Chapter: 11 Principles of Portfolio Management

Section: 5 Monitoring your Investment Performance

It is an integral part of the investment success formula to monitor the performance of the portfolio and the market trends on a regular basis. It may require adopting switching strategies of funds between bonds and stocks to make sure the portfolio is healthy.

 

Individual stocks, bonds and other investments should be regularly monitored and their performance be evaluated. The performance should be compared against the market as a whole and other mutual fund to ascertain the success of the portfolio.

 

I. Measuring Performance

The overall performance of a portfolio is driven by two factors:

 

• Portfolio income

• Change in portfolio value

 

Portfolio income could be in the form of dividends received (cash or stock) and interest income from the fixed income securities depending on the mix of the portfolio. Capital gain or loss, i.e., the value appreciation or decline of the portfolio is another measure of performance. Capital gains or losses will only be realized when the security is sold. However, when evaluating the portfolio, the loss or gain compared to the acquisition value will be considered.

 

II. Portfolio Yield

Portfolio yield is the summation of both portfolio income and change in portfolio value divided by portfolio value at the beginning of the period.

 

Portfolio Yield	=	Income + (Ending portfolio value – beginning portfolio value)
		Beginning value of the portfolio

 

  Example:

 

Value of the stocks and bonds in the portfolio on 1.1.2003	=	SR 2,300,000
Dividends received	=	SR 250,000
Value of the portfolio on 31.12.2003	=	SR 2,400,000

 

 

Portfolio yield for year 2003	=	250,000 + (2, 400,000 – 2,300,000)	x	100
		2,300,000

=

15%

   

                                      

 

Note: In the above example it is assumed that no additions or disposals have taken place during the period. If the holding period of the portfolio is less than one year, it can be annualized to have annual portfolio yield.

 

III. Benchmarking Portfolio Performance

Portfolio yield is a measure of performance to ascertain the return of the collective securities. However, that is not sufficient to say whether the portfolio has performed better. This requires a comparison with either another portfolio or market as a whole.

 

Benchmark investment portfolios should be identified in order to make meaningful comparisons. In this context, mutual funds can also be used as benchmarks. 

 

Market as a whole is comparable to a big portfolio consisting of all sectors and instruments in an economy. Thus, market return could be used to compare the portfolio performance. The calculation of market return is explained in Chapter 6.