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1. Introduction

Portfolio investment is a combination of financial assets owned by institutions or individuals

to maximize returns or minimize risks. One investment strategy that is often used is growth
investing. Growth investors will invest in stocks that have impressive potential returns in the
future. To find out whether their objectives have been achieved or not, investors need to
evaluate the performance of their portfolio regularly. The portfolio performance evaluation in
this paper focuses on growth with a target of 10% pa. This portfolio is formed from five shares
from various industry sectors domiciled in the United Kingdom with ownership periods from
29 January 2016 to 31 January 2020. These shares are Associated British Foods PLC (ABF),
Ashtead Group PLC (AHT), Burberry Group PLC (BRBY), Easyjet PLC (EZJ); Ocado Group
PLC (OCDO).

2. Portfolio performance evaluation

A good portfolio is a well-diversified portfolio. Markowitz (1952) argues that if risks are to be
minimized, diversification strategies must be undertaken. Based on the analysis of portfolio
correlation, it can be found that the relationship between stocks in the portfolio is well-
diversified. Furthermore, evaluation of portfolio performance will be carried out through three
parameters, namely performance measurement, risk measurement, and financial analysis.

2.1. Performance Measurement

There are three stocks (AHT, BRBY, and OCDO) that have an upward trend during the
investment period. OCDO's share price experienced a rapid increase at the end of the period,
while ABF and EZJ have a downward trend. ABF's share price decreased significantly
compared to the other four shares. EZJ provides the highest dividend, while OCDO does not
pay dividends to its shareholders. Companies that focus on growth rarely pay dividends, and
some of them have not been able to generate profits. On the other hand, the volatility of EZJ
shares was quite high during the ownership period. Most companies that do not have growth
potential tend to provide high dividends to attract investors or to keep shareholders. Afza and
Mirza (2011) state that an increase in dividends also signifies a low growth opportunity for
companies.

2.1.1. Portfolio return

Based on Compound AGR calculation, only ABF gives a negative return (-3.19%). In contrast,
stocks that provide fantastic returns are OCDO (46.53%). The considerable return on OCDO
explains why OCDO is the only stock in the portfolio that does not pay dividends. OCDO is a
retail business that has a focus on technology and automation for e-commerce businesses.
Companies whose primary goal is to translate technology into products enjoy faster growth
(Delapierre et al. 1998). Overall, this portfolio only produced 8.45% growth, thus failing to
reach the growth target set.

3. Risk Measurement
3.1. Standard deviation and beta

Standard deviation is used to measure the level of investment volatility. The higher the
volatility, the riskier a stock is. OCDO has the highest standard deviation among other shares,
while ABF is the lowest. The measurement of standard deviation is slightly different from beta
because it compares to the volatility of historical data of share price rather than the benchmark
index. AHT and OCDO, with beta coefficients of 1.40 and 1.24 respectively, represent a riskier
investment than others, while ABF, with a beta coefficient of 0.75, represents a less risky. The
beta of the portfolio itself is 1.07, which indicates a higher level of volatility compared to the
market and therefore becomes riskier.

3.2. Value at Risk (VaR)

VaR measures the maximum loss that cannot be exceeded at a given confidence level. OCDO
has a VaR value of -4% and -7.75% for a confidence level of 95% and 99% respectively. That
means that at that level of confidence, the worst daily loss in OCDO share ownership is
expected to be no more than 4% and 7.75%. This VaR value makes OCDO as the stock with
the highest level of risk. Meanwhile, ABF shows the lowest VaR value. In general, the VaR
value in the portfolio recorded indicates that the portfolio value will not depreciate more than
1.93% with a confidence level of 95%.

3.3. Capital Asset Pricing Model (CAPM)

The main desire of investors is to minimize risk and increase returns. Treynor (1962) stated
that CAPM provides a precise expectation of the relationship between the expected return of
an asset and its risk. In evaluating shares using CAPM, the following assumptions apply:
United Kingdom 5 Year Bond Yield (UK5YB) is used as risk-free rate (Rf) while FTSE100 is
used as the return on the market (Rm). UK5YB is used as risk-free rate with the consideration
that UK5YB has a similar period to the portfolio period and is risk-free government bonds.

Based on stock evaluations using CAPM, OCDO has the largest expected rate of return (E(Ri))
of 0.021%, while ABF has the lowest return of 0.013%.
Figure 1 Single Market Line

Single Market Line

0.03%

0.02%

0.02%
E(Ri)

0.01%

0.01%

0.00%
0 1 2
Beta

Figure 1 shows the relationship between systematic risk (beta) and E(Ri). The slope of the
relationship represents the risk-return trade-off of a share.

Figure 2 Stock Evaluation

Stock Evaluation
0,000%

0,000%

0,000%

0,000%

0,000%

0,000%

0,000%

0,000%

0,000%
ABF LN Equity AHT LN Equity BRBY LN Equity EZJ LN Equity OCDO LN Equity
0,000%

0,000%

E(Ri) Ri

Figure 2 shows a comparison between individual stock returns (Ri) and expected stock returns
(E(Ri)). Efficient stocks are stocks with individual returns greater than expected returns. The
results showed that there were three efficient shares (AHT, BRBY, OCDO) and two inefficient
shares (ABF, EZJ).

3.4. Sharpe Ratio

The Sharpe ratio focuses on total risk (systematic and unsystematic risk) measured in absolute
terms. Based on the calculation, OCDO produces the highest Sharpe ratio (6.128%) while ABF
is the only stock that has a negative Sharpe ratio, and this means that ABF’s return is lower
than Rf. Overall, the portfolio showed a Sharpe ratio of 2.768%. Nevertheless, these results are
still far from an optimal portfolio. a Sharpe ratio of more than one is considered to have a better
risk-to-reward trade-off.

3.5. Efficient Frontier

Portfolio optimization can be done by maximizing returns for a given amount of risk or by
minimizing risks for a given level of expected returns. A portfolio that only consists of OCDO
(100%) is capable of producing the maximum return. Meanwhile, to produce global minimum
variance (GMV) portfolio, the following proportions apply: ABF (42.78%), AHT (21.06%),
BRBY (24.01%), EZJ (9.47%), and OCDO (2.68%). The large difference between the
proportion of EZJ in the actual portfolio and GMV is one of the factors causing the failure to
reach the target set.

4. Financial Analysis
4.1. Price to earnings (P/E) ratio

Company valuation can be done by comparing the value of a company with its industry. P/E
ratio is one instrument that can be used as a comparison. P/E ratio is a good predictor of equity
return (Basu 1997, Campbell and Shiller 1998). Based on the latest financial statements, ABF,
BRBY, and EZJ have a P/E ratio that exceeds the industry average. In contrast, the remaining
two companies struggle to match the industry average. Damodaran (2006) stated that higher
growth companies will have a higher P/E ratio than lower growth companies, assuming ceteris
paribus.

4.2. Free Cash Flow

Some investors tend to follow the cash, specifically the free cash flow, to measure growth
potential. During the ownership period, three shares had strong free cash flow (ABF, AHT, and
BRBY). Strong free cash flow may help these companies grow because they have capital for
R&D. Negative free cash flow can be found on EZJ and OCDO due to high capital expenditure.
Companies that show a high level of capital expenditure have a big opportunity to grow (Ross
et al. 2015). When looking at stock price movements, the statement may apply to OCDO, but
not to EZJ.

4.3. Return on Equity

In the past four years, BRBY has shown a consistent increase in ROE. ROE on ABF, AHT,
and EZJ tends to fluctuate but is still higher than the cost of equity. Companies that have ROE
higher than their cost of equity are growing companies (Laopodis 2012). Negative ROE on
OCDO is caused by losses suffered by OCDO in the last two years. The growth that is not
accompanied by profitability is doubtless sustainable in the long run. Companies that grow at
the expense of their profits can face financial difficulties because they are forced to seek
external financing (Fitzsimmons, Steffens, and Douglas 2005). The statement was proven in
OCDO's debt to equity ratio, which is above 50%.

4.4. Debt to Equity ratio

BRBY is an attractive stock because it provides a pretty good capital gain and has a promising
profitability rate. Besides, BRBY’s debt to equity ratio is classified as very low, with an
average of 0.024 during the ownership period. On the other side, AHT’s debt to equity ratio is
always above 1. Companies that have huge obligations will undoubtedly have higher default
risk, and of course, investors do not want that. When the company faces insolvency, the
creditors are to be paid before the shareholders receive anything (Boatright 1999).

5. Conclusion
The portfolio failed to reach the 10% growth target pa, although some stocks in the portfolio
had growth characteristics. The failure was caused by the portfolio composition that was not
optimal, the existence of shares that underperformed, and poor financial performance.

References

Afza, T. and Mirza, H., (2011). Do Mature Companies Pay More Dividends? Evidence from
Pakistani Stock Market. Mediterranean Journal of Social Sciences. 2(2), 152-161.
Basu, S., (1977). Investment performance of common stocks in relation to their price to
earnings ratios: A test of the efficient market hypothesis. Journal of Finance. 32(3), 663–682.
Boatright, J.R., (1999). Ethics in Finance. Oxford: Blackwell.
Campbell, J. Y. and Shiller, R. J., (1998). Valuation ratios and the long-run stock market
outlook. Journal of Portfolio Management. 24(2), 11–26.
Damodaran, A., (2006). Damodaran on Valuation. 2th ed. New York: John Wiley & Sons Inc
Delapierre, M. et al., (1998). NTBFs: the French case. Research Policy. 26, 989–1003.
Fitzsimmons, J., Steffens, P., and Douglas, E., (2005). Growth and profitability in small and
medium sized Australian firms. In Proceedings AGSE Entrepreneurship Exchange.
Melbourne.
Laopodis, N. T., (2012). Understanding Investments: Theories and Strategies. Oxfordshire:
Routledge.
Markowitz, H.M., (1952). Portfolio Selection. Journal of Finance. 7, 77-91.
Ross, S. A. et al., (2015). Administração Financeira. Corporate Finance (10th ed.). Porto
Alegre: AMGH.

Appendix
Table A1 Stock Correlation
ABF LN AHT LN BRBY LN EZJ LN OCDO LN
EQUITY EQUITY EQUITY EQUITY EQUITY
ABF LN EQUITY NA NA NA NA NA
AHT LN EQUITY -0,56 NA NA NA NA
BRBY LN EQUITY -0,49 0,91 NA NA NA
EZJ LN EQUITY 0,31 0,14 0,06 NA NA
OCDO LN EQUITY -0,65 0,75 0,77 -0,02 NA

Table A2 Dividend
Stock Total Dividend
ABF LN Equity 134.485,23
AHT LN Equity 101.289,62
BRBY LN Equity 158.823,77
EZJ LN Equity 164.302,17
OCDO LN Equity -
Portfolio 558.900,79

Table A3 Rate of Returns

Inception Capital Return Simple return Compound
Weighting (ex Costs) AGR
ABF LN Equity 43.41% -17% -12% -3,19%
AHT LN Equity 12.51% 173% 184% 29,85%
BRBY LN Equity 20.45% 63% 75% 15,04%
EZJ LN Equity 21.14% -10% 2% 0,60%
OCDO LN Equity 2.50% 363% 359% 46,35%
Portfolio Total 34% 38% 8,45%

Table A4 Standar deviation

Daily Standard Deviation Annualised Standard Deviation

ABF LN Equity 1,53% 29,2%

AHT LN Equity 1,84% 35,1%
BRBY LN Equity 1,82% 34,7%
EZJ LN Equity 2,23% 42,6%
OCDO LN Equity 3,14% 60,0%
Portfolio Total 1,22% 23,37%
Table A5 Value at Risk
Closing Valuation ex 95% VaR 95% VaR £ 99% VaR VaR £
dividends
ABF LN Equity £2.088.457,80 -2,30% -£48.045,41 -3,74% -£78.059,48
AHT LN Equity £1.971.193,15 -2,91% -£57.275,07 -4,98% -£98.092,48
BRBY LN Equity £1.928.997,63 -2,74% -£52.908,18 -5,58% -£107.709,78
EZJ LN Equity £1.097.711,86 -3,12% -£34.238,65 -6,29% -£69.079,27
OCDO LN Equity £667.480,43 -4,00% -£26.725,48 -7,75% -£51.696,95
Portfolio Total £7.753.840,87 -1,93% -£149.334,14 -2,95% -£228.540,70
Portfolio Diversification Benefit £69.858,65 £176.097,25

Tabel A6 Stock Evaluation using CAPM

Stock Beta Rf RMRF E(Ri) Ri Ri - E(Ri) Stock
Evaluation
ABF LN Equity 0.75 0.00002 0.00015 0.013% -0.018% - 0.00031 Not
Efficient
AHT LN Equity 1.40 0.00002 0.00015 0.023% 0.094% 0.00071 Efficient
BRBY LN Equity 1.15 0.00002 0.00015 0.020% 0.047% 0.00028 Efficient
EZJ LN Equity 0.87 0.00002 0.00015 0.015% -0.011% - 0.00026 Not
Efficient
OCDO LN 1.24 0.00002 0.00015 0.021% 0.148% 0.00127 Efficient
Equity

Table A7 Performance appraisal

Mean SD Beta Sharpe Treynor Jensen
Ratio Ratio Alpha
ABF LN Equity - 0.00008 0.015265 0.751088 - 0.00495 - 0.00010 - 0.00021
AHT LN Equity 0.00109 0.018347 1.397162 0.05949 0.00078 0.00084
BRBY LN Equity 0.00062 0.018177 1.147607 0.03397 0.00054 0.00041
EZJ LN Equity 0.00013 0.022321 0.874176 0.00580 0.00015 - 0.00003
OCDO LN Equity 0.00192 0.031411 1.243933 0.06128 0.00155 0.00170
Portfolio 0.00034 0.012231 1.051998 0.02768 0.00032 0.00015

Table A8 Portfolio Optimization

Weight (Max Return) Weight (Min Variance)
ABF LN EQUITY 0,00% 42,78%
AHT LN EQUITY 0,00% 21,06%
BRBY LN EQUITY 0,00% 24,01%
EZJ LN EQUITY 0,00% 9,47%
OCDO LN EQUITY 100,00% 2,68%
Figure A1 Benchmarking (ABF LN Equity and FTSE Food Production Rebased)

The food production sector is the sector that has the lowest performance compared to other
sectors in the portfolio, the movement of this sector tends to decrease during the period of share
ownership even though at the end of the period the trend shows a slight increase. ABF's stock
performance shows the same trend as FTSE's performance in the food production sector.
However, when compared, it can be concluded that ABF's performance is less than optimal
because the movement of the food production sector is slightly above ABF shares (The
movements of the sectors reveal far more).

Figure A2 Benchmarking (OCDO LN Equity and FTSE Food Production Rebased)

The movement of the food and drug retailers sector tends to be stable during the ownership
period. OCDO stock movements showed a similar trend to movements in the food and drugs
retailer sector, but this trend only lasted for approximately two years. OCDO shares show a
different trend when compared to their sectors, OCDO shares show a relatively rapid increase
in the last two years and can be said to be an outlier in the food and drug retailers sector.
Figure A3 Benchmarking (Five shares in the portfolio and FTSE All-share)

When compared to FTSE All-Share, there are two underperformed shares (EZJ and ABF) and
three outperformed shares (OCDO, AHT, and BRBY), as the chart shows. AHT and BRBY
made constant gains, while OCDO showed a very significant increase at the end of the
ownership period and made it the top performers.

Figure A4 Benchmarking (Portfolio and FTSE All-Share)

Figure A4 shows that portfolio performance is below the FTSE All-Share at the beginning but
managed to outperform at the end of the period.

Figure A5 Share price

SHARE PRICE
4000

3000

2000

1000

0
1/29/2016 1/29/2017 1/29/2018 1/29/2019 1/29/2020

ABF LN Equity Price AHT LN Equity Price

BRBY LN Equity Price EZJ LN Equity Price