Th Eschindler Foundation

Schindler Foundation Report

I have been asked to evaluate the performance of the Schindler Foundation fund, which has been in progress for the past five years. From my evaluation I have come to several conclusions about Lamb and McRae's management of the portfolio.

Firstly, I calculated the beta of the portfolio from the information that was given to me. The beta measures the portfolio market risk; it measures the sensitivity of the rates of return on a fund to general market movement. By definition the beta of the market is 1.00. A beta above one is more volatile than the overall market, while a beta below one is less volatile. I calculated it to be 1.11, which means that the price of the portfolio would be expected to rise or fall by 1.1%; when the overall market has increased or decreased by 1.0%. Hence the higher the beta, the greater the risk. In this situation; the beta of the portfolio is only 0.11% above the beta of the market, which indicates from this particular calculation that the portfolio has performed well. Even though when the market price falls by 1.0%; the portfolio will only fall by an extra 0.11% and when the market rises by 1.0%, the portfolio will rise by an extra 0.11%. However, conclusions cannot be drawn from this alone, so further analysis has to be made.

I calculated the total return of the portfolio over the five year period to be 2.93% and the annual average return to be 0.579% (the percentage profit a portfolio is making on a yearly basis). The total return on the market was calculated to be 23.53% and the annual average return to be 4.32%. From this it can clearly be seen that the portfolio has performed rather poorly under Lamb and McRae's management because the market has performed approximately eight times greater than the portfolio over the five year period. I then measured the efficiency of the portfolio diversification by calculating the proportion of total variance that is specific (risk that affects a very small number of assets), which came out to be 18.91%. This shows that Lamb and McRae have had a very poor performance because in a well diversified portfolio the variance due to market related risk should be less than 5% of the portfolio. If all risk had been market related, the portfolio beta would have been 1.2333, and the expected return would have been 15.74%. Therefore the extra return that could have been obtained from the same amount of total risk was 1.1%. 1.83% less risk could have been obtained with the same level of return. This analysis tells us that Lamb and McRae could have performed a lot better with less risk; also they could have obtained more expected return for the same amount of total risk.

Lamb and McRae's performance is poor because they say they were following a passive investment strategy, which wasn't a very wise decision from which my studies suggest. Passive investors will purchase investments with the intention of long-term appreciation and limited maintenance. They also make no attempt to distinguish attractive and unattractive shares. They invest in broad sectors of the market and they make little or no use of the information that can be obtained. Following this investment strategy means that there are low operating costs and Lamb and McRae can be assured that the index funds will be on par with the indexes. However, the performance of the portfolio is dictated by the index, which means that it can't outperform the index. Whatever the market returns are, that is the best that the fund can do. There is also a lack of control, when this strategy is adopted. Managers