Introduction to Portfolio Performance Evaluation
Importance of Regular Reviews: Managing global equity investments requires regular, annual portfolio performance evaluations (reviews), which play a crucial role in ensuring achievement of investor objectives. The frequency of these reviews can occur more often if needed as a change in circumstance or investment objectives occur.
Components of a Portfolio Performance Review
During a portfolio performance evaluation, the investor and the investment manager discuss changes in circumstances that could impact investment goals. These factors could include investment time horizon, liquidity requirements, risk tolerance, tax efficiency or other circumstances. When establishing or modifying an investment policy, both parties agree on the appropriate benchmarks to measure investment performance quantitatively.
Understanding Performance Metrics
Key Performance Indicators (KPIs): Two critical portfolio performance indicators are total return and risk.
Total return for a stock portfolio includes stock price appreciation plus dividends. For a bond portfolio total return is bond price appreciation plus interest payments.
Alpha is a quantitative metric utilized to assess risk adjusted returns. It is a measure of the investment manager’s ability to structure a portfolio that outperforms the benchmark after factoring in risk.
Risk is defined as the volatility of an individual stock or a portfolio’s returns. There are several measures of risk, as explained below:
Standard Deviation: Standard deviation is a measure of volatility of an investment or a portfolio. The larger the standard deviation, the wider the range of returns achieved. A smaller standard deviation tends to have more consistent returns. To reduce volatility in a portfolio, investors often diversify into various asset classes.
Beta: Beta measures the volatility of an individual stock’s price relative to the stock market. Stocks with beta higher than 1.0 are more volatile than the market. Stocks with beta lower than 1.0 are less volatile than the market. By adding a stock with a high beta, for example, the portfolio’s volatility relative to the market increases. Beta refers to “systemic or market risk,” it is a risk that cannot be diversified.
Benchmark Comparisons: a benchmark is a standard point of reference that can be utilized to compare performance so that the investor can quickly assess portfolio performance versus the market in general. The Global Equity performance benchmark that is most appropriate for Hemispheres Global Equities Value strategy is the MSCI Global Value Index, as that benchmark reflects both the investment style and the returns from global markets.
Evaluating Global Equities
Market Analysis: Globally, there are over 45+ markets in which Hemispheres Investment Management can allocate capital. As part of our market analysis, Hemispheres evaluate factors such as fiscal and monetary policy that influence GDP growth, inflation data, employment data, trade policies and trade balances can influence market performance. Political stability also directly affects a market’s attractiveness.
Sector and Geographic Performance: Markets are cyclical and are susceptible to emerging themes such as advancements in technology, demographic shifts, monetary policy adjustments and changing environmental policies. These factors, along with economic cyclicality can influence sector rotation and market returns. For example, when interest rates were low in the United States, small capitalization technology sectors that were reliant on borrowing to fund growth thrived. When the Federal Reserve raised borrowing rates, capital access declined, and the sector underperformed the rest of the market in 2022.
Through diligent market analysis, Hemispheres Investment Management selects the most attractively valued stocks from the over 45+ major stock markets. Hemispheres is a bottom-up manager, meaning that its process for security selection begins at the individual company level; utilizing a disciplined approach that includes investing in companies that are fundamentally attractive. Fundamental analysis includes an analysis of market position, the balance sheet, profitability and valuation. Global Equities has a universe of over 10,000 companies with a market capitalization more than $1 billion to invest in compared to 2,000 + in the United States. Hemispheres reduces investor risk by buying undervalued stocks from the standpoint that fully valued or overvalued stocks are riskier considering that their return is vulnerable to the movement of stock market indices or a decline to their fair-market-value.
Currency Impact: Currency fluctuation can have a significant effect on investment returns. When the US dollar strengthens relative to a foreign country’s currency, foreign investments will have a lower return. Conversely, when the foreign currency strengthens relative to the US dollar, foreign investments will benefit and have higher returns.
Qualitative Factors in Portfolio Performance Evaluation
Investment Management Assessment: The principles of Hemispheres Investment Management each have 35 years of capital market experience and have successfully managed assets through multiple market cycles, economic and political environments. Hemispheres has a strong track record of performance in managing Global Equities as well as Domestic Equities and Fixed Income products.
Market Analysis Includes Evaluation of Economic and Political Climate Factors:
- The degree to which the political environment is stable and supportive of business, industry, market, and economic conditions.
- A government’s attitude toward foreign investment.
- Geopolitical relationships with various countries around the world.
- Favorable economic and political climate positively correlate to market performance.
Practical Steps for Investors
Regular Monitoring: Investors should have a thorough annual investment performance review. Furthermore, the investor should contact their investment manager with any change that should result in an investment policy revision. Hemispheres Investment Management is available to answer any question and address any concern that our investors may have. As always, annual, quarterly, and monthly reports are provided to clients along with trade confirmations for investor evaluation and monitoring.
Diversification Strategies: Hemispheres’ Global Equities strategy is diversified by region, by country, by sector and by individual securities. Investors can further diversify their portfolios through adding different asset classes which Hemispheres manages. Examples of this might include allocation to fixed income products or emerging markets.
Seeking Professional Advice: Hemispheres Investment Management, as your investment and financial advisor, would be happy to consult with you to assist you in identifying your financial and investment objectives. We have a network of legal and tax advisors to whom we can provide references should you need guidance in other specific areas.
Conclusion
We recognize that individual and institutional investors alike may be new to investing in Global Equities. There are complexities and nuances associated with investing in various markets that require expert guidance. Hemispheres Investment Management’s team of seasoned professionals have a 35-year track record of successful investment strategies.
Please contact Hemispheres Investment Management for a free consultation. We offer individualized guidance and strategies that can help you or your business optimize global equity strategies to meet your financial objectives. Book a meeting
