may be
recommended as:

Reference
o Arshanapalli, B., Daniel, C., and John, D. (1998). "Multifactor Asset Pricing Analysis of
International Investment Strategies". Journal of Finance, July 1998.

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Port-Folio Management
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o DeBondt, W and Thaler, R. (1985). "Does the Stock Market Overreact?", Journal of
Finance, pp. 793-805.
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o Fama, E. (1991). "Efficient Capital Markets II", Journal of Finance, pp. 1575-617.
o Fama, E., Fisher, L., Jensen, M., and Roll, R. (1969). "The Adjustment of Stock
o Prices to New Information", International Economic Review, pp. 1-21.
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o Jensen, M. (1968). "The Performance of Mutual Funds in the Period 1945-1964", Journal
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o Roberts, H. (1967). "Statistical Versus Clinical Prediction of the Stock Market".
Unpublished manuscript, CRSP, University of Chicago, May 1967.
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o Treynor, J. (1965). "How to Rate Management of Investment Funds", Harvard Business
Review, (Jan-Feb), pp. 63-75.

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