Professional Documents
Culture Documents
Portfolio Management
Spring Term Lecture 20+21
ActEd Chapter 20
Management styles
Tells you how the manager will run the
fund.
Helps distinguish between different asset
managers.
Management styles.
Top-down and bottom-up approaches.
Active and passive management.
Growth style.
Manager invests mainly in growth stocks.
Style of investing that emphasizes capital
appreciation.
Growth stocks:
Growth.
Value.
Momentum.
Contrarian.
Rotational.
Value style.
PER
Price-to-book ratio
Dividend yields.
Index-tracking.
Sales growth
Earnings growth
Forecast earnings growth
Return on equity
Earnings revisions
Top-down approach
Bottom-up approach
Starts with micro-analysis at the
company level.
Analyse various factors like:
Top-down approach
For example, during periods of low
inflation, consumer spending increases,
which might be a good time to buy
automobile stocks or retail stocks.
Finally select individual stocks, based on
fundamental share analysis.
Bottom-up approach
Next consider forecasts for the industry
prospects.
Finally consider the general (macro)
economic conditions.
Active management
All the techniques we have seen so far
are examples of active management.
It is an attempt to outperform
the market
the funds peers (where appropriate).
The verdict
Passive management
Makes no attempt to distinguish attractive from
unattractive securities, or forecast securities
prices, or market sectors.
Investors willing to accept average returns.
Makes little or no use of the information active
investors seek out.
Mandates:
Multi-asset or balanced.
Specialist.
Active or passive?
E.g.
Index-tracking
Liability hedging
Immunisation
Matching.
Active or passive?
Active or passive?
Active or passive?
Lower expenses.
Lower volatility.
Will at least make average returns for each
asset class.
Index-tracking: Definition
Index-tracking - Assumptions
Full replication
Use this strategy if the investment fund is
large.
Aim is to minimise tracking error (gross
of tax and expenses).
Index-tracking in practice
Switching
Switching
Switching
Policy switch
Anomaly Switching
Glossary
yield differences
price ratios
price models
yield models.
V =
Anomaly Switching
1 dP
P dy
Anomaly Switching
Yield differences are usually used to
identify cheap and dear bonds.
High gross redemption yield usually
means the bond is cheap.
However, this is may be misleading,
especially if there are tax-related
preferences.
So analyse carefully before making a
decision to switch.
Anomaly Switching
Price ratios can also be used, but
For two bonds A and B, keep a historical
record of the values of the price ratio
PA/PB.
When the ratio reaches an extreme high
or low point, then it usually indicates an
opportunity for a switch.
Problems?
Anomaly Switching
Solution?
Policy Switching
Entails taking a view on future changes
in shape or level of the yield curve and
moving into gilts with quite different
terms to maturity and/or coupon.
More risky
involves taking a view on future
changes to shape and level of yield
curve.
Anomaly Switching
Anomaly Switching
Price models can be built to assess the
theoretically correct price of a bond. A
bonds price is anomalous if the actual
price differs from the price derived from
the model.
Yield models that compare a bonds
yield with the par yield curve can also be
used.
Policy Switching
E.g., if yields in general are expected to
fall, the portfolio may be switched into
longer-dated more volatile stocks.
3 methods for identifying policy switches:
Reminder
Portfolio management could involve
using other assets like interest rate
swaps instead of direct bond investment.
When using such alternatives, check
whether you are rewarded adequately for
the risks taken: