Introduction

Zeus Asset management is a fund management firm founded in 1968 in Atlanta by Tim Landon and Jerry Schneider. Due to ERISA (employee retirement act) deregulation, Zeus has now become an independent, employee-owned, money management firm that serviced both institutional and individual investors. The firms investment philosophy was based on the belief that superior investment results could be achieved over many years by following a conservative, risk-averse, quality-oriented approach to investment management.

Zeus Unique Characteristics

Zeus investment philosophy is very unique and different from funds management firms in general. Instead of focusing on high return by doing high frequency trading in short term, Zeus believed that risk minimization and long term investment can actually give investor better investment result. This can be seen by their choice of using strategic asset allocation which focuses on long term movement (instead of using short term strategy which has high turnover cost and low probability of continued success). In addition, they also invest in medium to large capital-growth fund due to the lower risk profile of the portfolio in comparison with riskier small cap and/or value companies. Moreover, Zeus had a large client base with different circumstances and investment objectives. Hence, they need to pay special attention to satisfy clients needs. One example is tax consideration. Different individuals have different tax bracket and thus have different preference in security selection. The same case applies for institutional clients, as corporations have higher tax rate compared with foundations and endowments. So funds manager will have to choose securities that will provide the best after tax return for clients. Zeus was also known for its commitment to relationship-oriented client services. All staffs were dedicated to pursue clients investment objectives and they were available either in person or by phone to discuss issues with clients whenever needed. Moreover, all investment professionals at Zeus have had average of 18 years of investment experiences and had been through at least three recessions or major downturns of the market. Having such experiences might help them in making more sound and robust analysis in picking the best securities for clients. Additionally, having such individuals help reduce the probability of risk seeking activities. Zeus also had a unique approach of purchasing securities. Instead of having each portfolio manager purchased securities for clients portfolio, one security manager (eg. Municipal Bond Manager) was

assigned to be in charge of purchasing the security and it then be distributed to different portfolios. By using such method, Zeus could purchase securities at a discount due to the large volume trade. Moreover, to assist client in getting securities with best quality, staffs made due -diligence trips to companies to discuss their long-term strategic plans. This would assist them in finding wellpositioned companies with reasonable price to be added to the portfolio.

Financial Performance Measurement

Absolute and Relative Return Absolute return is one way of measuring the portfolio performances. Absolute return is basically the total return on investment over a certain period. Some methods of calculating absolute return are Holding Period Return calculation and present value of future estimated expected return. This method is useful in measuring whether investor is making a profit or loss from their portfolio performance. But having absolute return by itself will not provide robust analysis and come comparison is needed to measure the performance. Relative return is another way of measuring investment performances. Relative return is the difference between the absolute return of portfolio with the performance of certain benchmark (eg S&P500 index). This method is used to enhance absolute return analysis by checking whether the portfolio outperform or underperform market performance. It can also be used to measure performance of more than one portfolios or companies. Despite the advantages, both absolute and absolute returns do not reveal the entire truth about performance. This is because these measurements do not capture risk factors in the analysis. A portfolio may have a very high absolute return and may outperform a certain benchmark, however, that portfolio may have a very high risk profile compared to the benchmark and may not be suitable for certain type of investors. Moreover, choosing wrong benchmark will cause relative return analysis to be inaccurate. Risk-Adjusted Return Risk-adjusted return is another way of measuring portfolio performance. Since it measures the return from the portfolio for each unit of risk, it can be used to compare portfolio performance with different risk profile. As such, having higher risk-adjusted return is more preferable. Under the absolute term, risk-adjusted return can be calculated using Sharpe Ratio and Treynor Ratio.

Sharpe Ratio measures the portfolio risk premium for each unit of total risk. This can be calculated using the following formula:

Advantages of using this method include the simplicity of calculation. Sharpe ratio can be calculated easily with minimal market information as only return information and risk free rate are needed for the calculation. Moreover, the result is comparable across portfolios with different risks. However, some people find that sharpe ratio does not capture real world situation as it is based on normal distribution. Moreover, it is difficult to judge how much better an investment with higher sharpe ratio in comparison to lower sharpe ratio. Treynor Ratio measures the excess returns generated by a portfolio above risk free rate for each unit of un-diversifiable risk. The formula for that is:

Unlike Sharpe Ratio, Treynor ratio measures the excess return based on their systematic risk. The advantage of this ratio is that it can be compared with the benchmark performance or other portfolio with the same benchmark. However, this ratio can be a bad measure if the portfolio is not well diversified. Jensens alpha and Information ratio are other measurement methods that are useful in measuring the outperformance of the portfolio in comparison with the certain benchmark. Jensens alpha measures the difference between real portfolio return and the return predicted using CAPM. Additionally, information ratio divides the alpha of the portfolio by the non-systematic risk. For Zeus, risk-adjusted return is very important due to several reasons. Zeus believed that by analysing and examining the performance of the various mutual funds on risk-adjusted basis, it would help the company establish its internal rules regarding the level of risk and return. Due to the investment philosophy, they need to use this method in order to know the excess return that they earned for each unit of risk taken and not only depend on the absolute return. Moreover, the return from this method is more comparable to the benchmark and other portfolios with different structure and risk level. Additionally, this would make the firm to be more attractive to its relatively risk-averse clientele. Zeus could compare their portfolios performance with competitors performance using the risk-adjusted basis. By doing so, Zeus will be able to present their performance better compared to using absolute return, in which competitor with high risk profile may produce superior absolute return.

Benchmark and Ratio

In order to calculate the risk adjusted return for each mutual funds, different benchmark and ratios are used for different mutual funds due to the diversification profile as well as the risk profile. For equities, portfolio performance can be compared with both S&P500 and Lipper Growth Indices. As mentioned previously, Zeus Equity Fund focuses more on the Growth securities due to the risk aversion. As such, if compared with Lipper Growth Index, the portfolio can be argued to be diversified enough and hence we can compare the treynor ratio between portfolio and index. In the first sub-period, the portfolios treynor ratio is lower than indexs. This is due to the companys weak cash policy and internal rules. However, the portfolio performance in the second subperiod improved quite significantly as it beats the index performance. When compared with S&P500 Index, the portfpolio can be said to be less diversified as it only contained growth stocks. Hence, we can compare the sharpe ratios. Similar to previous observation,the portfolio performed better during the second subperiod which can be seen from higher sharpe ratio. The alpha figures and information ratio also show that portfolio underperform by smaller margin compared with previous period. For Bond Index, it can be argues that the portfolio is not well diversified. One argument is because investor will not be able to purchase all marketable bonds in the Lehmann Brothers Aggregate Index due to the large number of bonds. Lehmann Aggregate Bond Index is chosen to be the benchmark Index as in includes wide variaty of bonds to simulate the universe of bonds in the market. In addition, the fund maintained a minimum average quality rating of AA or higher at all times which is consistent with the investment philosophy. As such, the portfolio did not contain riskier bonds and sharpe ratio will be used to measure performance. Based on the figures, it is clear that the portfolio performance improved significantly during the second period. Sharpe ratio was higher and the fund also outperformed Lehmann Brothers Aggregate Index in that period. Additionally, the information ratio of 1.0967 suggests that the active risk is very low. One reason for that might be due to the bond synthetizing which helped them gaining higher return with same level of risk. Similar with the other two portfolios performance, Balance Fund also performed better in the second subperiod. This is due to the nature of Balanced Fund which is the equity and bonds. This is a very well diversified portfolio as it combined equity which have higher risk and bonds with lower risk but stable income. Hence, beta and treynor ratio can be used to measure the performance. From the figure, it can be seen that with similar beta level, Zeus Balanced Fund have higher treynor

ratio and positive alpha which suggest the outperformance of the fund. Lipper Index was used as a benchmark as it tracks the financial performance of balance mutual funds. The introduction of International Fund is said to reduce the risk of the entire portfolio due to diversification benefit. However, the funds standard deviation and beta are actually higher than MSCI Index. However, with the increase in risk, the return of the portfolio also increased significantly. During the period, the portfolio has positive alpha, higher treynor and sharpe ratio as well as high information ratio. Therefore, adding a considerable amount of risk to the portfolio might actually inprove performance significantly. MSCI index is used instead of BARRA growth index since the composition of the international portfolio is unclear. According to the philosophy, they wanted to have minimal risk. However, as seen in the figure, the funds risk was actually higher than the MSC Indexs suggesting the higher risk profile of the portfolio. To sum up, using Risk-Adjusted Return in addition to absolute return can assist investment professionals in Zeus to have a more robust analysis regarding the portfolio performance. However, qualitative aspects of the firms performance also needs to be considered. This includes: the staffs quality and experience, the corporate governance of the company, as well as maintaining good relationships with clients.
Equities Zeus Lipper S&P Equity Growth 500 Fund Index Index Sub-Period 1 8.37% 10.13% 11.95% Sub-Period 2 24.44% 24.38% 28.72% Whole Period 16.26% 17.15% 20.18% Sub-Period 1 Sub-Period 2 Whole Period Sub-Period 1 Sub-Period 2 Whole Period Sub-Period 1 Sub-Period 2 Whole Period Sub-Period 1 Sub-Period 2 Whole Period 7.76% 11.02% 9.71% 0.8435 0.8852 0.8758 0.5514 1.7394 1.1924 0.0507 0.2298 0.1389 -0.0018 -0.0010 -0.0014 -1.06189 -0.61269 -1.21617 8.83% 11.90% 10.57% 0.9750 0.9323 0.9428 0.6835 1.6072 1.1792 0.0619 0.2177 0.1385 -0.0012 -0.0017 -0.0015 -0.66255 -0.77794 -1.04081 8.45% 12.08% 10.58% 1.0000 1.0000 1.0000 0.9295 2.0383 1.5201 0.0786 0.2463 0.1609 Bonds Lehman Zeus Brothers Bond Aggregat Fund e Index 6.96% 8.42% 9.37% 9.29% 8.16% 8.86% 3.80% 4.00% 3.89% 0.8318 0.8990 0.8645 0.7455 1.0258 0.8899 0.0341 0.0457 0.0401 -0.0006 0.0004 -0.0001 -1.79657 1.096667 -0.41387 4.48% 4.37% 4.40% 1.0000 1.0000 1.0000 0.9590 0.9212 0.9458 0.0429 0.0403 0.0416 Balance Zeus Lipper Balance Balance d Fund d Index 8.60% 12.01% 14.82% 12.94% 11.66% 12.48% 8.91% 7.73% 8.34% 1.0060 1.0021 1.0064 0.3489 1.2431 1.3987 0.0309 0.0986 0.0311 -0.0026 0.0014 -0.0006 -2.35665 1.436681 -0.81721 8.46% 7.36% 7.89% 1.0000 1.0000 1.0000 0.7717 1.0870 0.9207 0.0653 0.0800 0.0268 International Zeus Internati onal MSCI Fund Index

Annual Return

5.80%

-0.03%

Annual SD

16.21%

13.32%

BETA

1.0880

1.0000

Sharpe Ratio

0.0308

-0.4001

Treynor Ratio

0.0046

-0.05328

Jensen's Alpha Sub-Period 1 Sub-Period 2 Whole Period Information RatioSub-Period 1 Sub-Period 2 Whole Period

0.0054

1.119824