Thompson Asset Management Case Study (1)
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Thompson Asset Management Case Study
Thompson Asset Management (TAM), established by Allison Thompson in 2009, is a small investment advising
and asset management company with around $100 million in assets under management across two different
types of assets. It is based in Jacksonville, Florida. The Pro Index, Thompson Asset Management's first fund,
was created to generate returns above the benchmark S&P 500 record while maintaining a level of risk
equivalent to the index.
Additionally, Thompson has a track record of outperforming benchmarks and managing the downside risk of
the portfolio. High-net-worth individuals made up the majority of the firm's clientele, and in 2014, Thompson
hopes to expand her client base by adding institutional clients as well. Using Exchange Traded Funds was a
straightforward way to maintain enough market exposure. ETFs offer benefits through economies of scale by
distributing administrative and transaction expenses, which lessen the effects of returns, among a large number
of investors. They do this by replicating a certain index at the lowest cost feasible.
Investment philosophies
Value Investing
An investor might manage their portfolio using a core set of beliefs or a strategy to optimize returns known as
an investing philosophy. The investment philosophy may have a particular emphasis on value, growth, indexing,
or quantitative analysis. Value investing is the approach to investing that emphasizes an investment is
undervalued when its share price is higher than its market value. The investors who employ this tactic Find
firms whose stocks, in their opinion, the market has undervalued. Moreover, Value investors think that stock
price changes do not reflect the company's long-term prospects. term fundamentals but instead to the market's
exaggerated responses to both good and bad news is an approach based on evidence. The intrinsic value of a
stock is the major area of concern for investors who adopt this technique. Because of this risk, value investors
will only invest when they believe there is a substantial margin of safety—that is, then there is a gap between
the intrinsic price and the projected value—offering the investment. It's also critical to keep in mind that while
some value investors just value current earnings, while others only value future growth, all of them ultimately
seek opportunities to profit by taking a long position when the price is depressed.
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Growth investing
Growth investing is a theory that involves buying stocks that the investor thinks have a good chance of future
growth. When compared to other businesses in the same industry and throughout the whole market, these stocks
of companies show a profit growth that is significantly higher than the average rate. Since firms in these
markets are generally viewed as being worth more than their earnings or book values, this investment strategy is
typically linked to technical companies, ones that control a particular industry, as well as emerging markets.
Moreover, since their main goal is to maximize their capital gains, growth investors frequently link this
investment philosophy with a capital growth strategy. Investors adopt a position on investments as a result of
this.
Indexing
Indexing, often known as a passive approach, is an investment philosophy in which the investor compares the
performance of their investment portfolio to that of a certain index. As a result, the produced return and risk
using this method will be identical to those of the index. When managing a portfolio, an investor should use
indexing if they think that the market operates with the greatest efficiency and that it is impossible to exceed it.
The portfolio decision-making process is as little as feasible in this financial approach to lower transaction
costs. Passive investors are constrained to following an index and lack access to a wider variety of assets or the
chance to bet against, say, those nations that are dealing with a political or economic crisis: This is a passive
technique that is not the same as limiting risk since diversity may be used to do it and investors can do it here
because they are more interested in absolute risk and return than relative risk and return.
To maximize their odds of outperforming the market, investors that follow the quantitative analysis investment
philosophy base their portfolio decision-making process on quant models. This investing technique focuses on
patterns and numbers and selects the investment that, for the same level of return, delivers the lowest degree of
risk. It is also unaffected by the emotions that are frequently linked with financial decisions among investors.
Quantitative
Investors examine several risk indicators, including as beta coefficient, and the Sharpe ratio, to avoid more risks
than required and select the investment that offers the maximum amount of return for a particular degree of risk.
Quantitative models are also able to assess a huge number of assets at once and exploit inefficiencies much
faster than traditional investors, which makes the trading process much simpler and less expensive. In addition,
there is less of a need to employ analysts and portfolio managers. Additionally, although models are updated
often to account for new information, it is crucial to keep in mind that quantitative investment strategies are
based on historical data that excludes future occurrences.
It is not always feasible to foresee unexpected market events, despite the fact that models are regularly updated
to do so.
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Similar to this, high turnover brought on by the economy's higher-than-average volatility results in high costs
like commissions and taxable events. Technical analysis, which draws its conclusions on changes in stock
prices, might be used in this method. It is a technique for assessing securities that involve looking at market
indicators including historical prices and volume. Technical analysts aim to gauge "market mood" and forecast
and profit from future price changes rather than concentrating on examining the businesses of individual
companies. In our view, technical analysis by itself may not be sufficient to properly comprehend the root
issues.
Return Variability
The questions raised in this case should examine the risk/return characteristics, return variability, and risk
versus return characteristics of the Pro Index and Pro Value funds, managed by Thompson Asset Management,
in terms of returns, absolute and relative risks, and risk versus a benchmark index. The best way to rebalance
the Pro Value funds should be assessed along with any enhancements that may be made to facilitate rebalancing.
In conclusion, while assuming various amounts of investment, seeks to give the data and portfolio
characteristics that Thompson Asset Management should reflect in the Pro Value fund
Pro Index fund
Year
Pro index %
S&P 500 %
2009
56.48
23.45
2010
14.16
12.78
2011
11.43
0
2012
17.20
13.41
2013
72.78
29.60
Cumulative 2009 - 2013
303.60
104.63
Daily standard deviation
1.91
1.23
Annualized standard deviation
30.37
19.48
Annualized return
60.61
20.93
Pro value fund
Holding Period
= [Ending – Beginning] / Beginning= [$4.03060084 –
$1.00000000] / $1.00000000= 3.03060084 x 100=
303.06%
Daily Return Holding Period Return / Trading days
= [3.03060084 / 1260 (5x252)] x 100= 0.2405
Annualized Return Holding Period Return / Trading’s
Year Return
= [3.03060084 / 5] x 100= 60.6120%
Standard Deviation
1.91%
Annualized Standard Deviation
1.9% x √252 = 30.37%
Correlation
65.1%
Beta
1.23% x √252 = 19.52%
= [0.3032 / 0.1952] x 0.6511
= 1.0
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Characteristics and Statistics
Holding period return
The overall return earned by owning an asset or portfolio of assets over time is known as the holding period
return and is often stated as a percentage. It is especially helpful for comparing the returns of assets kept for
various lengths of time. The holding term return is a significant metric in investment management. The statistic
provides a comprehensive understanding of an asset's or investment's financial performance since it accounts
for both the asset's income distributions and the investment's appreciation. Along with evaluating investment
success, the HPR may also be used to measure the performance of various assets or investments. The proper tax
rate is also determined using this measure. Return to the portfolio during a particular time period, computed as
(ending value-starting value) / (starting value.
Pro value fund= 20 million
7828719-20000000/ 20000000 = -0.608
-0.608 * 100= -60.8% yearly
-60.8% / 252 days = 0.24% daily.
Thompson Asset Management should increase the value-generating activities within its value chain and utilize
the marketing mix tools to elicit the necessary responses from its target market to meet its overall corporate and
business level objectives. Process of choosing the appropriate asset allocation (portfolio) based on index funds
and value funds. Return on investment is the simplest and most apparent metric for evaluating performance. We
advised Thompson to analyze his optimized portfolio using the Sharpe ratio, beta coefficient, and information
ratio since it would provide more accurate performance ratings.
Sharpe ratio
Pro Index Fund and Pro Value Fund are both over 1, at 1.90 and 1.64 respectively, and are regarded as solid
portfolio investments. A greater Sharpe ratio is advantageous when investors are making decisions. It may be
used to assess the overall performance of a stock portfolio or a whole investment portfolio. According to the
Sharpe ratio, an equity investment's performance is measured against the return on a risk-free investment. The
Sharpe ratio's goal is to enable investors to examine how much more of a return they are getting in comparison
to the amount of additional risk they are taking to create that return.
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Beta coefficient ratio
The Pro value fund's greater beta of 1.34 indicates that it is riskier than the pro index fund's beta of 1.01. The
pro-index fund is the greatest option for a portfolio since it offers a better Sharpe ratio and lower beta.
Information ratio
If a portfolio exceeds a benchmark index fund, the information ratio is utilized to assess this. A management
team's objective should be to outperform the benchmark since it serves as a reference portfolio for active
managers. Higher information ratios suggest the required level of consistency. Information ratios should be
greater than they now are. Thompson must decide whether to hold the fund's single long position or take a short
position.
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