You’re looking to evaluate the performance of an equity fund manager for the Gam

Question

You’re looking to evaluate the performance of an equity fund manager for the Gamma fund. You want to evaluate how much of this is based on the asset (sector) allocation and how much is based on selection within each sector. The benchmark fund allocates its investments to the Index within each sector.

Gamma weight Benchmark weight       ReturnIndex        ReturnGamma

Growth, domestic 20% 45% 11.5% 12.1%

Growth, international 40% 10% 16.6% 15.0%

Value, domestic 25% 35% 12.7% 12.3%

Value, international 15% 10%                    18.2% 19.4%

a. What return did the Benchmark fund earn over this time period?

b. What return did Gamma earn over this time period?

c. Did Gamma overperform or underperform for this time period?

d. How much of your answer to part c is based on asset (sector) allocation?

e. How much of your answer to part c is based on selection within the sectors?

f. Gamma’s fund manager is proposing she receives a large bonus for the year. Do you support that? Why or why not?

Explanation / Answer

a. Benchmark Fund Return = SUMPRODUCT(Benchmark Weight, ReturnIndex) = 13.10%

b. Gamma Return = SUMPRODUCT(Gamma Weight, ReturnGamma) = 14.41%

c. As obvious from the returns comparison, Gamma overperformed.

d. Gamma overperformed more because of sectoral allocation. Because if she had done the same allocation, as the Index, then her returns would have been just 13.19%

e. Within sector allocation of Gamma has not been very good. If she had done within sector allocations same as Index, then she would have earned 14.85%

f. Yes Gamma deserves the recommendation, because of the wise sectoral allocation, however she needs to be more diligent towards within sector allocation, which is just as important.

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