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Methods of assessing management quality of fund-asset MC

Fund selection:

Companies involved in managing different asset funds (UIF and IF) for at least two years may participate in the project Rating of management quality of fund-asset MC. To be assessed a fund should possess at least 30 mln rubles by 31.12.2004.

Assessment of asset management by MC is based on three main criteria:

1. Sharp coefficient (Sharp_c).
2. Coefficient Ω (Omega_c).
3. Yensen α (Alpha_c).

For better assessment funds would be divided into groups in line with their strategy and type.

Three main categories: conservative (minimum risk and low yield), mixed (average risk and average yield) and aggressive (highest yield and maximum risk).

Three types of funds: closed, interval and open (9 groups of funds altogether: for instance, interval-aggressive, open-conservative etc.).

Each group of funds would have different assessment parameters.

All three coefficients will be calculated on the basis of daily cost of units within two years (P_t). Daily yield will be calculated on the basis of daily unit cost (R ^t_p; Calculation algorithm is given below).

Interest rates – level of required yield and non-risk asset yield (see below), needed to calculate coefficients, will be reduced, to make comparisons more effective, to daily rates (the reduction algorithm is in the Addendum).

Unit cost data, presented by companies, will undergo preliminary analysis to cut out some “non-standard” elements (misprints etc.).

Assessment criteria

1. Sharp coefficient

The coefficient is included in the methodology, since de-facto it provides good criteria to assess investment companies and gives good indication of the most important notions for investors: yield and risk. Strategy producing the largest yield with minimum risk is the most preferable for investors.

The coefficient permits to correlate yield and risk and shows amount of yield per amount of risk. Risk is measured by volatility; contribution of older data to volatility is less; asset correlation is also taken into account.

1.1. Data to calculate Sharp coefficient

To calculate the coefficient (next to daily unit cost) you need to select:

Non-risk asset – asset with known yield and small risks, the asset circulation period is equal (or close) to the assessment period. A non-risk asset is a Sberbank of Russia “Accumulation” ruble deposit for two years.
Smoothness parameter – gives more precision to subjective time assessment of observations, and allows reducing influence of past observations over company activity. Values from 0 to 1. Expected to be 0.94.

The smoothness coefficient influences correlation between more or less time-remote observations. The closer the coefficient is to zero, the less influential time-remote observations are. The closer it is to 1, the more influential time-remote observations are.

1.2. Assessing results

Investments will be more efficient with higher values of Sharp coefficient. Small coefficient value would imply investment yield is below the risk level. Negative Sharp coefficient would testify to the following: investment to non-risk securities would have produced larger yield than investment to a fund.

2. Coefficient Ω

As a rule, an investor expects his return to be of a certain level – not below a required yield. Ω coefficient allows to determine whether a fund is in keeping with the investor’s demands.

For instance, if a required yield level is 30% per year, an investor would prefer a fund with a strategy allowing to get a required yield or even higher.

Ω coefficient shows, how many times probability of getting a required yield or higher exceeds probability of yield to be below a required level.

2.1. Omega coefficient calculation data

Next to a daily unit cost you need to select a required yield level.

To assess a required yield level you use average yield meaning of funds in a corresponding group during the last year of operations (as a rule, the period is of more interest to an investor).

2.2. Assessment of results

The larger the coefficient is, the more probable is an investor-required yield level.

3. Yensen α

Yensen alpha shows a role of management in obtaining additional yield in relation to a benchmark. The coefficient allows seeing whether the management outplays the market or is behind it. You compare yield of funds, whose assets are managed by some specific MC with average market indicators.

3.1. Alpha coefficient calculation data

Next to a daily unit cost, for each group of funds you have to select a benchmark. RUX-Cbonds index is selected for bond-oriented funds. In case of “blue chips” - S&P/RUX (takes into account Gazprom shares). For mix-strategy funds an index is based on simple average of yield in aggressive and conservative funds.

3.2. Assessment of results

The larger the coefficient is, the better the fund management is. A negative value implies a negative management influence.

Criteria aggregation

Final number of points comes from weighted total assessments for each of the three coefficients. Depending on the final assessment, a management company gets rated for quality of managing assets of a SPECIFIC company.

An example: Ivanov management company is assigned the A rating (high quality of management) for managing assets of an open mixed blue chip fund.

Addendum

Cost of net assets

Cost of net assets of a joint-stock investment fund or net assets of a unit investment fund is determined as difference between cost of assets of the fund and amount of liabilities to be paid with the above assets, at the time of determining costs of net assets.

Cost of net assets of a joint-stock investment fund or assets of a unit investment fund is determined in keeping with “Order and terms of determining costs of net assets of joint-stock investment funds, cost of net assets of unit investment funds, calculated cost of investment units of unit investment funds, and cost of net assets of joint-stock investment funds per share”.

Unit cost – determined by dividing cost of net assets of a fund to a number of investment units, according to a register of investment unit holders of the unit investment fund at the time of determining calculated costs.

Yield – profit-expense ratio. Shows rubles gained over rubles spent.
P_t – cost of a unit at t, yield at t - 1 to t interval is calculated as

Rate reduction

All rates (required yield, non-risk assets) would be reduced to daily ones (since company and benchmark yield is calculated by days; in case of reduction to annual rates final results will be influenced by days with unexpectedly high yield, which is of negative influence over the whole analysis). A daily yield to get required yield after a set number of days will be calculated. For instance, our daily interest rate is r_year. Then our daily yield will be calculated as follows:
(242 – a number of work days per year).

2007

Methodology of rating

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Home / Ratings / Rating of Unit Investment Funds / Methodology of rating Methods of assessing management quality of fund-asset MC Fund selection: Companies involved in managing different asset funds (UIF and IF) for at least two years may participate in the project Rating of management quality of fund-asset MC. To be assessed a fund should possess at least 30 mln rubles by 31.12.2004. Assessment of asset management by MC is based on three main criteria: 1. Sharp coefficient (Sharp_c). 2. Coefficient Ω (Omega_c). 3. Yensen α (Alpha_c). For better assessment funds would be divided into groups in line with their strategy and type. Three main categories: conservative (minimum risk and low yield), mixed (average risk and average yield) and aggressive (highest yield and maximum risk). Three types of funds: closed, interval and open (9 groups of funds altogether: for instance, interval-aggressive, open-conservative etc.). Each group of funds would have different assessment parameters. All three coefficients will be calculated on the basis of daily cost of units within two years (P_t). Daily yield will be calculated on the basis of daily unit cost (R ^t_p; Calculation algorithm is given below). Interest rates – level of required yield and non-risk asset yield (see below), needed to calculate coefficients, will be reduced, to make comparisons more effective, to daily rates (the reduction algorithm is in the Addendum). Unit cost data, presented by companies, will undergo preliminary analysis to cut out some “non-standard” elements (misprints etc.). Assessment criteria 1. Sharp coefficient The coefficient is included in the methodology, since de-facto it provides good criteria to assess investment companies and gives good indication of the most important notions for investors: yield and risk. Strategy producing the largest yield with minimum risk is the most preferable for investors. The coefficient permits to correlate yield and risk and shows amount of yield per amount of risk. Risk is measured by volatility; contribution of older data to volatility is less; asset correlation is also taken into account. 1.1. Data to calculate Sharp coefficient To calculate the coefficient (next to daily unit cost) you need to select: Non-risk asset – asset with known yield and small risks, the asset circulation period is equal (or close) to the assessment period. A non-risk asset is a Sberbank of Russia “Accumulation” ruble deposit for two years. Smoothness parameter – gives more precision to subjective time assessment of observations, and allows reducing influence of past observations over company activity. Values from 0 to 1. Expected to be 0.94. The smoothness coefficient influences correlation between more or less time-remote observations. The closer the coefficient is to zero, the less influential time-remote observations are. The closer it is to 1, the more influential time-remote observations are. 1.2. Assessing results Investments will be more efficient with higher values of Sharp coefficient. Small coefficient value would imply investment yield is below the risk level. Negative Sharp coefficient would testify to the following: investment to non-risk securities would have produced larger yield than investment to a fund. 2. Coefficient Ω As a rule, an investor expects his return to be of a certain level – not below a required yield. Ω coefficient allows to determine whether a fund is in keeping with the investor’s demands. For instance, if a required yield level is 30% per year, an investor would prefer a fund with a strategy allowing to get a required yield or even higher. Ω coefficient shows, how many times probability of getting a required yield or higher exceeds probability of yield to be below a required level. 2.1. Omega coefficient calculation data Next to a daily unit cost you need to select a required yield level. To assess a required yield level you use average yield meaning of funds in a corresponding group during the last year of operations (as a rule, the period is of more interest to an investor). 2.2. Assessment of results The larger the coefficient is, the more probable is an investor-required yield level. 3. Yensen α Yensen alpha shows a role of management in obtaining additional yield in relation to a benchmark. The coefficient allows seeing whether the management outplays the market or is behind it. You compare yield of funds, whose assets are managed by some specific MC with average market indicators. 3.1. Alpha coefficient calculation data Next to a daily unit cost, for each group of funds you have to select a benchmark. RUX-Cbonds index is selected for bond-oriented funds. In case of “blue chips” - S&P/RUX (takes into account Gazprom shares). For mix-strategy funds an index is based on simple average of yield in aggressive and conservative funds. 3.2. Assessment of results The larger the coefficient is, the better the fund management is. A negative value implies a negative management influence. Criteria aggregation Final number of points comes from weighted total assessments for each of the three coefficients. Depending on the final assessment, a management company gets rated for quality of managing assets of a SPECIFIC company. An example: Ivanov management company is assigned the A rating (high quality of management) for managing assets of an open mixed blue chip fund. Addendum Cost of net assets Cost of net assets of a joint-stock investment fund or net assets of a unit investment fund is determined as difference between cost of assets of the fund and amount of liabilities to be paid with the above assets, at the time of determining costs of net assets. Cost of net assets of a joint-stock investment fund or assets of a unit investment fund is determined in keeping with “Order and terms of determining costs of net assets of joint-stock investment funds, cost of net assets of unit investment funds, calculated cost of investment units of unit investment funds, and cost of net assets of joint-stock investment funds per share”. Unit cost – determined by dividing cost of net assets of a fund to a number of investment units, according to a register of investment unit holders of the unit investment fund at the time of determining calculated costs. Yield – profit-expense ratio. Shows rubles gained over rubles spent. P_t – cost of a unit at t, yield at t - 1 to t interval is calculated as Rate reduction All rates (required yield, non-risk assets) would be reduced to daily ones (since company and benchmark yield is calculated by days; in case of reduction to annual rates final results will be influenced by days with unexpectedly high yield, which is of negative influence over the whole analysis). A daily yield to get required yield after a set number of days will be calculated. For instance, our daily interest rate is r_year. Then our daily yield will be calculated as follows: (242 – a number of work days per year).	2007 Methodology of rating Business info
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