The Pakistan Stock Exchange (PSX) has remained highly volatile during the first quarter of calendar year 2016 (Q1CY16).
Strong macro and company fundamentals were partly neutralised by market dynamics such as foreign selling and regulatory investigations into leading business groups and brokerage houses.
The benchmark KSE-100 Index dropped sharply in January (-4.62%), remained flat in February (+0.23%) before recovering in March (+5.64%) and ended the quarter marginally up by 0.98%. In such an environment, retail investors often find it difficult to efficiently manage their portfolios and often succumb to the herd mentality of panic selling during a rout and buying only after a strong rally.
Therefore, it is crucial to see how various professional asset managers fared during this quarter and whether they were able to outperform the market without taking undue risk. For the purpose of analysis, the universe of equity funds has been restricted to those with a minimum of Rs1 billion. Out of the 20 equity funds currently in operation, 11 of them meet this minimum fund size requirement.
Table 1 shows some interesting facts; firstly, there is a significant variance of 8.47% between the top performing fund (+2.61%) and the worst performing fund (-5.86%). Secondly, out of these 11 funds only three (Lakson Equity Fund, NAFA Stock Fund and Atlas Stock Market Fund) were able to outperform the KSE-100 Index return of 0.98% during Q1CY16. For investors this is a strong indicator that in addition to decisions about asset allocation, the choice of asset manager is of paramount importance.
Another factor that investors do not take into account is the level of risk taken by asset managers to achieve their respective levels of return. An asset manager who manages to generate outsized returns may look like a good bet, but if his portfolio is concentrated in volatile and illiquid stocks then an optimal mix of risk and return has not been achieved. A popular way to measure the level of risk inherent in an equity portfolio is to measure the standard deviation or volatility in the daily returns of each fund. A fund that has a higher standard deviation is, by nature, riskier than its peers. In Table 2, there is a significant difference between the least volatile fund (National Investment Unit Trust) and the most volatile fund (AKD Opportunity Fund). Investors who have exposure to the AKD Opportunity Fund can expect more volatility in their returns as compared to the market and other funds.
The optimal mix
What is the optimal mix of risk and return? Financial experts have come up with various measures to determine how proficient an asset manager is at generating returns without exposing investors to excessive risk. One such measure is the information ratio, which measures an asset manager’s ability to generate excess returns relative to a benchmark and also attempts to identify the consistency of the manager. A higher information ratio shows that the asset manager has outperformed other managers and delivered consistent returns over a specified period. In Table 3, only three funds have a positive information ratio which makes sense as these were the only three to beat the KSE-100 index during Q1CY16.
Lakson Investments and The Express Tribune are part of The Lakson Group of Companies
Published in The Express Tribune, April 9th, 2016.