The Treynor Portfolio Performance Measure Finance Essay

Common fund or better known as unit trust fund in Malaysia is an investing strategy the pools money from many investors who portion the same fiscal aims, investing scheme and hazard tolerance. The pooled money will so put in a diversified portfolio of authorized investings by a professionally managed organisation on behalf of the unit trust ‘s investors. An independent legal guardian is appointed to supervise the direction of unitholders ‘ money. Therefore, the rights and involvement of investors in unit trust are safeguarded. The unit trusts are besides called ‘open-ends ‘ financess as the unitholders can deliver or sell back their portions through the fund direction company at the predominating purchasing monetary value or current market values. Unit trust fund is an low-cost avenue for investors to accomplish a sensible degree of variegation. With the debut of sector financess in Malaysia since 1959, investors are offered an alternate in doing investing determinations.

Besides that, unit trust besides plays a really of import function in Malaysia capital market. They are among the major participants in the market and believed to hold the act uponing power to pull little investors to capital market ( Leong, 1997 ) . It is more appealing and provides a wider investing base for little investors. Consequently, this has created intense competition among the unit trust fund direction companies in the unit trust industries. As such, more advanced unit trust merchandises have been developed and introduced in order to pull possible investors.


Based on the Guidelines on Unit Trust Funds issued by the Securities Commission in October 1991, a unit trust fund company can merely put in authorised Malaysia assets, which include listed and unlisted securities of Malayan companies, Malayan Government Securities, Cagamas bonds, bankers ‘ credences, Negotiable Certificates of Deposits, Government Investment Investment Certificates and hard currency ( Banker ‘s Journal Malaysia, 1995 ) . However, in March 1994, the Commission has provided a proviso by which trust financess can put ( 10 % of portfolio ) in abroad stock. Hence, conventional unit trust financess can put in any of the above Malaysian assets without any limitation every bit long as the financess have non reached its upper limit approved size.

Islamic unit trust fund is one of the Islamic fiscal merchandises nowadays in the market. These financess are runing in conformity with Shariah ( Islamic jurisprudence ) rules. The Shariah ‘s prohibition against riba ( involvement ) and some Fiqhi ( Islamic Jurisprudence ) issues in the reading of gharar ( inordinate hazard ) suggests that many of the instrument merchandises, which are available to conventional financess are non available to Islamic financess. However, in the instance of Islamic investing instruments for illustration, Islamic unit trust financess, fund directors do hold some restrictions in choosing stocks to organize portion of their portfolio. Even though most of the Bankss listed in Bursa Malaysia have Islamic banking weaponries, due to the Shariah guidelines, fund directors are unable to include banking stocks in their portfolio. Furthermore, due to the absence of Islamic money market, Islamic unit trust financess depend entirely on the equity market for investing. For conventional equity unit trust financess, fund directors do non put entirely in the equity market. From an Islamic position, the merchandises are avoided as they represent elements that are forbidden by Allah and the harmful effects of such merchandises on world ( Smart Investor, 2002 ) .

This paper intends to detect the differences in footings of public presentation between Islamic and conventional common fund in the context of Malayan capital market. There are many type of unit trust such as equity financess, balanced financess, fixed income financess, money market financess and others. However, this survey utilises equity fund merely because there are considered to be more hazardous financess as compared to other fund types, but they besides provide higher returns than other financess. Equity unit trust financess besides are popular in Malaysia as they provide investors with exposure to the companies listed on Bursa Malaysia. The public presentation of the units is hence linked to the public presentation of Bursa Malaysia. A lifting market will usually give rise to an addition in the value of the unit and frailty versa. The public presentation of Islamic and conventional unit trusts will be analyzed utilizing monthly informations from 2006 to 2011 and evaluated based on the standard public presentation steps known as Adjusted Sharpe ‘s, Treynor ‘s and Adjusted Jensen ‘s indices.


Many research workers have been study about the unit trust in the yesteryear. Some old surveies found consequences that are inconsistent with Chua ‘s findings. These surveies get same consequences with Ewe ( 1994 ) , Shamsher and Annuar ( 1995 ) and Tan ( 1995 ) . Harmonizing to Shamsher and Annuar ( 1995 ) , they found out that the returns on investing in unit trust were good below the hazard free and market returns. Their survey evaluated 54 unit trusts for the period of late 80s to early 90s. Furthermore, the consequences indicated that non merely the grade of portfolios variegation was below outlook but the existent returns and hazard features of financess were besides inconsistent with their declared aims. The survey by Tan ( 1995 ) analyzed public presentation of 12 unit trusts over a 10 twelvemonth period during 1984 – 1993. He concluded that unit trusts in general perform worse than the market portfolio. Consistent with Chua ‘s findings, Tan besides concluded that authorities sponsored financess performed better than private financess.

Therefore, this research is to measure whether the Islamic or conventional equity unit trust financess are better in footings of hazard, return and variegation for the five periods from 2006 to 2011. The survey analyzed over 60 months period get downing. It besides found that the public presentation of the financess was influenced by the economic status before, during and after crisis.


This survey focused to efforts to look into the comparative of public presentation between Islamic and conventional equity financess. The aims of the survey are: –

To compare the nature and features of Islamic and conventional unit trust in Malaysia.

To measure the hazard and return profiles of Islamic unit trust in comparing with the conventional unit trust.

To mensurate the grade of variegation of Islamic unit trust as compared to the conventional unit.

To compare the consistence of public presentation of equity financess.

Significance OF STUDY

There are several benefits that can be taken in this survey. The information gathered could profit a few parties and the research worker every bit good.


This survey will assist the investors particularly Muslim investor to put in Islamic unit trust. It besides creates cognition on how far Islamic and conventional unit trust financess perform better. The research besides helps the investors to put and calculate their investing scheme in hereafters.

Fund Manager

This research will assist the Fund Manager acquire the cognition and information about the unit trust. It could supply a benchmark to the fund director of their abilities in choosing and variegation of the fund.

Research worker

This research besides helps to heighten research worker ‘s cognition and ability to measure inside informations on public presentation of unit trusts financess. From the information, more extended surveies could be planned for the hereafter.


This research is really of import to concerns in recognizing the effects of portfolio direction on their public presentation. This is of import so that they will hold clear way in make up one’s minding their investing.


This survey will concentrate on determine the step of mean day-to-day return, entire hazard ( standard divergence ) , coefficient of fluctuation,

The information will take from conventional and Islamic equity common fund companies available in Malaysia.

The research use the return on equity common fund as the dependant variable whereas the return on stock market index ( KLCI ) as the independent variable for conventional and Islamic fund.

This survey will analyze by utilizing


Every research worker has their ain restriction or barriers to happen the consequence or result. However, in this research it will non impact the overall intent of the survey. The information truth had been supported from secondary informations. Here are the restrictions of the survey: –

Since the informations used in this research are chiefly from assorted secondary beginnings, its truth and dependability to a great extent depends on the truth of the published stuffs.

The information about the subject studied is besides hard to seek in the library because of the limited information.

Since this research is the first research experience for the research worker, doubtless there are still tonss of things to better.

The research worker is still lack of experience in making research comprehensively but researcher is seeking difficult to do this undertaking paper successful and committed to finish it decently

The clip given is really limited for the research worker to roll up all the informations and to complete this undertaking paper.

The research worker has limited cognition on the subject and needs more understanding on the subject studied.


Equity financess

An equity unit trust is the most common type of unit trust. The major parts of its assets are by and large held in equities or securities of listed companies. Equity unit trust financess are popular in Malaysia as they provide investors with exposure to the companies listed on Bursa Malaysia. The public presentation of the units is hence linked to the public presentation of Bursa Malaysia. A lifting market will usually give rise to an addition in the value of the unit and vice-versa.

Treynor Portfolio Performance Measure

Treynor ( 1965 ) develop the first composite step of portfolio public presentation that included hazard. He postulated two constituents of hazard, hazard produced by general market fluctuations, and hazard ensuing from alone fluctuations in the portfolio securities.

Sharpe Portfolio Performance Measure

Sharpe ( 1966 ) likewise conceived of a composite step to measure the public presentation of common financess. The step followed closely his earlier work on the plus pricing theoretical account ( CAPM ) , covering specifically with the capital market line ( CML ) .

Jensen Portfolio Performance Measure

The Jensen step ( Jensen, 1968 ) was originally based on the capital plus pricing theoretical account ( CAPM ) , which calculates the expected one-period return on any security or portfolio.

Chapter 2


From the old survey, its show many research workers have been done on the public presentation of unit trust. Different research workers have used different theoretical account to measure public presentation of unit trust.


The earlier research on unit trust ‘s public presentation was conducted by Friend et. Al. ( 1962 ) , 152 U.S common financess has done analyzed for the period 1953 to 1958 with Standard & A ; Poor indices of five securities as a benchmark. The findings indicated that the common financess earned mean one-year returns ( unadjusted hazard ) lower than the composite benchmark. Besides that, his survey consisted of the randomly constructed portfolio of common fund in 1965, they concluded that common fund have non performed superior to random constructed portfolio. However, the survey done by they and friend and Vickers are mostly irrelevant to the empirical issue of the quality and values of common fund direction were commented by Kalman and Jerry ( 1968 ) .

A new step for the public presentation of portfolio by integrating the fund ‘s return volatility was suggested by Jack L.Treynor ( 1965 ) , which is the mean extra return on the portfolio. It was simple yet meaningful mode volatility. Similarly, Sharpe ( 1966 ) was analyzed on 34 open-end common financess in the U.S during the period of 1954 to 1963 and showed that the Sharpe ratio for his sample was lower than the DJIA over the same period. His consequence was subsequently tested and confirmed by Ippolito ( 1993 ) as statistically important. Sharpe besides found that the size of financess per Se was non of import in foretelling future public presentation and good public presentation was associated with lower disbursal ratio.

Treynor and Mazuy ( 1966 ) has used 57 common financess in U.S for the period of 1958 to 1962 and the consequence was similar with Shape ‘s ( 1966 ) survey that on norm the common financess could non surpass the market. During longer period of 1945 to 1964, Jensen ( 1968 ) studied 115 open-end common financess in U.S and used the Standard & A ; Poor ‘s index of 5000 stocks as placeholder for the market portfolio. He developed a public presentation step called Jensen ‘s Alpha to measure portfolio director ‘s prognostic ability of security monetary values. Based on survey, he discovered that on norm, fund directors were unable to systematically predict portion monetary values as compared to purchase and keep scheme, therefore reaffirmed the findings of Sharpe ‘s and Treynor ‘s.

The literature on the public presentation of common financess has long standing issues. The issues addressed by old surveies included the risk-return public presentation, choice and market clocking abilities of fund directors and the degree of variegation of common financess. McDonald ( 1974 ) estimated the Sharpe, Treynor and Jensen measured for 123 common financess utilizing monthly informations for the period between 1960 and 1969. The findings showed that bulk of the financess did non execute every bit good as the New York Stock Exchange ( NYSE ) index.

Gram molecules and Taylor ( 1977 ) further supported the consequences of Sharpe ‘s. They conducted a risk-return analysis on 86 financess in U.S covering from 1966 to 1975 and their findings yielded that in most instances, the public presentation variables of the financess such as figure of portions and the size of financess had weak prognostic power for the financess ‘ public presentation in the subsequent periods. However, Friend et. Al. ( 1970 ) was a contradictory survey which replicated Sharpe ‘s survey with the decision of beta construct during the period of 1960 to 1968. This survey revealed that the mean return of the sample was higher than the market portfolio. Ippolito ( 1990 ) besides found a different consequence when reviewing and comparing statistical surveies on common financess public presentation for the period of 1962 to 1991. His survey discovered that common financess showed a better public presentation compared to market indices. Furthermore, he besides found that common financess returns are consistent with the financess ‘ risk-adjusted public presentation sole of disbursals and its public presentation is similar to that of the index portfolio. In 1989, the consequences supported his old survey on the public presentation of 143 financess in the U.S over the period of 1965 to 1984. The consequence showed that common financess with higher turnover fees and disbursals, earned rates of return sufficiently high to countervail the higher charges.

In the U.K, Firth ( 1977 ) analyzed the public presentation of 72 unit trusts for the period of 1965 to 1975. The result showed that on norm, directors of unit trusts in the U.K have non been able to calculate portion monetary values accurately plenty to surpass a simple bargain and clasp policy. During the period of 1975 to 1993, Bal and Leger ( 1996 ) further analyzed the public presentation of 92 U.K investing trusts utilizing the Sharpe ( 1966 ) , Treynor ( 1965 ) and Jesen ( 1968 ) steps of portfolio public presentation. The consequences of the survey showed that the unadjusted financess public presentation as a whole outperformed the market. Fletcher ( 1999 ) examined the public presentation of 85 U.K unit trusts with North American investing aims between January 1985 and December 1996. The survey concluded that there was no grounds that U.K and North American unit trusts on norm or separately generate important unnatural returns. They besides found that there was no relationship between the charges of the trusts and unnatural public presentation. Therefore, it was suggested that U.K trusts directors exhibited similar public presentation accomplishments to U.S common fund directors.


A survey on 19 unit trusts from January 1980 to December 1984 was conducted by Koh and Koh ( 1987 ) with the Stock Exchange of Singapore ( SES ) All Share Index as the placeholder for the market portfolio. The consequences of their survey revealed that the returns and hazards features of the financess were non to the full consistent with their declared aims. They besides discovered that the trusts public presentation was non consistent over clip and they were unable to surpass the market and the financess did non accomplish a high grade of variegation.

Koh, Phoon and Tan ( 1989 ) studied the public presentation of four investings financess listed on the Stock Exchange of Singapore, from January 1979 to December 1987, by comparing against the market portfolio proxied by SES Index. They concluded that three out of four unit trusts outperformed the market portfolio even though all of the trusts bear systematic hazard near to that of the market portfolio by utilizing Sharpe ratio, Treynor Index and the Jensen alpha to mensurate the financess public presentation. They besides discovered that there were no important difference in public presentation between least aggressive unit trusts and the more aggressive unit trusts.

Koh and Kee ( 1990 ) studied on some facets of the public presentation of unit trusts in Singapore for the period 1980 to 1984. It showed that the unit trusts in Singapore underperformed the market, ill diversified and recorded inconsistent public presentation over clip. During the period of January 1986 to December 1990, Lee ( 1993 ) showed that all the unit trust financess by and large underperformed the market with the public presentation of 21 unit trust financess. However, their hazard profile seemed rather stable during the period under survey even though there was deficiency of consistence in the public presentation and the ranking of the financess. The systematic hazards and the grade of variegation of the financess were found lower than that of the market. Therefore, the writer concluded that, the past public presentation of the financess may non be declarative of future public presentation though their hazard profile was non expected to alter drastically.


In the Malaysia context, although there have been many research workers surveies related to the investing public presentation of unit trust financess. Most surveies had analyzed on the overall fund public presentation. The earliest survey on unit trusts public presentation was by Chua ( 1985 ) . He found that unit trust financess performed reasonably consistent and fund directors were able to command hazard good. Later surveies were provided by Shamser and Annuar ( 1995 ) , Tan ( 1995 ) , Annuar et Al. ( 1997 ) , Arbi ( 1997 ) , Leong ( 1997 ) , Mohd Nawawi ( 1999 ) , Shamser et Al. ( 2001 ) , Taib et Al. ( 2002 ) , Soo Wah Low and Noor A. Ghazali ( 2005 ) , Soo Wah Low ( 2007 ) , Hussin ( 2006 ) and Huson ( 2007 ) .

Shamser and Annuar ( 1995 ) found that mean return on Malaysian unit trust financess was below the market norm. Hence, they examine that unit trust financess failed to accomplish expected degree of variegation. In the survey by Annuar et Al. ( 1997 ) gets the similar consequence sing the variegation degree of unit trust financess which is below outlooks. Previous surveies besides found that fund directors have inferior choice accomplishments and hapless market clocking abilities ( Annuar et al. , 2001:139-140 ; Ahmad & A ; Haron, 2006:121 ; and Huson, 2007:22-23 ) .

Leong and Aw ( 1997 ) studied the public presentation and ranking of 32 private unit trusts utilizing different market portfolio as benchmarks, the KLCI and the Kuala Lumpur Emas Index ( EMAS ) during the period from January 1984 to December 1996. The consequences of the survey indicated that the returns of the sample trust portfolios were more sensitive to alterations in the returns of the KLCI based on higher beta calculated when utilizing KLCI as the benchmark. However, the EMAS benchmark formed a higher R -square than the KLCI, hence were more diversified.

Leong ( 1997 ) examined the public presentation of 13 unit trusts in Malaya from January 1992 to December 1996 utilizing KLCI as market ‘s placeholder within the model of APT and CAPM. The research besides attempted to measure the trusts ‘ public presentation before and after 19 March 1994 when Securities Commission announced the new guidelines and ordinances for unit trusts after the stock market clang in1993. The research worker used the financess public presentation steps such as Adjusted Sharpe Index, Adjusted Jensen Alpha and Treynor Index under the CAPM model. The findings indicated that most of the unit trusts were superior to the market as compared to 2nd sub-period during the first sub-period and the full period.

The country of Islamic unit trusts public presentation is besides being the focal argument among bookmans. The Malayan Islamic unit trust financess public presentation was examined by Hanafi ( 2002 ) , Shariff ( 2002 ) , Abdul Ghafar and Mohd Saharudin ( 2003 ) , Zaidi et Al. ( 2004 ) , Kefeli and Zaidi ( 2006 ) and Abdullah et Al. ( 2004, 2007 ) . These surveies provided some penetrations on the public presentation of Islamic unit trust financess in Malaysia by mensurating the nature and features of these Islamic trust financess ( Bashir, 2009: 135-137 ) .

Harmonizing to Hanafi ( 2002 ) , Islamic unit trust financess performed better than the market and the riskless investings. However, Islamic unit trust financess failed to supply variegation in investing. During the bear period, clocking ability showed negative by the fund directors. While survey by Zaidi et Al. ( 2003 ) found that on the norm, most of Islamic unit trust financess showed negative return and were underperformed the market. Otherwise, Abdullah et Al. ( 2006 ) studied that Islamic unit trust financess were non merely underperformed the market but showed low degree of variegation.

Baharuddin and Azwan ( 2004 ) and Abdullah et Al. ( 2007 ) have done surveies about the comparative public presentation of Islamic and conventional unit trust financess and the consequence are rather new in Malaysia. Furthermore, Baharuddin and Azwan ( 2004 ) examined the return public presentation between conventional and Muslim financess, to cognize whether assets allocation types and manners influence the fund ‘s public presentation and besides to place whether the fund size and fund age influence the return public presentation.

Besides that, Abdullah et Al. ( 2007 ) examined 65 financess where, 14 are Muslim financess by divided into three different periods, which were pre ( 1992 – 1996 ) , during ( 1997 – 1998 ) and station ( 1999 – 2001 ) fiscal crisis to determine the impact of the economic conditions on the public presentation of unit trusts financess. For 10 twelvemonth period from January 1992 to December 2001, he attempted to happen the differences between Islamic and conventional common financess in footings of public presentation in the position of Malaysia capital market at of monthly returns adjusted for dividends and fillips.

Chapter 3