equity portfolio management[1].ppt

8/4/2019 Equity Portfolio Management[1].Ppt

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Equity Portfolio

Management


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Role of the Equity Portfolio

significant source of wealth today equities constitute differing proportions of

average portfolio weights in different countries one characteristic important to investors across

markets is ability to be an inflation hedge equities have comparatively high historical long-term

rates of return

in study of 17 countries the long term real rates ofreturn to equities exceeded that of bonds in allcountries


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Equity Investment passive management

active management

semiactive management


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Passive Management no attempt to reflect investment

expectations through changes in security

holdings indexing

attempt to match the performance of somebenchmark

in US alone, more than $1 trillion ininstitutional indexed equities


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Active Management

principle way historically that investorsmanage equities

even with growth of indexing, still accounts foroverwhelming majority of equity assetsmanaged

seek to outperform benchmark


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Semiactive Management enhanced indexing or risk-controlled active

management

seek to outperform benchmark but managerworries more about tracking risk than activemanager and builds portfolio that will have

limited volatility around benchmarks return


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Indexing, Enhanced Indexing, and

Active Approaches: A ComparisonIndexing Enhanced

IndexingActive

ExpectedActiveReturn

0% 1% - 2% 2% +

TrackingRisk


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Passive Equity Investing 1971 - Wells Fargo 1st indexed portfolio 1973 Wells Fargo has commingled index fund

for trust accounts 1976 Wells Fargo combines funds and uses

S&P 500 as template for combined portfolio 1981 Wells Fargo has fund to track market

outside of S&P 500 1975 Bogle at Vanguard launches 1st broad-

market index fund for retail investors


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Indexing many studies have found that the average active

institutional portfolio fails to beat the relevant comparisonindex after expenses often difference in performance is found to be close to average

expense disadvantage of active management

compared with the average actively managed fund that hassimilar objectives, a well-run indexed funds major advantage isexpected superior long-term net-of-expenses performancebecause of relatively low portfolio turnover

management fees

high tax efficiency


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Equity Indices indexes are portfolio management benchmarks

also used

to measure return of a market or market segment

as basis for creating an index fund

to study factors that influence share price movements

to perform technical analysis

to calculate a stocks systematic risk


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Equity Indices characteristics of index

boundaries of indexs universe

criteria for inclusion in the index

how the stocks are weighted

how returns are calculated


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Index Weighting one of greatest differences among indexes due to how components

are weighted price-weighted each stock is weighted according to its absolute share

price

value-weighted each stock is weighted according to its market cap float-weighted index

equal-weighted each stock is weighted equally

different weighting schemes can lead to different biases PW biased towards highest price stock VW biased towards the shares of firms with the largest market caps

(likely large and mostly mature firms and possibly overvalued firms) EW biased towards small firms because these indexes have many more

small firms than large firms and it must be rebalanced periodically


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Problem of Benchmark Index

SelectionStephen Alcorn is a portfolio manager at Amanda Asset Management (AAM). At the end

of 2002, a wealthy client engaged Alcorn to manage $10,000,000 for one year in anactive focused equity style. the investment management contract specificed asymmetric incentive fee of $10,000 per 100 bps of capital appreciation relative to thatof an index of the stocks slected for investment. (Symmetric means that the incentive

fee will reduce the investment management fee if benchmark-relative performance isnegative.) In an oversight, the contract leaves open the method by which thebenchmark index will be calculated. Alcorn invests in shares of Eastman Kodak,McDonalds, Intel, Merck, Wal-Mart, and Microsoft achieving a 15.9% price return forthe year. The table gives information on the 6 stocks. Using only the informationgiven, address the following:

1. For each of the 6 shares, explain the price-only return calculation on the followingindices for the period 12/31/2002 to 12/31/2003:

1. PW index2. VW index3. Float-weighted index4. EW index

2. Recommend the appropriate benchmark index for calculating the performanceincentive fee on the account and determine the amount of that fee.


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Equity Market Data for the Shares of Six Companies

Share price Share price Price MV Shares MV Shares Free Float

12/31/2002 12/31/2003 Change 12/31/2002 12/31/2003 Factor

(millions) (millions)Kodak 35.04 24.85 -29.10% 10,056 7,132 1

McDonald's 16.08 24.09 49.80% 20,406 30,570 1

Intel 15.57 31.36 101.40% 101,703 204,844 1

Merck 53.58 45.1 -15.80% 119,216 100,348 1

Wal-Mart 50.51 53.05 5.00% 221,992 233,154 0.6Microsoft 25.85 27.37 5.90% 277,060 293,352 0.85

Total 750,433 869,400


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Passive Investment Vehicles investment in an indexed portfolio

a long position in cash plus a long positionin futures contracts on the underlyingindex

a long position in cash plus a long position

in a swap on the index


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Indexed Portfolios conventional index mutual funds

exchange-traded funds

separate accounts or pooled accounts (mostlyfor institutional investors designed to track abenchmark index)

indexing can be done by

full replication stratified sampling

optimization


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Value and Growth Styles Value substyles

low P/E

contrarian

high yield

Growth substyles

consistent growth

earnings momentum


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Equity Styles Blend or Core Investor

market-oriented

market-oriented with a value (growth) bias

growth-at-a-reasonable-price

style rotators


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A

ctive Investing Socially Responsible Investing

integrates ethical values and societal

concerns with investment decisions negative screens

Long-Short Investing value added is alpha

market neutral strategy

pairs trade/pairs arbitrage


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Long-Short Investing price inefficiency on the short side

many investors look for undervalued stocks but because of theconstraints many have on shorting, fewer search for overvalued stocks

opportunities to short may arise due to management fraud, window-

dressing, or negligence sell-side analysts issue many more reports with buy recommendations

than with sell recommendations sell-side analysts may be reluctant to issue negative opinions on

companies stocks for reasons other than generic ones such as that astock has become relatively expensive

long-short strategies can make better use of a portfolio managersinformation because both rising and falling stocks offer profitpotential rather than simply avoiding a stock with a bad outlook, a long-short

manager can short it thereby earning the full performance spread


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Semiactive Equity Investing enhanced index or risk-controlled active

strategies

basic forms

derivatives-based strategies

stock-based strategies

equity portfolio management[1].ppt

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