A U.S. large-cap value portfolio run by Anderson Investment Management returned 18.9 percent during the first three quarters of 2003. During the same time period, the Russell 1000 Value Index had returns of 21.7 percent and the Wilshire 5000 returned 25.2 percent.

            i.        What is the return due to style?

          ii.        What is the return due to active management?

        iii.        Discuss the implications of your answers to Parts A and B for assessing Anderson's performance relative to the benchmark and relative to the market.

Answer:

The Russel 1000 value index is an index In US that tracks the performance of top 1000 highest ranking stocks which forms the part of larger index Russell 3000 index.On the other hand WillShire 5000 index is an index of actively traded stocks in the US whose values are derived as the basis of weighted average market capitalization.  Therefore WillShire 5000 returns are on market returns.

(i).

The returns due to the style would be computed as the difference of the returns offered by Willshire 5000 index and Russell index as shown below: -

Returns by investment style = Returns from WillShire 5000 - Returns from Russell 3000

Returns by investment style = 25.2 - 21.7 =3.5%

Therefore large cap investment style outweighs the ranking investment style by 3.5%

(ii).

Returns due to active management would be the difference of the returns earned by money manager and the Willshire 5000 index as shown below: -

Returns due to active management = Returns from investment management fund - Returns from Will share 5000

Returns due to active management = 18.9 - 25.2 = -6.3%

(iii).

The implications to the performance of Anderson investment management fund is that the style of the manager was in favor as returns from investment style were positive but the manager's investment fund failed to perform as per the benchmark established by both indexes namely Russel and Willshire as the returns due to active management are negative at -6.3%