To illustrate the types of results obtained with Style Analysis, this section provides information about the styles of each of the LS100 funds chosen at the end of 1993 for inclusion in the set used for investment analysis in 1994.
Details of the computations are provided in the section titled Computing the Styles of the LS100 Funds.
To illustrate the method, we show the results for Merrill Lynch's Capital /A Fund. Each of the five sections of the report is shown below, with a brief description.
This section gives the name of the fund and a key summary measure. The Active Management (Selection Variance / Fund Variance) indicates the ratio of the variance of the selection return to that of the fund as a whole over the prior 36 months (in this case, from December 1990 through November 1993, inclusive). The selection return in each month is the difference between the return on the fund and that of its most recently-computed style, based on all available returns up to two month's earlier (for example, the style used to compute the selection return for November 1993 used returns through and including September 1993). The larger is the ratio of selection variance to total fund variance, the more active is the fund. A large value indicates relatively little diversification within asset classes, frequent rotation among asset classes, or both. In this case, only 5% of the fund's variance in returns from month to month was attributed to selection, indicating a relatively passive investment approach.
93% US Dollar |==============================================
7% Other |===
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10 20 30 40 50 60 70 80 90 100
The US Dollar Exposure indicates the proportion of the fund that is not exposed to movements in the exchange rates of other currencies vis-a-vis the US Dollar. In this case it is 93%. The exposures to movements in other currencies is thus 7%. As will be seen, the latter is slightly greater than the exposures of the fund to Non-US Security classes, suggesting lack of currency hedging of such positions and possibly small positions in foreign short-term fixed income instruments. When a fund chooses to hedge some or all of its foreign currency, the percentage shown for exposures to other currencies will generally be smaller than that shown for exposures to Non-US Securities Classes.
15% Deposits |=======
12% US Bonds |======
68% US Stocks |==================================
5% Non-US |==
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10 20 30 40 50 60 70 80 90 100
This bar chart shows the exposures to the major types of securities included in the Style Analysis. Each is determined by summing the exposures to the specific asset classes in each group.
It is important to remember two things about all the results obtained from a Style Analysis.
First, the exposures are based solely on the comovements of the fund's returns with those of the asset classes. Hence they reflect the behavior of the fund, and may not necessarily equal the proportions invested in various asset classes as conventionally defined. The goal is to estimate the economics of the fund as best one can with limited data. To put it colloquially: if it walks like a duck and talks like a duck, for all important purposes, it is a duck.
The second point is equally important. At the very best, Style Analysis can indicate a fund's exposures over a past period. In our analyses we weight the more recent past more heavily than the more distant past, but of necessity, the procedure cannot reflect the precise exposures of the fund in the most recent week or month (unless they just happen to coincide with the longer-term average). The key question that must be answered when considering this fact concerns the purpose for which the analysis is performed. If the estimated style is to be used to select funds to be held for a reasonably long period of time (e.g. from one to five years), it may well be that past average style is a better predictor of future average style than is the particular style that the fund utilized a day or week ago. In any event, Style Analysis can only provide an estimate of a fund's (possibly weighted) average style over a period of many months.
In this case, the analysis indicates that the fund's returns acted as if the fund had invested a majority of its assets in US Stocks, with a small exposure to Non-US Securities and the remainder invested in US Bonds and Deposits. Since the Non-US Dollar Exposure was slightly larger than the Non-US Securities exposure, some of Deposits may have been held abroad, but the majority were probably held in the US.
While the fund acted as if it had invested in US Bonds and US Deposits, this could reflect a strategy of holding bonds of shorter maturity than those in the US Bond asset classes used for the Style Analysis. Similarly, some of the Deposit Exposure could have reflected investment in more defensive ("low-beta") US Stocks than those included in the US Stock indices. As always, it is important to remember the Duck Theorem.
67% Int Govt |=================================
33% Long Govt |================
0% Corporate |
0% Mortgage |
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10 20 30 40 50 60 70 80 90 100
This chart breaks down the exposure shown in the initial chart into the portions attributed to each of the four US Bond classes. In this case the fund returns acted as if roughly 2/3 of the bond portfolio (representing 12% of the overall fund) was invested in Intermediate US Government Bonds, with the remaining 1/3 in Long-term US Government Bonds. The corresponding portions of the overall portfolio would thus be 8% and 4%.
49% Lrg Value |========================
23% Lrg Growth |===========
8% Med Value |====
6% Med Growth |===
14% Small |=======
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10 20 30 40 50 60 70 80 90 100
In this chart the overall exposure to US Stocks (68% of the fund) is broken into five components, each reflecting one of the included US Stock Asset Classes. The fund acted as if it had held a stock portfolio diversified across all five classes, with 72% in large capitalization stocks. Within the large capitalization area, the fund also appears to have had a preference for Value (low price/book) stocks.
0% Bonds |
23% Japan Stk |===========
77% Other Stk |======================================
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10 20 30 40 50 60 70 80 90 100
The final chart breaks out the fund's overall exposure of 5% to Non-US Securities. In this case the relatively small exposure appears to have been restricted to stocks rather than bonds. Among Non-US holdings, Japanese Stock exposure was smaller than that in Europe and Asia outside of Japan..
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