Evaluating SEB Investment Strategy´s Recommended Mutual Fund Portfolios

Abstract: Preview:     SEB Investment Strategy is the function in SEB that supports business units SEB      Private Banking and SEB Retail with investment philosophy and investment            process. The framework of SEB Investment Strategy encompasses to manage a     structured investment philosophy and process to produce a range of investment                    options and portfolios for different target groups. From January 2006 to October        2009 forty “Proposal for fund portfolios” were produced each containing         writing on market condition and expectations plus portfolio recommendations.        Each time four portfolios consisting of six mutual funds was recommended,                    Fund Portfolio 30, 50, 70 and 100. Fund Portfolio 30 (FP30) contained           30% equity fund and 70% fixed-income funds. By same reasoning FP50           contains 50/50 equity- and fixed-income funds, FP70, 70% equity funds and         30% fixed-income funds and FP100 only equity funds.   Purpose:      The aim of this work is to evaluate these SEB Investment Strategy recommended       portfolios for private SEB Retail clients from January 2006 to December 2009.    Evaluation is done by comparing the performance of recommended portfolios       with portfolios produced by applying Vasicek´s Technique and simplified   optimization technique.   Method:     To allow work with Vasicek´s Technique in which we are dependent on a market        portfolio, I have created an Index which includes SEB Mutual Funds and their         share of the Index is determined from each fund´s total assets in relation to the    sum of the total assets under management of all funds inclusive in the Index.   Index consists of 40 mutual funds 2002-2007 and 37 mutual funds 2008         and 2009. The total supply of funds has been reduced to the above numbers by             the following criteria:   Clients must be able to invest in funds through conventional SEB Fund Account. No initiation fees or sales charges. Minimum historical Net Asset Value prices (NAV-prices) from 2nd January 2002. Daily trading and at least 300 million SEK in assets under management. No Fund-in-Fund products. Only SEB or SEB Choice funds.   The closing daily NAV-prices (time series) of these funds have been obtained from seb.se/fonder from 2nd January 2002 to 28th December 2009. With prices daily returns are calculated and used for estimation of historical and average values of variables needed for computing forecasted Alphas and Betas according to Vasicek´s Technique. Mutual funds are then ranked with respect to excess return over forecasted Beta given risk free rate equal to Swedish government 1 month treasury-bill (SSVX1M) at time for optimisation. Top six ranked funds are included in the optimization process. The first optimized portfolio given actual T-bill is then compared to FP100 recommended by SEB Investment Strategy. In order to find optimized solutions to other recommended portfolios premiums are added to actual T-bill rate.