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Risk-adjusted performance measurement
Performance measurement should not be reduced to the evaluation of fund returns alone, but must also integrate other fund elements that would be of interest to investors, such as the measure of risk taken. Several other aspects are also part of performance measurement: evaluating if managers have succeeded in reaching their objective, i.e. if their return was sufficiently high to reward the risks taken; how they compare to their peers; and finally whether the portfolio management results were due to luck or the manager’s skill. The need to answer all these questions has led to the development of more sophisticated performance measures, many of which originate in modern portfolio theory.
Modern portfolio theory established the quantitative link that exists between portfolio risk and return. The Capital Asset Pricing Model (CAPM) developed by Sharpe (1964) highlighted the notion of rewarding risk and produced the first performance indicators, be they risk-adjusted ratios (Sharpe ratio, information ratio) or differential returns compared to benchmarks (alphas). The Sharpe ratio is the simplest and best known performance measure. It measures the return of a portfolio in excess of the risk-free rate, compared to the total risk of the portfolio. This measure is said to be absolute, as it does not refer to any benchmark, avoiding drawbacks related to a poor choice of benchmark. Meanwhile, it does not allow the separation of the performance of the market in which the portfolio is invested from that of the manager. The information ratio is a more general form of the Sharpe ratio in which the risk-free asset is replaced by a benchmark portfolio. This measure is relative, as it evaluates portfolio performance in reference to a benchmark, making the result strongly dependent on this benchmark choice.
Portfolio alpha is obtained by measuring the difference between the return of the portfolio and that of a benchmark portfolio. This measure appears to be the only reliable performance measure to evaluate active management. In fact, we have to distinguish between normal returns, provided by the fair reward for portfolio exposure to different risks, and obtained through passive management, from abnormal performance (or outperformance) due to the manager’s skill, whether through market timing or stock picking. The first component is related to allocation and style investment choices, which may not be under the sole control of the manager, and depends on the economic context, while the second component is an evaluation of the success of the manager’s decisions. Only the latter, measured by alpha, allows the evaluation of the manager’s true performance.
Portfolio normal return may be evaluated using factor models. The first model, proposed by Jensen (1968), relies on the CAPM and explains portfolio normal returns with the market index as the only factor. It quickly becomes clear, however, that one factor is not enough to explain the returns and that other factors have to be considered. Multi-factor models were developed as an alternative to the CAPM, allowing a better description of portfolio risks and an accurate evaluation of managers’ performance. For example, Fama and French (1993) have highlighted two important factors that characterise a company's risk in addition to market risk. These factors are the book-to-market ratio and the company's size as measured by its market capitalisation. Fama and French therefore proposed three-factor model to describe portfolio normal returns (Fama-French three-factor model). Carhart (1997) proposed to add momentum as a fourth factor to allow the persistence of the returns to be taken into account. Also of interest for performance measurement is Sharpe’s (1992) style analysis model, in which factors are style indices. This model allows a custom benchmark for each portfolio to be developed, using the linear combination of style indices that best replicate portfolio style allocation, and leads to an accurate evaluation of portfolio alpha

Portfolio Management and Advisory Services
National banks provide investment management services to clients with
differing characteristics, investment needs, and risk tolerance. A bank is
usually paid a percentage of the dollar amount of assets being managed in the
client’s portfolio. If an account’s total assets are below a minimum, it often
pays a fixed fee. Other factors in the amount of fees are an account’s
complexity and other banking relationships. Some banks have advisory
agreements that base compensation on performance. In this type of
arrangement, the portfolio manager, or adviser, receives a percentage of the
return achieved over a given time period.
National banks manage and provide advice on all types of assets for their
clients. Besides managing portfolios of publicly traded stocks and bonds,
national banks also manage and provide advice for portfolios that include a
broad range of investment alternatives such as financial derivatives, hedge
funds, real estate, private equity and debt securities, mineral interests, and art.
Refer to the Comptroller’s Handbook for Fiduciary Activities for information
on individual investment categories and related risk management processes.
Investment management services are provided in two primary types of
accounts: separately managed accounts and commingled or pooled
investment funds. Two types of pooled investment funds are collective
investment funds and mutual funds. A fiduciary portfolio manager may invest
a separately managed account’s assets in these types of funds to help achieve
its investment goals and objectives.
Separately Managed Accounts
A separately managed account is created solely for the purpose of investing a
client’s funds on a stand-alone basis. There are two primary types of accounts
for which a national bank provides investment management services: trusts
and investment agency accounts. National banks may also be responsible for
separately managed accounts when serving as an executor, administrator,
guardian, or in any other fiduciary capacity.


Investment Agency Accounts

Agency accounts are governed by the terms of the contract establishing the relationship, by state law, and by common agency and contract law
principles. A bank may have investment discretion for an investment agency account, or it may provide investment advice for a fee with limited or no investment discretion. Investment agency accounts for which the bank has investment discretion or for which it providessections of 12 CFR 9, Fiduciary Activities of National Banks. In a discretionary investment agency account, the bank usually has sole authority to purchase and sell assets and execute transactions for the benefit of the principal, in addition to providing investment advice. The bank’s investment authority is usually subject to investment policy guidelines established in the investment agency contract. In some discretionary investment agency accounts, the bank is given limited investment authority. Major investment decisions, such as changing the
account’s investment strategy or asset allocation guidelines, might be subject to the principal’s approval. In nondiscretionary investment agency accounts, the bank may provideinvestment advisory services for a fee to the principal, but must obtain the principal’s consent or approval prior to buying or selling assets. The bank may also be responsible for investment services such as executing investment transactions, disbursing funds, collecting income, and performing othercustodial and safekeeping duties.

References
1. ^ Fund Management: City Business Series. International Financial Services, London. 2009-09-29. http://www.ifsl.org.uk/upload/Fund_Management_2009.pdf. Retrieved 2008-14-14.
2. ^ http://www.cnbc.com/id/31756797

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Publication Date: 03-19-2010

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