University of St Mark and St John

Portfolio Management
Module code: MBA- 721
Talha Ali

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Portfolio management

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Table of Contents
Task- 1 ............................................................................................................................................ 3
Introduction to country economy .................................................................................................... 3
Task- 2 ............................................................................................................................................ 5
International fund evaluation based on techniques of portfolio management: a case of Harbor
funds................................................................................................................................................ 5
Overview: .................................................................................................................................... 5
Investment objective: ................................................................................................................... 6
Principal Investment Strategy:..................................................................................................... 6
Principal Risks: ............................................................................................................................ 6
Risk: ............................................................................................................................................. 7
Dividend distribution: .................................................................................................................. 8
Performance: ................................................................................................................................ 9
Portfolio Management: .............................................................................................................. 10
Buying and Selling Fund Shares: .............................................................................................. 12
Tax Information: ........................................................................................................................ 12
Portfolio Turnover: .................................................................................................................... 13
Equity Portfolio Management Strategy: .................................................................................... 13
Asset Allocation Strategy: ......................................................................................................... 15
Task- 3 Performance of harbor capital appreciation fund with its benchmark: .......................... 18
OUTLOOK AND STRATEGY: ............................................................................................... 21
Task- 4 its analysis and evaluation using port-folio technique ..................................................... 22
Conclusion & Recommendation: .................................................................................................. 27
Reference ...................................................................................................................................... 29

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Task- 1
Introduction to country economy
Fiscal Year 2008-09 can easily be regarded as one of the most challenging years that Pakistan
has ever witnessed. Exogenous shocks such as commodity price escalation and the global
financial crisis, coupled with domestic political and economic challenges, led Pakistan to the
verge of default on its foreign debt obligations. Moreover, parched foreign investment, falling
reserves, depreciating local currency and burgeoning external deficits forced the government to
seek IMF economic assistance. As part of conditionalitys imposed by the IMF, the State Bank
was forced to increase the benchmark Discount Rate by 200bps to 15%.
KSE100 closed the year at 7162 points, marking 42% decline for FY09 on the back
unprecedented global challenges, domestic macro environment instability, fragile political
environment and regulatory interventions. For equity markets, the most significant blow came in
the form of regulatory intervention such as imposition of floor on stock prices on Aug 27, 2008
for a period of 100 days leading to a major deterioration in investor confidence and raising
question marks on the integrity of Pakistans capital markets.
With FY08 having presented the country with more than its fair share of challenges, the
consensus is that the worst of political and economic turmoil is over. Nevertheless with the
current valuations still near their historic troughs, we believe that the security situation has been
more than discounted in the share prices. Moreover, the recent equity market rally abroad has
pushed Pakistans regional valuation discount to over 55% (from an historic average of 35%)!
Hence with dividend yields and multiples being too enticing to overlook, we expect the market to
re-rate to reflect the recent positive developments. The magnitude and timeline for the re-rating
will however be largely dependent on 1) extent of monetary easing, 2) inter-bank market
liquidity and 3) re-introduction of effective leverage tools. Hence while we project continued
monetary easing, the main risk to further discount rate cuts is the re-emergence of inflationary
pressures, while the absence or presence of inter-bank liquidity will determine how effective the
accommodative monetary stance will be in generating economic growth. We believe that under
the auspices of the IMF and continued structural vulnerabilities to international price

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movements, the SBP will remain cautious with regards to the discount rate and make a maximum
cut of 100bps in Jul09. Given the general slowdown, especially in the industrial sector, we
expect the SBP to cut the discount rate by 350 bps to 10.5% by the end of FY10.
In this scenario the importance of the policy rate will be diminished as the spread between
market and official rates narrows towards insignificance. As long as liquidity remains
constrained, lending rates will not come off in line with the SBPs accommodative stance. The
inflow of dollars and budgetary discipline will be the necessary pre-requisites for a successful
monetary and fiscal stimulus.
With the macro situation, energy deficit and consumer sentiment still far from comfortable
levels; we highlight the increasing need to focus on fundamentally sound sectors and limit
exposure to companies with pricing power, low leverage, sustainable cash flows, bottom line
growth and quality corporate governance.

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Task- 2
International fund evaluation based on techniques of portfolio management: a
case of Harbor funds

Harbor funds are categorized in many funds which includes the sub-classes also.Harbor Capital
Appreciation Fund:

Overview:
Harbor Funds - Harbor Capital Appreciation Fund is an open-ended equity mutual fund launched
and managed by Harbor Capital Advisors, Inc. It is co-managed by Jennison Associates LLC.
The fund invests in the public equity markets of the United States. It invests in the stocks of the
companies operating across diversified sectors. The fund primarily invests in the growth stocks
of the mid-cap and large-cap companies with a market capitalization of least $1billion. It
employs a fundamental analysis with the bottom-up stock picking approach focusing on strong
market position, unique marketing competence, strong research and development leading to
superior new product flow, and capable and disciplined management to create its portfolio. The
fund benchmarks the performance of its portfolio against the Russell 1000 Growth Index and the
S&P 500 Index. Harbor Funds - Harbor Capital Appreciation Fund was formed on December 29,
1987 and is domiciled in the United States. Through rigorous research, visits, and meetings with
top management, the portfolio manager knows these businesses intimately, and only invests in
those that the portfolio manager believes have:
-

Strong balance sheets and earnings performance

Sales momentum and growth outlook

Highly profitability history or potential

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-

Unique market position

A capable and committed management team

The Fund stays fully invested in stocks and does not try to time the market, but instead works
toward steady investment growth.

Investment objective:
The Fund seeks long-term growth of capital. The Fund stays fully invested in stocks and does not
try to time the market, but instead works toward steady investment growth.

Principal Investment Strategy:

Principal Style Characteristics: Mid to large cap growth stocks. The Fund invests primarily in
equity securities, principally common and preferred stocks, of U.S. companies with market
capitalizations of at least $1 billion at the time of purchase and that the Sub adviser considers to
have above average prospects for growth. In selecting stocks for the Funds portfolio, the Sub
adviser looks for companies that it believes have the following financial characteristics:
-

Superior absolute and relative earnings growth

Superior sales growth, improving sales momentum and high levels of unit growth

High or improving profitability

Strong balance sheet.

Principal Risks:
There is no guarantee that the investment objective of the Fund will be achieved. An investment
in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Stocks fluctuate in price and the value
of your investment in the Fund may go down. This means that you could lose money on your
investment in the Fund or the Fund may not perform as well as other possible investments.
Principal risks include:
Market risk: The individual stocks in which the Fund has invested or overall stock markets in
which they trade may decline in value. Additionally, an adverse event, such as an unfavorable
earnings report, may depress the value of a particular companys stock.

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Growth style risk: Over time, a growth oriented investing style may go in and out of favor,
which may cause the Fund to sometimes underperform other equity funds that use different
investing styles.
Selection risk: The Subadvisers judgment about the attractiveness, value and potential
appreciation of a particular companys stock could be incorrect.
Large cap risk: Large cap stocks may fall out of favor relative to small or mid cap stocks, which
may cause the Fund to underperform other equity funds that focus on small or mid cap stocks.
Mid cap risk: The Funds performance may be more volatile because it invests in mid cap
stocks. Mid cap companies may have limited product lines, market and financial resources. They
are usually less stable in price and less liquid than those of larger, more established companies.
Additionally, mid cap stocks may fall out of favor relative to small or large cap stocks, which
may cause the Fund to underperform other equity funds that focus on small or large cap stocks.
Foreign securities risk: Prices of the Funds foreign securities holdings may go down because
of unfavorable changes in foreign currency exchange rates, foreign government actions, political
instability or the more limited availability of accurate information about foreign issuers. Also, a
decline in the value of foreign currencies relative to the U.S. dollar may reduce the unhedged
value of securities denominated in those currencies. Foreign securities are sometimes less liquid
and harder to value than securities of U.S. issuers. These risks are more significant for issuers in
emerging market countries.

Risk:
There is no guarantee that the investment objective of the Fund will be achieved. An investment
in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Stocks fluctuate in price and the value
of your investment in the Fund may go down. This means that you could lose money on your
investment in the Fund or the Fund may not perform as well as other possible investments.

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Current performance may be higher or lower than the performance data shown. Investment
returns and the value of an investment will fluctuate, and an investor's shares, when sold, may be
worth more or less than their original cost.
The strategy was not very appropriate as there are lot of the calculations and interpretation
through the technical and mathematical way it was erected in the research. There was even the
theory used in order to analyses the result of the Tata motors on the basis of risk and return
analysis.
The research report of the Harbor Funds hold the theory of portfolio theory which was useful in
order to acknowledge that how the profits and risk are inter linked with each other as there
various cases of Harbor Funds investment used as one such case was harbor capital .
Port-folio theory
When many assets are held together, assets decreasing in value can often be offset by other
assets increasing in value, thus the decreasing risk the total variance of the portfolio is therefore
almost always lower than a simple weighted average of the individual variances. If the number of
assets is large enough, the total variance does in fact stem more from the covariances than from
the variances of the assets. It is in other words more important how the assets tend to move
together than how much each individual asset fluctuates in value.

Dividend distribution:
Each Fund expects to distribute all or substantially all of its net investment income and realized
capital gains, if any, each year. Each Fund declares and pays any dividends from net investment
income and capital gains at least annually in December. Harbor Large Cap Value Fund declares

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and pays any dividend semi-annually. Each Fund may also pay dividends and capital gain
distributions at other times if necessary to avoid federal income or excise tax. You may receive
dividend and capital gain distributions in cash or reinvest them. Dividend and capital gain
distributions will be reinvested in additional shares of the same Fund unless you elect otherwise.

Principal Style Characteristics: Mid to large cap growth stocks

Performance:
As of Quarter-Ended 06/30/2010

YTD

1 Year

5 Year

10 Year

Since Inception

-10.83%

10.21%

0.42%

N/A

4.39%

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The harbor capital appreciation fund comprises of 3 sub-classes that is investor class,
institutional class and administrative class. The Funds average annual total returns for certain
time periods compared to the returns of a broad-based securities index. The Russell 1000
Growth Index is an unmanaged index generally representative of the U.S. market for larger
capitalization growth stocks. The S&P 500 Index is an unmanaged index generally representative
of the U.S. stock market.

The Funds best and worst calendar quarters during this time period were:

Portfolio Management:
Investment Adviser: Harbor Capital Advisors, Inc. Harbor Capital Advisors employs a
manager-of-managers approach by selecting and overseeing subadvisers responsible for the
day-to-day management of the assets of the Funds. Pursuant to an exemptive order granted by
the SEC. Harbor Capital Advisors, subject to the approval of Harbor Funds Board of Trustees, is
able to select subadvisers and to enter into new or amended subadvisory agreements without
obtaining shareholder approval.
Subadviser: Jennison Associates LLC. Jennison Associates LLC has subadvised the Fund since
1990.
Portfolio Manager: Spiros Segalas. Jennison Associates LLC

TOP TEN Holdings

Company Name [Ticker]

10

% of Net Assets

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Apple Inc. [AAPL]

5.7

Amazon.com Inc. [AMZN]

3.4

Microsoft Corporation [MSFT]

3.0

Walt Disney Company [DIS]

3.0

Hewlett-Packard Co. [HPQ]

2.9

Google Inc. [GOOG]

2.9

Occidental Petroleum Corporation [OXY] 2.9

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Schlumberger Ltd. [SLB]

2.8

VISA Inc. [V]

2.7

MasterCard Inc. [MA]

2.5

% of Total Holdings:

31.8

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Buying and Selling Fund Shares:

Shareholders may purchase or sell (redeem) Fund shares on any business day (normally any day
the New York Stock Exchange is open). Purchase and redemption orders are processed at the net
asset value next calculated after an order is received in good order by the Fund.
The minimum initial investment amounts are shown below.

Tax Information:
The Fund expects to distribute any net investment income and any net realized capital gains
annually in December. The Funds distributions are generally taxable to you as ordinary income,
capital gains, or a combination of the two, unless you are investing through an IRA, 401(k) or
other tax-advantaged investment plan.

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Portfolio Turnover:
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or
turns over its portfolio). A higher portfolio turnover may indicate higher transaction costs and
may result in higher taxes when Fund shares are held in a taxable account. The Funds portfolio
turnover rate in the most recent fiscal year was 72%.

Equity Portfolio Management Strategy:

These are active investors and they use Active equity portfolio management strategy because it
is an attempt by the manager to outperform, on a risk-adjusted basis, a passive benchmark
portfolio. A benchmark portfolio is a passive portfolio whose average characteristics match the
risk-return objectives of the client.
Therefore the goal of the active equity management is to earn a portfolio return that exceeds the
return of a passive benchmark portfolio, net of transaction cost, on a risk-adjusted basis.
Active equity portfolio management strategy has three general categories:
-

Fundamental

Technical

Market anomalies and security attributes.

Harbor use Anomalies and attributes strategies. The Price fundamental strategies just could
either be based on pure price trend analysis or supported by the underlying economic
fundamentals of the company. An earnings momentum strategy is a somewhat formal active
portfolio approach that purchases and holds stocks that have accelerating earnings and sells
stocks with disappointing earrings. The notion behind this strategy is that, ultimately, a
companys share price will follow the direction of its earnings, which is the bottom-line measure
of the firms economic success. Therefore Harbor seems to use this strategy.
A more promising approach to active anomaly investing involves forming portfolio based on
various characteristics of the companies themselves. Two such characteristics we have seen to
matter in the stocks market are the total capitalization of the firms outstanding equity (i.e., firm
size) and the financial position of the firm, as indicated by its various financial ratios (e.g., P/E,
P/BV).

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One way of ranking investments taking into account both risk and return is by using the Sharpe
ratio. This ratio essentially divides the return by the risk, after first subtracting the risk-free rate
of return from the return, since any asset with a lower return should never be chosen; the higher
the ratio the more favorable the risk/return characteristics of the investment.

Si

Ri R f

The Sharpe ratio will be the predominant measure in the analyses, but a description of other
measures is due.
Another risk measure suggested in the literature is the Treynor measure. This measure is not as
straightforward and intuitive as the Sharpe ratio and requires an understanding of CAPM, the
Capital Asset Pricing Model. The model was put forth in the 1960s and answers what the
expected return should be for an asset of certain risk.
The model states that the return of an asset should equal the risk-free rate added together with
some risk premium multiplied by the assets sensitivity to market movements, called beta.
The risk premium is defined as the return of a market portfolio minus the return of the risk-free
asset, where the market portfolio in theory is a portfolio consisting of all risky assets in the
market.

Ri R f i Rm R f
CAPM is however not a generally accepted model and the debate regarding it has raged ever
since its inception almost 40 years ago. Finding the market portfolio is a difficult task, as it is

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supposed to include all risky assets in their relative proportion, of which only a fraction are
traded and quoted with up-to-date prices. Proxies may of course be used but it is not clear what
the scope of the proxy should be, whether the portfolio can be taken as domestic-only for a USbased investor or how much one would depart from the real market portfolio if the S&P 500 or
DJIA were used as proxies.
The Treynor measure and all other measures (i.e. the Jensen differential performance index
among others) based on betas, rely on a correctly defined market portfolio, but such a portfolio
does obviously not exist. With CAPM evidence being inconclusive and the market portfolio nonexistent, no beta-based performance measures will be used in the analyses.

Asset Allocation Strategy:

Harbor use Integrated Asset Allocation strategy, because it separately examines (1) capital
market conditions and (2) the investors objectives and constraints. These factors are then
combined to establish the portfolio asset mix that offers the best opportunity for meeting the
investors needs given the capital market forecast.
There are three key steps to integrated asset allocation; first both capital market conditions and
the investor-specific objectives and constraints are summarized before the asset mix is
determined. The second step is to combine the information from the first step in order to select
the single best portfolio for the investor in question. The third stage of the integrated portfolio
process occurs after enough time has passed that the optimal portfolios actual performance can
be compared with the managers original expectations
Annualized Total Returns as of the Month-Ended 07/31/2010:

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YTD

Month Return

1 Yr

3 Yr

5 Yr

10 Yr

Since

Expense

Incp.

Ratio

Net

Gross

Harbor
-

Capital

Appreciation 8.38%

-5.38%

8.64%

-1.06%

13.65%

-0.11%

13.84%

3.25%

0.43% N/A

5.15% 1.07%

1.07%

N/A

Fund

Russell
1000

Growth

6.49%

4.25%

0.80%

4.08%

Index

S&P

500 -

Index

6.69%

6.78% 0.17% 0.76%

N/A

As of Year-Ended 12/31:

2005

2006

2007

2008

2009

13.51%

1.91%

11.83%

-37.36%

41.39%

Harbor
Capital
Appreciation

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Fund

Russell
1000

5.26%

9.07%

11.81%

-38.44%

37.21%

4.91%

15.79%

5.49%

-37.00%

26.46%

Growth Index

S&P

500

Index

The Harbor Funds performance shown assumes the reinvestment of dividend and capital gain
distributions and is net of management fees and expenses. Returns for periods less than one year
are not annualized.
From time to time, certain fees and/or expenses have been voluntarily waived, which has resulted
in higher returns. Without these waivers, the returns would have been lower. Voluntary waivers
may be applied or discontinued at any time without notice.
The Russell 1000 Growth Index is an unmanaged index generally representative of the U.S.
market for larger capitalization growth stocks. This unmanaged index does not reflect fees and
expenses and is not available for direct investment. The Russell 1000 Growth Index and
Russell are trademarks of Russell Investments.
The S&P 500 Index is an unmanaged index generally representative of the U.S. stock market.
This unmanaged index does not reflect fees and expenses and is not available for direct
investment.

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Task- 3 Performance of harbor capital appreciation fund with its
benchmark:
Harbor

Capital

Appreciation

Fund

advanced

12.81%

(Institutional

Class),

12.69%

(Administrative Class), and 12.65% (Investor Class) in the six months ended April 30, 2010,
underperforming the Russell 1000 Growth benchmark, which rose 15.79%. Every sector in the
benchmark rose, with gains exceeding 25% in the industrials and consumer discretionary sectors.
Information technology holdings contributed most to Fund returns, as Baidu, Salesforce.com,
and Apple posted strong gains. Beijing-based Baidu is the worlds dominant Chinese-language
Internet search engine. We believe the Chinese search market is still in its early growth stage and
we like Baidus improving execution and exploration of long-term monetization opportunities.
Salesforce.coms enterprise cloud computing CRM (customer relationship management) service
and platform permit customers to avoid many of the expenses and complexities of traditional
enterprise software development and implementation. New offerings are helping the company
both expand to new markets and deepen relationships with existing customers. Apple continues
to be a prime beneficiary of the digitization of music, photos, and video because of its cuttingedge software for managing, editing, and sharing content. With iPhone, Apple is gaining access
to significant growth opportunities in the mobile phone market. Its creativity and innovation in
product design and marketing should continue to drive share gains.
In the consumer discretionary sector, Amazon.coms strong earnings reflected an ongoing
secular shift toward e-commerce as well as market share gains. Disney, with what we consider
one of the media sectors most balanced and best positioned portfolios, reported solid financial
results, as well. Marriott International climbed on improving fundamentals in the lodging sector.
Health care holdings detracted from return relative to the benchmark. Multinational diversified
health care company Baxter International fell after lowering its 2010 financial outlook, citing
recently-passed health care legislation and weakness in its blood plasma products business.

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As of April 30, 2010:

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As the appreciation fund has its sub-classes, we choose an investor class.

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The graph compares a $10,000 investment in the Fund with the performance of the Russell
1000 Growth Index and the S&P 500 Index. The Funds performance includes the
reinvestment of all dividend and capital gain distributions. The graph shows the variation in the
investment held by harbor with respect to its benchmark.

OUTLOOK AND STRATEGY:

Given easy comparisons against last years weak first half, continued rigorous cost controls, and
recovering revenue gains, corporate profit growth looks to be strong in the remainder of calendar
2010. A rebound in consumer spending, particularly for cars and other durable goods, also
appears to be gathering momentum, spurred by sales incentives and pent-up demand. Although
unemployment remains high, we believe that income growth, too, is in the early stages of
recovery, as furloughs end and modest annual salary adjustments resume. Housing starts may
have bottomed out, but overall weakness in the housing sector persists.
In Europe, sovereign debt issues have caused major concern. Although Greece has been the
epicenter of the crisis, Spain, Ireland, Portugal, and Italy face similar issues. In Asia, there are

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indications that Chinas growth momentum is starting to peak, as the impact of stimulus
spending wears off and Beijing policymakers take steps to tighten lending and bank reserve
requirements in light of rapidly rising real estate activity and prices.
The revenue gains of companies held in our portfolio have continued to accelerate, and we
remain confident that our holdings will achieve better-than-average revenue growth for calendar
2010. Accommodative monetary policy is providing an additional tailwind for equity prices. We
would view the eventual (and approaching) return to higher interest rates as another sign of
overall economic strength.

Task- 4 its analysis and evaluation using port-folio technique

HARBOR CAPITAL APPRECIATION FUND
Portfolio Characteristics (As of Quarter-Ended 06/30/2010)
Harbor

Number of Holdings
Weighted Avg. Market Cap
($Mil)

22

Capital

AppreciationRussell

Fund

Index

66

631

60,596.00

68,262.85

1000

Growth

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Harbor

Capital

AppreciationRussell

Fund

Index

Median Market Cap ($Mil)

24,672.28

4,571.66

Price/Book Ratio

4.58

4.97

Adj. Trailing P/E Ratio

19.21

17.07

Forecasted P/E Ratio

16.48

15.13

Earnings Growth Rate (%)

19.20

14.08

Proj. Earnings Growth Rate (%) 15.45

13.14

Return on Equity (%)

18.82

22.86

Beta vs. Russell 1000 Index

0.94

Beta vs. Russell 3000 Index

0.88

1000

Growth

The harbor capital appreciation fund performed far better than Russell 1000. We calculated the
statistical analysis from July 2009- June 2010.

Index Name: Russell 1000 Growth

Index

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IndexStyle

Month

Return

Large-Cap Indexes

9-Jul

7.1

Large-Cap Indexes

9-Aug

2.07

Large-Cap Indexes

9-Sep

4.25

Large-Cap Indexes

9-Oct

-1.35

Large-Cap Indexes

9-Nov

6.14

Large-Cap Indexes

9-Dec

3.09

Large-Cap Indexes

10-Jan

-4.36

Large-Cap Indexes

10-Feb

3.44

Large-Cap Indexes

10-Mar

5.78

Large-Cap Indexes

10-Apr

1.12

Large-Cap Indexes

10-May

-7.63

Large-Cap Indexes

10-Jun

-5.51

Harbor

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Russell 1000 Growth

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Fund

Index

Standard Deviation

14.58%

11.78%

Sharpe Ratio

-0.19

-0.24

Beta

1.12

Alpha

0.04%

Treynor Ratio

-0.02

-0.03

Jenson

0.01

0.01

Beta:
Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred
to as a measure of the sensitivity of the asset's returns to market returns, its non-diversifiable
risk, its systematic risk, or market risk. On an individual asset level, measuring beta can give
clues to volatility and liquidity in the marketplace. In fund management, measuring beta is
thought to separate a manager's skill from his or her willingness to take risk. Harbors beta is
positive and it is above 1 as that the fund has higher normalized systematic risk than the market.
Standard deviation:
As the data shows the volatility of harbor funds is more than Russell 1000, which means that its
returns are more dispersed than its mean because the Standard Deviation is a measure of
dispersion from mean.
Sharpe ratio:

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The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a
result of excess risk. This measurement is very useful because although one portfolio or fund can
reap higher returns than its peers, it is only a good investment if those higher returns do not come
with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted
performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform
better than the security being analyzed.
The numerator in its formula is the portfolios risk premium. -0.19 includes the total risk of the
portfolio by including standard deviation of returns. Thus -0.19 indicates the risk premium return
earned per unit of total risk.

Treynor Ratio:
T-ratio applies to all investors, irrespective of their risk preferences. Treynor predicted that
rational and risk-averse investors would prefer portfolio possibility lines with larger slopes as
that would place them on a higher indifference curve.
Harbor Fund illustrates the example of a very poor performance portfolio with a negative t-ratio
of 0.02, calculated for a period of 12 months from July 2009 to June 2010. The reason is that
Harbor Fund produced a lower average rate of return compared to the treasure bill rate of return,
for the period under consideration. Thus, such performance is most likely to be plotted below the
Security Market Line (SML).
In simple words, T-ratio indicates harbor funds risk premium per unit of risk. Since Harbor
Funds T value (-0.02) is slightly above that of Russell growth index of -0.03, we say the former
has performed better than the market in the period under consideration.
Jenson Ratio:
The Alpha indicates whether the portfolio manager is superior or inferior in market timing or
/and stock selection. A positive alpha means positive residuals (actual rate of return> expected
rate of return) and therefore, a superior manager and vice versa.

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The alpha for Harbor Funds for a period of 12 months came out to be 0.04 percent which is
significantly close to zero and thus indicating poor ability of the manager to derive aboveaverage returns adjusted for risk. In other words, the manager seems incapable to predict
appropriate market turns, or selecting undervalued issues for portfolio, or both.

120.00%
100.00%
80.00%
60.00%
40.00%

Harbor Fund

20.00%

Russell 1000 Growth Index

0.00%
-20.00%
-40.00%

Conclusion & Recommendation:

Pakistan's domestic economy was shielded from the global collapse due to its lack of dependence
on international demand. However, the domestic economic problems led to a fiscal crisis in the
1HFY09. Trade deficit and Current Account Deficit rose by 20%YoY and 44%YoY during the
first half of the year, putting immense pressure on foreign exchange reserves which declined to
USD6bn - leading to a sharp depreciation in PkR parity versus USD to a weakest level of
PkR84.4/USD. Despite relative improvement in 2HFY09, the economic growth stayed under
pressure due to tight monetary policy. Fiscal Year 2009 was a very volatile period for both
International and domestic capital markets. The KSE100- index declined by 42% during the year
from 12,289 at the beginning of the year to 7,162 at year-end. The daily average trading volumes
during the year also declined to 75mn shares from 168mn shares last year.

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The both international and domestic fund provides great opportunities to investors. Comparing
the risk profile of both the funds international fund is less risky than domestic fund because
Pakistani economy is more volatile than international market. The Average Sharpe ratio or the
risk premium factor per unit of risk in an investment for the USF funds is positively reflecting
the fact that both investments have lesser risk than the market portfolio.
On the basis of relative valuation, KSE is at a substantial discount to regional and international
markets. While relative valuations signals Pakistani equities to deliver positive performance in
2010, for the market to show substantial recovery, the economy needs to come out of its somber
state and critically GDP growth should pick up pace in continuing fall in domestic interest rates
and global economic recovery should help in improving the prospects of relatively better GDP
growth in the second half of the current fiscal year. Most importantly, the government needs to
bring the domestic security situation under control as prolonged conflict and war like situation in
the tribal belt will make it extremely difficult to attract any sizeable investments inflows in the
country.
Hence due to the riskiness and volatility in Pakistani economy a better portfolio may be
recommended as:

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Portfolio Management
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