Investing into funds is an intricate task that involves not only numerical figures but requires
thorough decision making based on known facts. Through the help of the well-equipped and
well-educated fund managers, the investors are released from the burned of looking to
humongous numerical data that can lead to a sound investment decision. It is, then, the task of
the fund managers that the level of investment return is always optimal thus gain high profit on
the side of the investors. But, it is also the task of the investors to check once in a while the
soundness of the decision making of the fund managers. There are several tools in addressing
this concerns. It will be discussed thoroughly what are these measurements that can see how the
fund managers do their tasks efficiently. There are 9 investment funds that have been measured:
Fund Bench Mark
Ticker Fund Name Bench Mark Ticker
VUVLX Vanguard U.S. Value Fund Russell 3000 Value RAV
RYLVX Rydex S&P 500 Pure Value Fund S&P 500 Pure Value SPXPV
LVPIX ProFunds Large Cap Value Fund S&P 500 Value SVX
PRF Invesco FTSE RAFI US 1000 ETF FTSE RAFI US 1000 FR10
S&P High Yield
SDY SPDR S&P Dividend ETF Dividend Aristocrat SPHYDA
IVE iShares S&P 500 Value ETF S&P 500 Value SVX
American Century Equity Income
TWEIX Fund Russell 3000 Value RAV
Fidelity Advisor Value Leaders
FVLAX Fund Russell 1000 Value RLV
MRBVX BlackRock Basic Value Fund Russell 1000 Value RLV
Table A. The 9 Investment Fund and the corresponding Benchmarks
There are several measurements that can quantify the investors. The nine investment managers
will be ranked accordingly as how they par against each other. With these series of tests, an
investment manager will be named as the best in handling the finances of the investors.
Tracking Error
The deviation of portfolio return and the benchmark price behavior is called Tracking Error
(TE). It is an efficient way of measuring the performance of the fund as it shows the volatility of
portfolio return vis-à-vis its respective bench mark index. In simple sense, if the tracking error is
high, the deviation to the benchmark index is also high. If the tracking error is low, the deviation
to the benchmark index is also low. Interpreting the TR, it is dependent to investors’ preference
if the TE is high or low. ‘If the investor believes markets are efficient and that it is difficult for
active managers to consistently add value, then that investor would prefer a lower tracking error.
Alternatively, if the investor believes that smart active managers can add significant value and
should not be “tied down” to a benchmark, the investor would tolerate higher levels of tracking
error.’ (Zephyr, 2013)
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Investment Fund TE Average
Benchmark
Indices
(Based on the
respective indices
of each funds)
VUVLX 4.31% 0.66%
RYLVX -6.30% 0.67%
LVPIX 4.40% 0.67%
PRF 4.66% 0.66%
SDY 4.07% 0.90%
IVE 4.39% 0.80%
TWEIX 4.36% 0.66%
FVLAX 4.30% 0.66%
MRBVX 1.99% 0.67%
Table B. Tracking Error of 9 Investment Fund
RYLVX posted a negative TE, while PRF is the highest among the 9 investment fund. VUVLX,
LVPIX, PRF, SDY, IVE, TWEIX, and FVLAX have 4% TE.
Sharpe Ratio
Named after the Noble Laureate and a professor in Stanford University William F. Sharpe,
Sharpe ratio measures the risk-adjusted return of a financial portfolio. It measures excess
portfolio over the standard deviation of risk-free rate. To see the superiority of the fund portfolio,
it is imperative that the ratio is higher compared to its peer. ‘The Sharpe Ratio is designed to
measure the expected return per unit of risk for a zero investment strategy. The difference
between the returns on two investment assets represents the results of such a strategy.’ (Sharpe,
1994)
Sharpe ratio
VUVLX 0.12
RYLVX 0.10
LVPIX 0.09
PRF 0.15
SDY 0.18
IVE 0.13
TWEIX 0.20
FVLAX 0.08
MRBVX 0.12
Table C. Sharpe Ratio of 9 Investment
fund
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In measuring the performance of the fund, the highest Sharpe Ratio compared to the peer’s ratio
means, the fund is outperforming the other funds. In this understanding, TWEIX has the highest
Sharpe Ratio thus it outperforms the other 8 investment funds.
Treynor Measure
Compared to Sharpe Ratio, Treynor Ratio factored in the systematic risk. The risk and return are
the main concern of this measurement. It is named after Jack Treynor, an American economist
that is also known to developed Capital Asset Pricing Model. ‘The purpose of this financial
ratio is to adjust all investments for market volatility and the risk associated with it in an effort to
compare investments based on their performance instead of market factors.’ (Shaun, nd)
Treynor
VUVLX 0.0053
RYLVX -0.0009
LVPIX 0.0041
PRF 0.0070
SDY 0.0070
IVE 0.0055
TWEIX 0.0041
FVLAX 0.0042
MRBVX 0.0056
Table D Treynor Ratio of 9 Investment Company
In judging between the ratios of investment fund, the higher the Treynor Ratio means a more
favorable risk/reduction scenario. PRF and SDY have the same ratio and both financial fund the
highest among the other peer investment fund.
Jansen’s Alpha
Also known as Jensen’s Performance Index and suggested by the CAPM model, Jensen’s Alpha
measures excess returns earned by the portfolio and it is being compared to the returns. It is
named after Michael Jensen. ‘Jensen’s Alpha is important to investors because they need to look
not only at the total return of a security or portfolio but also at the amount of risk involved in
achieving that return.’ (Sebkuhnert, 2018)
Jensen (Alpha)
VUVLX -0.0477%
RYLVX -0.1972%
LVPIX -0.1603%
PRF 0.6976%
SDY 0.1364%
IVE -0.0131%
TWEIX -0.2344%
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FVLAX -0.2626%
MRBVX -0.0150%
Table E. Jansen’s Alpha of 9 Investment Fund
Higher alpha means the portfolio has grossed above the level predicted. The highest Alpha
among the 9 funds is PRF. Contrary, the lowest is FVLAX.
Information Ratio
In measuring the level of skill of the fund manager, the measurement that has been employed in
the Information ratio. It computes the portfolio returns over the benchmark, the index, and
compared to the volatility of those returns. ‘The IR is often used as a measure of a portfolio
manager's level of skill and ability to generate excess returns relative to a benchmark, but it also
attempts to identify the consistency of the performance by incorporating a tracking error, or
standard deviation component into the calculation.’ (Murphy, 2019)
Information Ratio
VUVLX -0.01
RYLVX 0.03
LVPIX -0.04
PRF 0.00
SDY -0.15
IVE -0.14
TWEIX -0.15
FVLAX -0.15
MRBVX -0.33
Table F. Information Ratio of the 9 Investment
Fund
If the ratio is high the desired level of consistency is achieve while lower ratio means the
opposite. The highest is RYLVX, while the lowest is MRBVX.
Regression Analysis –Performance of the Portfolio
In understanding further the funds, multiple regression analysis were done to see the return
portfolios as dependent variable over the independent variables which are Value-weighted
market return, size factor, value factor, momentum factor.
The result indicates that majority of the independent variables are not statistically significant
because the p-values are greater than 0.05 (significance level). There is an exception to this as
momentum factor seems significant statistically to some investment portfolio such as TWEIX,
IVE, SDY, LVPIX, and VUVLX.
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Conclusion
To conclude, the determination of which fund performs well is not an easy task. It requires a lot
of numerical, statistical, and research to determine the optimal fund. There are many factors that
can be considered in the judgment of the best fund manager. Each measurement has determined a
specific fund that merits on the numbers being provided. Though the measurement vastly differ
in the analyses, Invesco FTSERAFI US 1000 ETF (PRF) seems to perfume well in some test
measurement. Treynor Ratio and Tracking Error indicates that PRF has a significant value thus,
it is considerable for the investors to see this investment fund as possible investment fund to put
in their wealth.
Reference:
CFI. (nd) What is the Treynor Ratio?. CFI Education Inc. Retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/finance/treynor-ratio/
Chen, James. (21 February 2019). Tracking Error. Investopedia. Retrieved from
https://www.investopedia.com/terms/t/trackingerror.asp
Murphy, Chris B. (2019 May 13). Information Ratio. Investopedia. Retrieved from
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Portfolio Management. (nd). Jensen’s Alpha. Finance Train. Retrieved from
https://financetrain.com/jensens-alpha/
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https://news.tradimo.com/glossary/jensens-alpha/
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https://www.myaccountingcourse.com/financial-ratios/treynor-ratio
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from https://economictimes.indiatimes.com/definition/sharpe-ratio
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