Zeus asset management

1. Overview of Zeus Asset Management Inc.
Founded in 1968, Zeus Asset Management Inc. (ZAM) is an independent, money – management company offering services to both institutional and individual clients. ZAM follows a conservative, risk-averse, quality-oriented investment management to exploit the extra return from long term strategies. In fact, the company’s investment philosophy of risk-aversion can be guaranteed by the experienced staff, who have the average of 18 years of experience in the sector and have deal with recession and major market downturns, compared to the age of 26 on average and 5 years of experience in Fidelity Investments’ staff – the largest asset-management firm.

The high quality professionals allow ZAM serving its clients and performing the company’s strategies effectively. Moreover, the clients and investment strategies of the firm also highly support its original direction since it allows ZAM to diversify its portfolios and seek the return in association with investor’s requirements. Different to some other asset- management firms, ZAM has both institutional and individual customers who have different financial goals therefore the firm has designed portfolios to meet the needs of clients.

In fact, Zeus Asset Management concentrates on risk–averse, high net worth individuals and companies with various return and risk profile.

With individually managed account, the company apply the minimum requirement of $2 million, the portfolios then customized based on an investor’s investment objectives and risk-return profile alongside with other particular concerns, such as: tax, liquidity, legal restrictions, diversification, time horizon… Besides, ZAM has constructed a range of mutual funds, including equity fund, bond fund, balance fund and international fund, to meet the requirements of different clients.

Why is estimation of risk-adjusted returns of particular interest to Zeus? Since the capital of ZAM is allocated in a range of portfolios which have different level of risk and return, the company is taking consideration into risk-adjusted return methods to properly evaluate the performance of a particular asset class in association with its risk. In fact, there are some key benefits of risk-adjust returns that ZAM can gain to apply for portfolio evaluating purposes. First, risk adjustment methods allow the company to choose between investment opportunities of various expected risk and return. Moreover, such methods facilitate ZAM to compare the performance of portfolios that have different levels of return and risk since it provides a metric based on the company and market’s data. A second benefit is providing a guide to firm’s managers in allocating the capital and the weights of asset classes in a particular portfolio in order to meet the requirements of different clients.

For instance, as the individual investors of Zeus are typically risk-averse and high-net-worth, they may more likely to pursue the asset growth over the long term and avoid the portfolio’s volatility; therefore, a larger proportion of the portfolio may distribute to fixed-income assets and the strategic asset allocation should be applied. At each level of risk, the portion of asset is determined based on its risk-adjusted return relative to other portfolios.

2. Risk-adjusted return models

The firm’s manager, John Abbott, considered risk-adjusted methods, including: Sharpe ratio, Treynor ratio and Jensen’s Alpha, for gaining the insights, enhancing the portfolio evaluation as well as attracting potential investors.

2.1 Sharpe ratio

2.1.1 Definition
Sharpe ratio measures the excess return per unit of deviation in an investment asset or a trading strategy (which reflect the risk of the portfolio). It can be calculated as follows: Sharpe ratio = with Rp = average return of the portfolio, Rf = average of the risk-free rate and σp = standard deviation of the portfolio.

2.1.2 Advantages and disadvantage of Sharpe ratio
Advantages
Disadvantages
– The Sharpe ratio captures both return and risk in a single measure. Hence, it facilitates analysts to compare the risk-adjusted performance of different portfolios based on the level of the ratio which higher Sharpe ratio is considered to be better than the lower ones.

– Sharpe ratio refers to the differential between two portfolios, providing the information to choose between two investment opportunities, given the returns of them are uncorrelated the rest of the company’s portfolios.

– Lastly sharpe ratio avoids the drawback of alpha and beta which are high volatility measures.

– Sharpe ratio may not give the reliable assessment if one or more of the assets is correlated to the rest of the portfolio.

– Sharpe ratio does not take into account the systematic risk as well as other non-quantifiable factors, such as: changes in economic and political background…

2.2 Treynor ratio
2.2.1 Definition
Treynor ratio is a measurement of the returns earned in excess of that which could have been earned on an investment that has no diversifiable risk. Treynor ratio is calculated as following: Treynor ratio= with β is the systematic risk for portfolio, Rp is the average return of the portfolio and Rf is the average of the risk-free rate

2.2.2 Advantages and disadvantage of Treynor ratio
Advantages
Disadvantages
– Treynor ratio shows how a fund will perform not in relation to its own volatility but the volatility it brings to an overall portfolio. – Investors can use the Treynor ratio to evaluate portfolio performance throughout the lifespan of the portfolio. This allows for a trend analysis to determine the overall volatility of the portfolio.

– A ranking of portfolios based on the Treynor Ratio is only useful if the portfolios are fully diversified.

– Treynor ratio does not quantify the value added of active portfolio management.

2.3 Jensen’s Alpha
2.3.1 Definition
Jensen ratio measures how much of the portfolio’s rate of return is attributable to the manager’s ability to deliver above-average returns, adjusted for market risk and can be determined through the formulae: α = Rp – [Rf – βp(Rm – Rf)]

2.3.2 Advantages and disadvantage of Sharpe ratio
Advantages
Disadvantages
The method shows how much of the abnormal return that the investors can gain or lost in a portfolio. Typically, investors seeking for securities that have positive alpha which gain the extra profit. Assist the investors to construct the portfolio by picking up stocks that possibly generate abnormal return to achieve the above-average growth. – Based on CAPM, which only measures the expected return of the portfolio by the systematic risk and ignores other factors that can affect the portfolio performance.

3. Risk-adjusted return in case of Zeus Asset Management
3.1 Beta
The beta results can be achieved by running the regression:

Equity fund
Bond fund
Balanced fund
International fund
Benchmark
S&P500
Lipper Growth Index
Lehman Brothers Aggregate Index
Lipper Balance Index
MSCI Index
Beta
0.875766944
0.847748757
0.86447033
1.006438974
1.088018754
Beta value indicates the systematic risk and also implies the return of the
portfolio. As can be seen from the above table, we can see that with the entire beta values are approximately 1.0, meaning that the portfolio are effectively tracking the performance of the respective benchmark. Moreover, based on the profile of Zeus’s clients, which mostly focus on risk-averse and high net worth individuals, we can argue that all of the company’s portfolios are performing relatively well. Specifically, equity fund and bond fund of Zeus have beta lower than 1 indicating a better performance than its benchmarks in terms of risk avoidance.

3.2 Sharpe ratio

Equity fund
Bond fund
Balanced fund
International fund
Rp – Rf
0.92%
0.28%
0.53%
0.14%
Ϭp
0.02802
0.01124
0.02407
0.04680
Sharpe ratio
0.32813
0.24813
0.21920
0.03097

Equity fund
Bond fund
Balanced fund
International fund
Benchmark
S&P500
Lipper Growth Index
Lehman Brothers Aggregate Index
Lipper Balance Index
MSCI Index
Sharpe ratio
0.39500
0.32472
0.26335
0.25715
-0.09425
As the higher Sharpe ratio is preferred, the equity fund offered the superior risk-adjusted return, compared to the other portfolios. The table also reflects the relation between risk and return which equity fund generated higher return on a monthly basis but tended to be more volatility. Conversely, the Zeus’s international fund seemed to have poor performance since the low average return (0.14%) accompanied with high risk (Ϭ = 0.0468). However, it is noted that the relevant data of Zeus’s international fund is available in a relatively short period of time, which possibly cause biases in evaluating its performance. Moreover, compare to the benchmark, most of Zeus’s Sharpe ratios are lower than those of its respective benchmark, indicating that Zeus’s funds underperformed the market in terms of risk-adjusted return.

3.3 Treynor ratio

As mentioned above, Treynor ratio measures the risk-adjusted return of the portfolio in the absence of unsystematic risk. If the company’s portfolios have been diversified, the unsystematic risk therefore is almost eliminated.

Equity fund
Bond fund
Balanced fund
International fund
Benchmark
S&P500
Lipper Growth Index
Lehman Brothers Aggregate Index
Lipper Balance Index
MSCI Index
Rp – Rf
0.92%
0.92%
0.28%
0.53%
0.14%
Beta
0.87577
0.84775
0.86447
1.00644
1.08802
Treynor ratio
0.01050
0.01084
0.00323
0.00524
0.00133
In this case, equity fund is considered to generate higher return than the others in association with its level of systematic risk. However, since the company were pursuing different strategy and seeking high-quality securities in order to exploit the above-average rate, Treynor ratio should be used in conjunction with other methods.

3.4 Jensen’s Alpha

Equity fund
Bond fund
Balanced fund
International fund
Benchmark
S&P500
Lipper Growth Index
Lehman Brothers Aggregate Index
Lipper Balance Index
MSCI Index
Jensen’s Alpha
-0.00179715
-0.001459013
-0.000512532
0.003626154
0.005765252
According to the table, the actual returns of equity fund and bond fund are lower than expected returns which were determined by CAPM. Meanwhile, since the alpha values of balanced and international fund are positive, it implies that such fund generates abnormal return for investors.

4. Conclusion

In the case of Zeus Asset Management, we can conclude that using the performance evaluation tool presented above could provide an insight of the fund’s performance on a risk-adjusted basis since the return of each portfolio is viewed in accordance with its level of risk. However, all of the risk-adjusted methods above contain pros and cons and limited available data which may result in misleading portfolio assessment. Hence, it is believed that Zeus’s manager should employ various risk-adjusted approaches to gain the most realistic optic about the portfolio performance.