orbitex investment portfolio

ORBITEX
INVESTMENT
PORTFOLIO
INDEX
• ORBITEX Investment Process
• Selecting and Structuring of Asset Classes
• ORBITEX Investment Portfolio
• Performance Analysis
• Glossary
ORBITEX
INVESTMENT PROCESS
TOP-DOWN APPROACH
Top
World Economy
Europe ➪ USA ➪ Japan
Monetary/Fiscal Policy
Interest, Inflation
Currency
Political
Sphere
Economic/
Earnings
Growth
Social
Sphere
Technological
Sphere
Environmental
Sphere
Down
Result of Top-Down Approach (Macro-Analysis):
➪ Guidelines for asset allocation, selection and weighting of asset classes in portfolios
➪ Standards for structuring of the selected asset classes
➪ The portfolio should anticipate and reflect the future economic development
3
ORBITEX Investment Process
BOTTOM-UP APPROACH
Bottom
Up
Cash
(0-5%)
FixedIncome
Securities
(30-45%)
Equities*
(30-50%)
Alternative
Investments
(10-25%)
Currencies
USD, EUR,
GBP, YEN, CHF
Duration,
Government vs.
Corporate Bonds,
Rating
Liquidity, Earnings
Growth and Consistency,
PEG-Ratio
Private Equity Funds
(0-5%)
Hedge Investment
Strategies
(5-25%
➪ Defensive Stocks
➪ Cyclical Stocks
➪ Growth Stocks
➩ Low Beta Stocks
➩ High Beta Stocks
➪ Market Neutral
➪ Incentive-Driven
➪ Opportunistic
Result of Bottom-Up Approach:
➪
➪
Asset allocation: Portfolio structure by asset classes
Structuring of each asset class
* See Stock Selection Process, page 5-9
4
ORBITEX Investment Process
STOCK SELECTION PROCESS
QUANTITATIVE AND QUALITATIVE APPROACH
Investment Universe
Quantitative Screening:
Qualitative Screening:
-Computer Screening
-Technical Analyses
-GlobalScreening
-FundamentalAnalyses
YOUR PORTFOLIO
SCREENING AND ANALYSES CRITERIA
(>10,000)
Growth rates
Valuation
Liquidity
Historical returns
Computer Screening
Global Screening
(>1,000)
(>500)
(<100)
Fundamental
Analyses
Technical
Analyses
Global conference calls
International forecasts
Historical valuation
Company meetings
Industry conferences
Wall Street analyses
Proprietary research
Bollinger bands
Money flow
Relative strength
Rate of change
30 - 40 STOCKS
(Number of Companies)
5
ORBITEX Investment Process
STOCK SELECTION PROCESS:
AN EXAMPLE
Methodology for Selecting the Stocks of the
Defensive Sector of the Equity Portfolio
(See Page 13)
Defensive stocks are characterized by sustainable growth which is determined by the pricing flexibility, the recurrence of the company’s
revenues and the global reach.
The Keys to Successful Long-Term Growth Investing
Pricing Flexibility
+
Recurring Revenues
Sustainable
Growth
Pricing Flexibility
(The ability to price products and services at consistently profitable levels)
Reasons for pricing power
Examples
Strong franchises
Mc Donald’s - Quick service restaurants
Marriott International - Hotel and senior living services
Starbucks - Specialty coffee retailing
Proprietary positions
Abbott Laboratories - Diagnostics
Gillette - Razor blades
Johnson & Johnson - Healthcare products
Pfizer - Cardiovascular drugs
Low cost provider
Automatic Data Processing - Payroll processing
Home Depot - Home improvement
State Street Corp. - Mutual fund shareholder accounting
Wal-Mart - Mass merchandising
Brand name acceptance
Coca Cola - Soft drinks
Colgate - Toothpastes
Tiffany - Specialty retailing
Wm. Wrigley - Chewing gum
6
ORBITEX Investment Process
Recurring Revenues
(Companies with revenues that recur are better able to sustain high growth rates because their products or services are consumed and
need to be replaced.)
Time Period
Company A
Recurring Revenues (in USD mn)
Company B
No Recurring Revenues (in USD mn)
Repeat
Sources
Repeat
Sources
New
Growth
Beg. Year 1
Revenue
Totals
New
Growth
Revenue
Totals
100
100
End Year 1
100
20
120
0
120
120
End Year 2
120
24
144
0
144
144
End Year 3
144
29
173
0
173
173
End Year 4
173
35
208
0
208
208
End Year 5
208
42
250
0
250
250
5 Years totals
745
150
895
0
895
895
% Total Revenues
83%
17%
100%
0%
100%
100%
➩
Over five years, both companies grew 20% and generated total sales of USD 895 million.
➩
Company A derives 83% of these revenues from doing the same things with the same customers.
It needs only 17% from new customers each year.
➩
Company B got none of these revenues from doing the same things with the same customers.
It needs to find new customers for all its growth.
7
ORBITEX Investment Process
Our Sustainable Growth Companies Have a Global Reach
The United States
+
Canada, Western Europe and Japan
(1950s - early 1980)
+
Latin America, Asia, Eastern Europe, Middle East and Africa
(Late 1980s - 2000 and beyond)
Five Billion Consumers Now Living Within
Market-Oriented Economies
Creating an Investment Universe
Most do it quantitatively
We do it qualitatively
•
•
•
•
•
Computer screening creates initial universe
Earnings and price changes monitored against
benchmarks
Little continuity to universe over time
•
Direct research prequalifies each universe company
Earnings and price changes monitored against
established benchmarks
Significant continuity to universe over time
Valuation Discipline
Valuation screens
•
•
Reinvestment rates related to price/earnings ratios
Sustainable growth rate estimates related to
price/earnings ratios
Our valuation screens help identify
•
•
•
8
Which of the universe companies are most
attractively valued and should be in the portfolio
What percentage of total portfolio assets each
holding should represent
When a portfolio company should be sold
ORBITEX Investment Process
How the Defensive Part of the Equity Portfolio Would Be Invested Today
Pricing
Flexibility
+
Recurring
Revenues
+
Global
Reach
=
Sustainable
Growth
Beverages
Coca Cola
4.1%
Household Products
Colgate
3.1%
Business & Information Services
Automatic Data Processing
4.4%
Insurance
American International Group
5.0%
Entertainment & Lodging
Marriott International
4.5%
Mass Merchandising
Wal-Mart
7.1%
Financial Services
Marsh & Mc Lennan
State Street Corp.
8.3%
1.9%
6.4%
Package Delivery Services
United Parcel Service
2.3%
Foods
Wm. Wrigley
Nestle
6.2%
4.8%
1.4%
Food Services
Mc Donald’s
Starbucks
10.6%
3.6%
7.0%
Health Products
Abbott Laboratories
Johnson & Johnson
10.9%
3.9%
7.0%
Pharmaceuticals
Merck
Pfizer
Novartis
12.8%
4.7%
6.6%
1.5%
Specialty Retailing
Home Depot
Staples
Tiffany
16.9%
5.7%
6.4%
4.8%
Toiletries
Gillette
3.8%
9
SELECTING
AND
STRUCTURING OF
ASSET CLASSES
The economic downtrend beginning in 2001 - the first recession in the globalized world economy - is fundamentally different from those
in the past. Previous recessions were generally a result of monetary squeezes that were put in place to deal with excess demand and
rising inflation. As a result, once monetary conditions were relaxed, recessions soon came to an end. The current cycle has been
associated with supply excesses as well as demand excesses and it has been more of a deflationary than inflationary environment.
Furthermore, in previous cycles at least one major region was not in recession and provided a certain support to the regions affected by
the economic slump; this time all major economies are simultaneously in recession, so the external sector offers little relief. This helps to
explain why sharp declines in interest rates have not been as effective as in the past in stimulating growth. Nevertheless, the power of
easy money should not be underestimated.
For the upcoming three years we expect continued sluggish growth with erratic capital markets with practical no clear-cut long-lasting
price trends.
The following selection and structuring of the asset classes in our portfolio reflects our assessment
of the economic and capital market developments:
10
Selecting and Structuring of Asset Classes
Selected Asset Classes
Cash / Money Market
Instruments
(0-5%)
Equities
(30-50%)
Fixed-Income Securities
(30-50%)
Alternative Investments
(10-25%)
For each of these four asset classes, special portfolios are designed in accordance with two typical customer profiles:
1) Conservative Value Oriented Investor, whose prime target is capital protection and achieving a return of around the double of riskfree investments (US-Government Fund Rates) by assuming minimal risks.
2) Dynamic Growth Oriented Investor, whose prime target is longer-term capital protection and achieving a return which is three times
the risk-free rate by assuming higher but controllable risks.
CASH / MONEY
MARKET INSTRUMENTS
This asset category offers very low returns (risk free investments in USD and Euro: around 1%). A small portion in this asset class is
held in the portfolio for tactical purposes; it allows to act quickly if and when special opportunities arise in the field of equities and/or
alternative investments. Currency-wise, 25% are held in Euro and 75% in USD.
FIXED-INCOME SECURITIES
Bonds in general do not offer exiting value at present. They do, however, offer protection in a deflationary environment;
therefore, positions above minimum levels should be kept. Nevertheless, with unexiting valuations and a slight economic
recovery on the horizon, we expect that bonds will underperform stocks in the next twelve months and beyond.
On the one side, we assume that investors will be quick to react as the economy picks up. On the other side, the inflation outlook
in the USA and in Europe is very good and this argues against being too bearish on bonds. We assume that yields will be very slow
to move up when the economy picks up because of lingering deflationary concerns.
To maximize returns from the bond portfolio, we intend to focus on corporate bonds rather than government bonds. Credit spreads
have narrowed from their very high levels, but they are still at the top end of their historical range.
The high yield bond markets offer good potential in absolute and relative terms. A diversified basket of high yield issues may beat
equity returns in the coming years, with some issues perhaps delivering more than 20%. We recommend to invest for growth oriented
portfolios up to 10% of the bond portfolio in high yield issues.
In order to reduce the price risk of the bond portfolio, we focus on fixed-income securities with shorter to middle-term maturities
resulting in a relatively low duration of the overall bond portfolio. Currency-wise, we invest 50% in USD and 40% in Euro; Yen-Bonds
are avoided.
11
Selecting and Structuring of Asset Classes
Value Oriented Bond Portfolio
Issuer
Minimal
Rating
Weight
Expected
Return
Government
Bonds
A+
60.0%
4.5%
Corporate
Bonds
A+
40.0%
5.5%
Expected
Volatility
(Risk)
Return
Contribution
to Portfolio
Risk
Contribution
to Portfolio
0.5%
2.7%
0.3%
1.0%
2.2%
0.4%
Expected return of value oriented bond portfolio
4.9%
Expected risk of value oriented bond portfolio
0.7%
Expected sharpe ratio1 of value oriented bond portfolio
0.6
Growth Oriented Bond Portfolio
Issuer
Minimal
Rating
Weight
Expected
Return
Expected
Volatility
(Risk)
Return
Contribution
to Portfolio
Risk
Contribution
to Portfolio
Government
Bonds
A
40.0%
4.5%
0.5%
1.8%
0.2%
Corporate
Bonds
A
40.0%
5.5%
1.0%
2.2%
0.4%
High Yield
Bonds
A
20.0%
13.0%
10.0%
2.6%
2.0%
Expected return of growth oriented bond portfolio
6.6%
Expected risk of growth oriented bond portfolio
2.6%
Expected sharpe ratio1 of growth oriented bond portfolio
1Risk
12
free rate = 4.5%
0.8
Selecting and Structuring of Asset Classes
EQUITIES
We are neutral and cautious for the major equity markets in the USA and Europe. Since 2002, a number of bear and bull factors are
overhanging the equity markets:
Negative factors
The bursting of the technology bubble beginning in spring 2000 has washed out most of the market excesses and left back a great
number of investors with huge losses and suposedly with a lasting impact on investor psychology. One has to assume that the
experience of the last couple of years would encourage investors to pay more attention to market fundamentals, and to make them
more cautious. This reluctant behavior is shown by the large mountain of cash piled up in money market funds. Another negative
element is the fact that the equity valuations are not cheap. At the beginning of 2003 the S&P 500 Index traded at close to 30 times
trailing operating earnings. To justify a P/E-ratio of 30, an average earnings growth of 15% p.a. in the coming years would be required.
In view of the prevailing recessionary and deflationary tendencies, only a few selected industries may reach these earnings growth
rates.
Positive factors
Other than the valuation, many prices are in place for a classic cyclical recovery: Many measures of sentiment reached depressed levels;
liquidity is explosive; there are some hints that the economy and earnings are set to slightly recover. As experience shows, stocks led
economic upturns by an average of 4.5 months during the past eight cycles. Chartists, however, teach us that the broad market has yet
to receive a technical green light by breaking through above its 200-day moving average.
Summary of Equity Market Outlook
– Opportunities outweigh the risks
– Markets will remain liquidity-driven with little chance to become earnings-driven
– Since a transition from liquidity-driven to earnings-driven is rarely smooth:
➩ Volatility will remain high
➩ Sector rotation may be frequent
Our Investment Policy
We pursue a defensive policy in our equity portfolios. Consequently, we focus on defensive sectors such as utilities, food, pharmaceutical, retail; also prime quality cyclicals such as technology, paper, chemicals, selected natural resources - in particular, precious metals and
gold - belong to our favorites. In the stock-picking process low beta stocks are preferred to high beta stocks; strong large cap companies, which have the power to expand their market share in the current low growth environment, get preference to middle and small
sized companies. Particular attractive are stocks with secured high dividend yield.
As soon as a slight economic recovery becomes reality, a more aggressive investment behavior will be adopted. Beside cyclical stocks
growth sectors such as financials, IT, communication, biotech will be focused on. Preference will be given to higher beta stocks.
13
Selecting and Structuring of Asset Classes
Value Oriented Equity Portfolio
Sectors
Weight
Industries
(Company Example)
Defensive
Stocks
60.0%
Food (Nestle),
Drugs (Pfizer),
Retail (Wal-Mart),
Insurance (Aetna Life),
Health Products (Johnson & Johnson),
Utilities (RWE)
10.0%
5.0%
6.0%
3.0%
Cyclical
Stocks
30.0%
Automobiles (Daimler-Chrysler),
Banking (City Corp.),
Machinery (GE),
Paper (International Paper),
Basic Materials (Alcoa, Holcin),
Energy (Exxon)
12.0%
7.0%
3.6%
2.1%
Growth
Stocks
10.0%
Computer Hardware (IBM),
Biotech (Amgen),
Media (AOL),
Financial Services (Merrill Lynch),
Software (Microsoft),
Telecoms (Vodafone)
14.0%
8.0%
1.4%
0.8%
Writing of
Call andPut
Options 2
Expected
Return
Return
Contribution
to Portfolio
2.0%
Expected return of value oriented equity portfolio
Expected risk of value oriented equity portfolio
Expected sharpe ratio1 of value oriented equity portfolio
14
Expected
Volatility
(Risk)
2.0%
13.0%
5.9%
1.4
Risk
Contribution
to Portfolio
Selecting and Structuring of Asset Classes
Growth Oriented Equity Portfolio
Sectors
Weight
Industries
(Company Example)
Expected
Return
Expected
Volatility
(Risk)
Return
Contribution
to Portfolio
Risk
Contribution
to Portfolio
Defensive
Stocks
50.0%
Food (Nestle),
Drugs (Pfizer),
Retail (Wal-Mart),
Insurance (Aetna Life),
Health Products (Johnson & Johnson),
Utilities (RWE)
10.0%
5.0%
5.0%
2.5%
Cyclical
Stocks
30.0%
Automobiles (Daimler-Chrysler),
Banking (City Corp.),
Machinery (GE),
Paper (International Paper),
Basic Materials (Alcoa, Holcin),
Energy (Exxon)
12.0%
7.0%
3.6%
2.1%
Growth
Stocks
20.0%
Computer Hardware (IBM),
Biotech (Amgen),
Media (AOL),
Financial Services (Merrill Lynch),
Software (Microsoft),
Telecoms (Vodafone)
14.0%
8.0%
2.8%
1.6%
Writing of
Call andPut
Options 2
Expected return of growth oriented equity portfolio
Expected risk of growth oriented equity portfolio
Expected sharpe ratio1 of growth oriented equity portfolio
2.0%
2.0%
13.4%
6.2%
1.4
1
Risk free rate = 4.5%
2
Where market conditions allow, we write put options instead of direct purchase of a stock at limited price and we write call
options instead of direct sale of a stock in the portfolio at limited price. By collecting premiums the overall return of the
portfolio can be increased.
15
Selecting and Structuring of Asset Classes
ALTERNATIVE INVESTMENTS
The market environment which became very difficult since the burst of the technology bubble at the beginning of 2000 offers great
potential to the alternative investments. The capital markets of the last couple of months and years can be characterized by the
following observations:
– Stocks are more risky as the volatility has remarkably increased.
– Stocks may have low or negative performance over a longer period of time.
– The correlation between the major stock markets became very high with the consequence that the diversification benefits in
equity portfolios have substantially diminished.
There is now the consensus opinion in the financial industry that specific alternative investments are an efficient solution to mitigate
and overcome above capital market problems. Among the alternative investments, there is a great variety and heterogenity.
In our portfolio management we focus on market neutral strategies which are designed
– to generate pure alpha (returns independent on direction of underlying markets zero-beta),
– to capitalize on mispricings and inefficiencies in global capital markets and
– to generate high and consistent returns with low correlation to traditional asset classes.
Moving-up of the Efficient Frontier of Investor’s Portfolio
by Adding Alternative Investments
Investor’s return/risk profile
Return
Stocks Japan
Stocks USA
Alternative
Investments
Stocks Europe
Bonds USA
Money Market
Bonds Europe
Risk
Numerous academic studies have shown that the inclusion of alternative investments in general and market neutral hedge funds in
particular in a traditional portfolio greatly contributes to the optimization of the portfolio; it increases the overall return and reduces the
overall risk of the portfolio by moving upwards the efficient frontier.
16
Selecting and Structuring of Asset Classes
Classification of the Hedge Investment Strategies
(Criterion: Exposure to general market)
Hedge Investment Strategies
Relative-Value
Non-Directional
Event-Driven
Opportunistic
Directional
Convertible
Arbitrage
Merger Arbitrage
(Risk Arbitrage)
Macro
Warrant
Arbitrage
Distressed
Securities
Short Sellers
(Short only Funds)
Fixed-Income
Arbitrage
Emerging
Markets
Equity Market
Neutral
Long/Short
Equity
Statistical
Arbitrage
Commodity
Trading Advisors
Low
High
Market Exposure
17
Selecting and Structuring of Asset Classes
Relative-Value
Non-Directional
Convertible
Arbitrage
Warrant
Arbitrage
Fixed-Income
Arbitrage
Equity Market
Neutral
Statistical
Arbitrage
Mean
Reversion
18
Relying and capitalizing on mispricings of two or more interrelated instruments. These
strategies have low or no correlation to the underlying markets; they are therefore also
called “market neutral” or “non-dirctional”.
E.g. long underpriced convertible bonds and short the underlying stocks; long underpriced convertibles and short overpriced convertibles of the same underlying stocks.
E.g. long underpriced warrants and short the underlying stocks; long underpriced
warrants and short overpriced warrants of the same underlying stocks.
Capitalizing on pricing anomalies within and across global fixed-income markets and
their derivatives. Example: Buying underpriced fixed-income instruments and selling
short expensive securities.
Exploiting equity market inefficiencies by being involved simultaneously in long and short
matched equity positions. One of the greatest advantages is the doubling of the alpha.
Most of these strategies are proprietary quantitative styles that are developed using
sophisticated mathematical and statistical tools to identify non-random price behavior.
Statistical arbitrage can be broadly characterized into three sub-styles: 1) Mean
Reversion, 2) Momentum and 3) Multi-Factor Models. In most cases these strategies
trade large liquid equities, maintain equally balanced long/short market exposure and
capitalize on the statistically proved price distortions.
Mean Reversion Strategies exploit a tendency between two assets with a quantifiable
sympathetic price relationship. For example, lets take a pair of automobile stocks such
as GM and Ford. A mean reversion statistical arbitrage program will have defined a
mean price and a probability distribution for the price difference between the two stocks
over a specific time horizon. When the price differential between GM and Ford spreads
a standard deviation measurement from the mean within this specific time horizon, the
computer sells one stock and buys the other, expecting the price differential to revert
back to the mean.
Momentum
Sophisticated mathematical formulas measure the momentum (speed) of market
movement and seek to exploit differences in the structures of individual sector
momentums.
Multi-Factor
Models
Multiple fundamental factors drive this strategy that seeks to exploit relative values
between equities based on these factors.The holding time in this strategy is substantially
longer than the one of the short-term Mean Reversion and Momentum Strategy.
Selecting and Structuring of Asset Classes
Event-Driven
Merger Arbitrage
(Risk Arbitrage)
Distressed
Securities
Opportunistic
Directional
Macro
Short Sellers
(Short only Funds)
Emerging
Markets
Long/Short
Equity
Commodity
Trading Advisors
This strategy class focuses on identifying and analyzing securities that can benefit from
the occurence of extraordinary transactions and events. It has a variable, rather low
degree of market exposure.
Investing in securities of companies which are or may be the subject of publicly announced
mergers or acquisitions, in anticipation of earning the spread between prevailing market
prices and the prices of the value of the securities or cash to be received upon
consumption of the particular corporate event or transaction. This strategy intends to
buy the target company’s shares and simultaneously sell short the proper ratio of the
acquiring company’s shares. An example is the acquisition proposal of GE for Honeywell
announced in spring 2001.
Taking long and, to some extent, short positions in equities and debts of companies
which are in financial distress, in a bankruptcy procedure or in a major reorganization.
This strategy class has a variable, rather high degree of market exposure. It capitalizes
on an identified expected price trend on a specific market.
This strategy employs an opportunistic top-down approach to invest in a leveraged base
across multiple sectors, markets and instruments. The investment process is based on
macro-economic analyses and forecasts of shifts in global interest rates, currency
markets, equity markets and policy changes. Example: Soros‘ Quantum Fund
Profitable in a bearish market environment. Short sellers borrow stocks and sell them on
the market with the intention of buying them back at a lower price; the portfolio holds
usually only short positions.
Taking long and short positions of equity and/or debt and derivative products in emerging
markets.
Long/Short strategies combine both long as well as short equity positions. A long/short
equity manager can add value by buying winners and selling losers in one and the same
industrial sector. The long and short positions are usually not balanced.
Market specialists buying and selling index, interest, currency or commodity futures and
the respective options in order to capitalize on the expected market trends.
19
Selecting and Structuring of Asset Classes
Value Oriented Alternative Investments Portfolio
Strategies
Weight
Expected
Return
12.0%
Expected
Volatility
(Risk)
Sharpe
Ratio
Return
Contribution
to Portfolio
Risk
Contribution
to Portfolio
4.0%
1.9
3.6%
1.2%
Fixed-Income Arbitrage
30.0%
Convertible Arbitrage
20.0%
14.0%
5.6%
1.7
2.8%
1.1%
Merger Arbitrage
10.0%
10.0%
3.7%
1.5
1.0%
0.4%
Warrant Arbitrage
10.0%
15.0%
6.0%
1.8
1.5%
0.6%
Long/Short Global Equities
10.0%
15.0%
8.0%
1.3
1.5%
0.8%
Statistical Arbitrage
20.0%
15.0%
10.0%
1.1
3.0%
Expected return of value oriented alternative investments portfolio
Expected risk of value oriented alternative investments portfolio
Expected sharpe ratio1 of value oriented alternative investments portfolio
1 Risk
20
free rate = 4.5%
13.4%
6.1%
1.5
2.0%
Selecting and Structuring of Asset Classes
Growth Oriented Alternative Investments Portfolio
Strategies
Weight
Expected
Return
Expected
Volatility
(Risk)
Sharpe
Ratio
Fixed-Income Arbitrage
10.0%
12.0%
4.0%
1.9
1.2%
0.4%
Convertible Arbitrage
30.0%
14.0%
5.6%
1.7
4.2%
1.7%
Merger Arbitrage
10.0%
10.0%
3.7%
1.5
1.0%
0.4%
Warrant Arbitrage
10.0%
15.0%
6.0%
1.8
1.5%
0.6%
Long/Short Global Equities
10.0%
15.0%
8.0%
1.3
1.5%
0.8%
Statistical Arbitrage
30.0%
15.0%
10.0%
1.1
4.5%
Expected return of growth oriented alternative investments portfolio
Expected risk of growth oriented alternative investments portfolio
Expected sharpe ratio 1 of growth oriented alternative investments portfolio
Return
Contribution
to Portfolio
Risk
Contribution
to Portfolio
3.0%
13.9%
6.9%
1.4
21
ORBITEX
INVESTMENT PORTFOLIO
(Investment Portfolios for 100 Million USD)
Proposed Structure
The portfolios of each asset class are - comparable to modules - combined to two different investment portfolios:
➩ Value Oriented Investment Portfolio, designed for more conservative investors and
➩ Growth Oriented Investment Portfolio, designed for investors willing to take a higher but controllable risk.
The two investment portfolios - designed for two typical client profiles - are the consolidation of the respective model portfolios for
each asset class. If the client requests - in accordance with his risk profile, personal wishes and needs - modifications of the different
asset class portfolios respectively of the final portfolio, ORBITEX can easily comply with these requests by changing the contents and
weights in the asset class portfolios and by changing the weights of the different asset classes in the final portfolio. Such modifications,
of course, result in modified risk/return profiles and in different performance figures. To conclude, ORBITEX is in a position, if needed,
to create for each client a tailor-made portfolio.
Value Oriented
Bond Portfolio
Value Oriented
Equity Portfolio
Value Oriented
Alternative Investments
Portfolio
Value Oriented
Investment Portfolio
Growth Oriented
Bond Portfolio
Growth Oriented
Equity Portfolio
Growth Oriented
Investment Portfolio
22
Growth Oriented
Alternative Investments
Portfolio
Investment Portfolio
VALUE ORIENTED
INVESTMENT PORTFOLIO
Asset Classes
Investment
Group
Weight
Expected
Return
Expected
Volatility
(Risk)
Return
Contribution
to Portfolio
Risk
Contribution
to Portfolio
Cash / Money
Market Instruments
Treasury Bills
5.0%
1.0%
0.0%
0.1%
0.0%
Fixed-Income
Securities
(See Page 12)
50.0%
Government
Bonds
30.0%
4.5%
0.5%
1.4%
0.2%
Corporate
Bonds
20.0%
5.5%
1.0%
1.1%
0.2%
Value Oriented
(See Page 14)
30.0%
13.0%
5.9%
3.9%
1.8%
15.0%
13.4%
6.1%
2.0%
0.9%
Equities
Alternative
Investments
Time Deposits
Value Oriented
(See Page 20)
Expected return of value oriented investment portfolio
8.5%
Expected risk of value oriented investment portfolio
3.1%
Expected sharpe ratio1 of value oriented investment portfolio
1 Risk
1.3
free rate = 4.5%
23
Investment Portfolio
GROWTH ORIENTED
INVESTMENT PORTFOLIO
Asset Classes
Investment
Group
Weight
Expected
Return
Expected
Volatility
(Risk)
Return
Contribution
to Portfolio
Cash / Money
Market Instruments
Treasury Bills
1.0%
1.0%
0.0%
0.0%
0.0%
Fixed-Income
Securities
(See Page 12)
39.0%
Government
Bonds
19.0%
4.5%
0.5%
0.9%
0.1%
Corporate
Bonds
15.0%
5.5%
1.0%
0.8%
0.2%
High -Yield
Bonds
5.0%
13.0%
10.0%
0.7%
0.5%
Equities
Growth Oriented
(See Page 15)
40.0%
13.4%
6.2%
5.4%
2.5%
Alternative
Investments
Growth Oriented
(See Page 21)
20.0%
13.9%
6.9%
2.8%
1.4%
Time Deposits
Expected return of growth oriented investment portfolio
Expected risk of growth oriented investment portfolio
Expected sharpe ratio1 of growth oriented investment portfolio
1 Risk
24
free rate = 4.5%
Risk
Contribution
to Portfolio
10.6%
4.7%
1.3
PERFORMANCE
ANALYSIS
VALUE ORIENTED INVESTMENT PORTFOLIO
Asset Classes
Performance Figures
Alternative
Investments
15%
Cash / Money
Market Instruments
5%
Fixed-Income
Securities
50%
Equities
30%
Expected Return of Value
Oriented Investment Portfolio
8.5%
Expected Risk1 of Value
Oriented Investment Portfolio
3.1%
Expected Sharpe Ratio2 of Value
Oriented Investment Portfolio
1.3
GROWTH ORIENTED INVESTMENT PORTFOLIO
Asset Classes
Performance Figures
Alternative
Investments
20%
Cash / Money
Market Instruments
1%
Fixed-Income
Securities
39%
Equities
40%
1
The formula for Risk (Standard Deviation) is
[ ]
n
n Σ x2i i=1
δ=
n
Σ xi
i=1
Expected Return of Growth
Oriented Investment Portfolio
10.6%
Expected Risk1 of Growth
Oriented Investment Portfolio
4.7%
Expected Sharpe Ratio2 of Growth
Oriented Investment Portfolio
2
The formula for Sharpe Ratio is
µannual - Rf
2
n(n-1)
xi = Monthly Returns
i = Monthly Interval
n = Number of Fund Returns
1.3
Sharpe Ratio =
δannual
µannual = Annualized Average Return
δannual = Logged Annual Risk (Standard Deviation)
= Risk Free Rate
Rf
25
GLOSSARY
Active Premium
A measure of the investment‘s annualized return minus the benchmark‘s annualized return.
Alpha
A measure of value added generated independent on the direction and move of the underlying
benchmark. It is calculated by taking the total return of a fund minus beta times the return of
the benchmark. It is based on monthly values.
Beta
A relative measure of the sensitivity of an investment‘s return to changes in the benchmark‘s return.
The beta (or slope) between two funds is the amount the first fund moves when the other moves by
one. For example, if one fund always goes up and down by exactly half of the performance of the index, it‘s beta will be 0.50. The index goes up 1.00 it goes up 0.50 etc. In other words the beta
represents the volatility of the first investment versus the second.
Capture Ratio (Down)
The down capture ratio is a measure of the investment‘s compounded return when the benchmark
was down divided by the benchmark‘s compounded return when the benchmark was down.
Capture Ratio (Up)
The up capture ratio is a measure of the investment‘s compounded return when the benchmark was
up divided by the benchmark‘s compounded return when the benchmark was up.
Correlation
Correlation expresses the strength of the relationship between the distribution of returns of the fund
and its benchmark. The coefficient of correlation is always between +1.00 and –1.00. A perfect
correlation is when the investment behaves in exactly the same manner. A perfect positive correlation
is represented by +1.00, a perfect negative correlation is represented by –1.00. A correlation of more
than 0.70 indicates a strong relationship, between 0.40 and 0.69 a modest relationship. If the
correlation is below 0.30 there is effectively no correlation.
Deviation (Downside)
Downside deviation is similar to the loss standard deviation except the downside deviation considers
only returns that fall below a defined minimum acceptable return (MAR) rather then the arithmetic
mean. For example, if the MAR is assumed to be 10%, the downside deviation would measure the
variation of each period that falls below 10%.
Deviation (Standard)
The standard deviation is the measure of the square root of the variance of data (lognormal or arithmetic) points from the mean. We recommend the use of the lognormal measure as this takes into
account that 10% up is not the same as 10% down.The larger the figure the higher the volatility of a
fund and thus its risk. To annualize the result we multiply by the square root of 12.
Deviation (Standard, Gain)
Similar to standard deviation, except this statistic calculates an average (mean) return only for the
periods with a gain and then measures the variation of only the gain periods around this gain mean.
This statistic measures the volatility of upside performance.
Deviation (Standard, Loss)
Similar to standard deviation, except this statistic calculates an average (mean) return only for the
periods with a loss and then measures the variation of only the losing periods around this loss mean.
This statistic measures the volatility of downside performance.
Information Ratio
The informatio ratio is the active premium divided by the tracking error. This measure explicitly relates
the degree by which an investment has beaten the benchmark to the consistency by which the in
investment has beaten the benchmark.
26
Jensen Alpha
Quantifies the extent to which an investment has added value relative to a benchmark. Equal to the
investment‘s average return in excess of the risk free rate minus beta times the benchmark‘s average
return in excess of the risk free rate.
Maximum Drawdown
This is the largest percentage drawdown that has occured in any investment data record.
Number Ratio (Down)
The down number ratio is a measure of the number of periods that the investment was down when
the benchmark was down, divided by the number of periods that the benchmark was down.
Number Ratio (Up)
The up number ratio is a measure of the number of periods that the investment was up when the
benchmark was up, divided by the number of periods that the benchmark was up.
Percent Gain Ratio
A measure of the number of periods that the investment was up divided by the number of periods
that the benchmark was up.
Percentage Ratio (Down)
The down percentage ratio is a measure of the number of periods that the investment outperformed
the benchmark when the benchmark was down, divided by the number of periods that the benchmark was down.
Percentage Ratio (Up)
The up percentage ratio is a measure of the number of periods that the investment outperformed the
benchmark when the benchmark was up, divided bythe number of periods that the benchmark was
up.
Sharpe Ratio
A return/risk measure. Return (numerator) is defined as the incremental average return of an investment over the risk free rate. Risk (denominator) is defined as the standard deviation of the investment returns.
Sortino Ratio
This is a return/risk ratio. Return (numerator) is defined as the incremental compounded average period return over a minimum acceptable return (MAR). Risk (denominator) is defined as the downside
deviation below a MAR.
Tracking Error (Annualized)
A measure of the unexplained portion of an investment‘s performance relative to a benchmark. Annualized tracking error is measured by taking the square root of the average of the squared deviations between the investment‘s returns and the benchmark‘s returns and then multiplying the
result by the square root of 12.
Treynor Ratio
The treynor ratio is similar to the sharpe ratio, except that it uses beta as the volatility measurement.
Return (numerator) is defined as the incremental average return of an investment over the risk free
rate. Risk (denominator) is defined as the beta of the investment‘s returns relative to a benchmark.
Value Added Index
The value added monthly index (VAMI) reflects the growth of a hypothetical USD 1‘000 in a given
investment over time. The index is equal to USD 1‘000 at inception. Subsequent month-end values
are calculated by multiplying the previous month‘s VAMI index by 1 plus the current month‘s rate of
return.
Volatility (Annualized)
Volatility is an estimate of the risk of an investment and is measured by the lognormal annualized
standard deviation of a fund. Standard deviation is the measure of the square root of the variance
of returns from the average return. We use the lognormal measure as this takes into account that
10% up is not the same as 10% down. Thus the standard deviation uses logarithmic data rather
than monthly percentage returns. The larger the figure the higher the volatility of a fund and thus its
risk.To annualize the monthly volatility, we multiply the square root of 12.
27