Assessing Portfolio Performance: The Case of Flexible Investment Unit Trusts

Abstract

The standard approach used to assess the performance of unit trust managers is based on the premise that the investment strategy is basically stationary. Active management is viewed as being confined to timing - occasional switching between risky and riskless securities - and selectivity - switching between securities of essentially the same systematic risk to exploit temporary misprising. For unit trusts that are free to select securities from various uncorrelated risky asset classes, timing and selectivity are more difficult to define, measure and assess. A methodology to measure timing and selectivity when the assessor is in possession of essentially uncorrelated actual asset class allocation of funds by the unit trust is developed and its application demonstrated for a sample of Israeli unit trusts.