Measuring the relative efficiency of fund management strategies in New Zealand using a spreadsheet-based stochastic data envelopment analysis model

Abstract

Portfolio managers can face cash outflows and possible job loss if their short-term performance temporarily lags behind the competition. The practical relevance of this problem is accentuated in New Zealand where the small number of predominantly resource-based companies has meant that a few unfortunate stock picks by New Zealand fund managers have often led to sharp and sudden divergences amongst managed fund performance. This concern over relative efficiency suggests that data envelopment analysis (DEA) could be helpful when New Zealand fund managers select portfolios, but a stochastic data envelopment analysis (SDEA) approach is necessary due to the chance element in short-term portfolio management performance. This paper proposes a spreadsheet-based numerical SDEA model based upon @RISK in order to alleviate this short-term relative performance aspect of New Zealand portfolio management. The predictive ability of the SDEA model for avoiding portfolios which will display subsequent short-term underperformance is demonstrated using New Zealand investment return data.