Treynor can help your per­sonal port­fo­lio

Finweek English Edition - - INSIDE - BY SCHALK LOUW Sep 13 Sep 14

In­vest­ments and risk have been com­pared to many things, but t he one t hing t hat will surely get en­thu­si­asts’ blood f low­ing i s com­par­ing i nvest ment ri s k t o cricket. But why? On one side, you f i nd play­ers l i ke Chris Gayle who can score 200 r uns from only a few balls, only to be taken out the next day af­ter one or t wo overs with less t ha n 10 r u ns. Then t here’s t he t y pi­cal f i ve- day bats­man who can spend an en­tire day dilly-dal­ly­ing in front of the wickets to score a measly 50 runs.

I n my opin­ion, Hashim Amla rep­re­sents per­fect bal­ance. While giv­ing us t he i mpres­sion t hat he is a slow bats­man, he i s act ually t he fastest bats­man to score 20 cen­turies, he holds a hit rate of 89% and 42% of his One Day In­ter­na­tionl (ODI) runs were scored through bound­aries.

It ’s easy to com­pare his regular high scores to a stan­dard de­vi­a­tion i n an i nvest­ment. The higher t he stan­dard de­vi­a­tion, t he more r isky t he i nv es t ment, whi l e a l o wer stan­dard de­vi­a­tion not only low­ers the in­vest­ment risk, but also means that the bats­man isn’t al­ways bowled out early in the game.

Apart from this stan­dard de­vi­a­tion, one of the many risk ra­tios one ca n use to s how t he r et urns ver­sus the risk that should be taken, is the Treynor ra­tio.

Th e Tr ey n o r ra­tio is used t o ev a l u a t e t he pe r f or mance of dif fer­ent ac­tively man­aged f unds while mea­sur­ing t he r et u r ns on t hese i nvest­ments ver­sus t he r i sk. The higher this ra­tio, the bet­ter the f und’s per­for­mance rel­a­tive to t he amount of r isk, or put dif­fer­ently, the in­vestor re­ceived a higher re­turn on his i nvest­ment r el at i ve to his risk. Be­fore we look at the Treynor r at i o, how­ever, it i s i mpor­tant to un­der­stand t he con­cepts of mar­ket and com­pany-specif ic r isk, as well as the beta of a fund.

Mar­ket risk is the risk as­so­ci­ated with cer­tain eco­nomic fac­tors in the mar­ket and i nvestors usu­ally have ver y l it t le con­trol over t his. When l ook­ing at t he great cor­rec­tion of 20 08, i t didn’t mat­ter how wel l di v er si f i e d i nvestors were – t he mo­ment the mar­ket started to re­act to t he bad news, com­pa­nies/shares started to suf­fer.

Com­pany-specif ic risk is the risk as­so­ci­ated with a specif ic com­pany or share. This r i sk can usu­ally be low­ered by means of di­ver­sif ica­tion. The beta of an in­vest­ment mea­sures t he mar­ket r i sk of t he i nvest­ment and to which ex­tent the in­vest­ment re­turns move with the mar­ket.

The Treynor ra­tio i s cal­cu­lated by sub­tract­ing the risk-free re­turns, s uch as money mar­ket, f rom t he in­vest­ment re­turns and then plac­ing it rel­a­tive to the beta. The re­sult is ret urns per unit of mar­ket r i sk as op­posed to to­tal risk.

This ra­tio can be used to com­pare dif­fer­ent ‘ bats­men’. When ap­ply­ing the Treynor to lo­cal gen­eral shares unit trusts (ex­clud­ing fund of funds) over the past f ive years, you will see that the f ive f unds be­low stand out as t he ‘i n shape’ play­ers over t his pe­riod. They ar e: 36ONE MET Eq­uity, Mar­riott Div­i­dend Growth, PSG Eq­uity, Mo­men­tum Best Blend Spe­cial­ist Eq­uity and Fo­ord Eq­uity.

I know his­tor­ica l data pre­dicts as much as who will be scor­ing a

Port­fo­lio Manager at PSG Wealth










0% -20%

Sep 10 A - High Treyor UT - Gen­eral Eq­uity [164.49%] B - FTSE JSE All Share [119.89%]

SOURCE: Fi­nan­cial Ex­press cen­tury in the next Proteas match, but if you had in­vested 20% in each of t hese f unds, your re­turns would have been no­tice­ably higher t han t he FTSE/ JSE All Share In­dex at a lower av­er­age stan­dard de­vi­a­tion. Fo­ord do e sn’t d ispl ay its shareholding, but if you com­bine the f ive high­est Treynor funds (out of the top si x), those who be­lieve in their choices of shares would be ex­cited to know that the top 10 av­er­age share hold­ing con­sists of: Bid­vest, Britsh Amer­i­can Tobacco, Life Health­care Group, MTN, Mr Price, Nam­pak, Na sp e r s * , S A BMi ll e r , Sa s o l , Stein­hoff.

Although no one may know what the mar­kets will bring to­mor­row, I know that in com­pil­ing my in­vest­ment plan, I would def initely choose the play­ers who are in shape.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.