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Quantitative Analysis (Spreadsheet Examples)


Evaluating investment funds on a risk-adjusted return basis


A spreadsheet example Illustrating the different risk metrics used in the investment industry. The purpose of such an exercise is to standardize the risk profiles of the different funds under review  in order to make a fair assessment of the real value added by each investment fund.


Fund size and performance


In this hypothetical spreadsheet example it is shown that the performances of actively-managed unit trust funds, which are governed by specific rules and regulations pertaining to the maximum exposure allowed for any one security in a portfolio, are seriously constrained whenever the fund reach a specific size of assets under management.  For example, a unit trust fund is not allowed to have more than 5% exposure to a specific security in the investment portfolio. In the case of large-cap securities this limit is increased to 10%.


In this example it is found that whenever the value of assets under management in an actively-managed fund reach a level of around 5% of the total market capitalization of assets it will start to underperform the market; simply because the actively-managed fund by then should replicate the market index and with the costs involved in managing such a fund it will invariably lead to the underperformance of the market index.  


Equity valuation


The different theoretical models of equity valuation, namely intrinsic value, dividend discount model and PE analysis.



Share Buyback programs


Why companies embark on share buyback programs—the effect on Earnings, ROE and Price after the completion of a buyback program.


The impact of management costs on investment returns


Easily one of the most underestimated and less understood barriers to investment performance in the long run. In this example the impact of different cost structures on investment returns are shown over various investment periods. A simple rule applies: If you invest in expensive structures you will need considerable outperformance to make up lost ground  - this is fact, the outperformance however, is not.  


Concentrated versus Equally-weighted Indexes


A spreadsheet example illustrating two different constructed indexes; one based on market capitalization and the other on an equally-weighted basis, i.e. each constituent in the index carries the same weighting. Typically, market cap indexes are heavily concentrated—meaning that a few large cap shares dominate the index and make up the bulk of the total weight of the index.


This exercise demonstrates that heavily concentrated market cap indexes, like the ALSI 40, is over time likely to underperform as many times it would outperform an equally-weighted index, simply because the performance of the concentrated index hinges mainly on the performances of a few dominant constituents in the portfolio, while the performances of the majority of constituents are less important. In an equally-weighted index the performance contribution of each constituent is equally important.  


A further implication of the above is that actively-managed investment portfolios, like the typical collective equity investment (unit trusts) are normally more or less equally-weighted compared with the market cap index. Purely by design (construction) actively-managed funds should have a reasonable chance to outperform the market cap index from time to time, although in practice you will find this “outperformance” attributed to skill rather than mathematical randomness!