portfolio management and evaluating investments. buy-side buy-side analyst: reports to pm, delivers...
TRANSCRIPT
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PORTFOLIO MANAGEMENT AND EVALUATING
INVESTMENTS
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BUY-SIDE
Buy-side analyst: reports to PM, delivers
trade ideas from research/analysis
Buy-side trader: carries out PM’s
instructions
MARKET PARTICIPANTS
Portfolio Manager (“PM”) makes decisions about which securities to buy and sell in his/her
portfolioSELL-SIDE
Sell-side analyst: makes recommendations on
stocks in his/her “space”Salesperson:
markets sell-side analyst’s research, recommendations
to the buy side Sell-side trader:
executes trades for buy side
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• Total Return: the percentage change in the value of a security over a specific time horizon• Has two components:• Price appreciation (capital gain)• Dividends (distributions)
• Individual Security total return analysis• TRA<GO>, COMP<GO>• Risk-Free Return• Excess Return
EVALUATING PERFORMANCE: TOTAL RETURN
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• Market Value of individual security price * number of shares• Market value of portfolio
sum of all individual security’s market values• Weight of individual security
MV of security / MV of portfolio• Total return
(current value – initial value) / initial value• Total return of portfolio
weighted average (i.e. sum of each security’s weight * TR) • P&L = MV of day 2 – MV of day 1
PORTFOLIO RETURN CALCULATIONS
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• A PM uses a benchmark to determine if the return on their portfolio over a specific time period was relatively good or bad
• Active strategy: Attempt to beat the benchmark in risk-adjusted return
➔ Alpha/Active Return • Passive strategy: Attempt to replicate the
risk/return of the benchmark➔ Tracking Error
RELATIVE RETURNS
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• Beta: correlation of the returns of a stock with the returns of the overall market; BETA<GO>, HRA<GO>• The percent change in price of a stock
given a 1% change in the price of the overall market • Beta < 1• Beta = 1• Beta > 1
• Portfolio Beta: weighted average
RISK MEASURES
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• What is a portfolio?• Who are the market players?• Why is diversification important?• What are the two approaches of asset
allocation? • What are the two components of an
individual security’s total return?• If I am a passive portfolio manager what
is my goal? Would I track alpha or tracking error?
REVIEW OF PORTFOLIO THEORY
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• PRTU: You can manually enter in your positions and costs on PRTU.
• Excel• Drag & Drop into PRTU• BBU<GO> upload
CREATING A PORTFOLIO
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IMPORTANT PRTU SETTINGS
Field Description
Position type Defines if the portfolio uses fixed weights, drifting weights, or shares. This cannot be changed once selected.
Asset Class Defines the asset class of the portfolio. Choices are: Equity, Fixed income, Balanced, or Fund of Funds
Base Currency
Defines what currency the portfolio is denominated in
Enable history
Allows history to be stored for the portfolio
Enable data acquisition
Allows historical analytics to be run on the portfolio (HFA, attribution, performance)
Futures margin type
Sets what type of margin will be associated with futures
Short margin type
Sets what type of margin will be associated with short positions
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• Mkt Px: exchange price in local currency• Market Val: value of total position in portfolio currency
➔Position*Mkt Px*FX Rate• Cost Price: price the security was bought
➔ Can we write in the same security for different cost prices?
➔ Holdings based vs. Transaction based analysis
PRTU COLUMNS
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• Fixed weight – Securities have fixed weights which remain the same over time. This implies that the portfolio is rebalanced each day
• Drifting weight – Securities have weights which will change daily to reflect the price changes from the previous day; act like Shares portfolios
• Shares - securities have actual number of shares or par amount of bonds you hold
FIXED VS. DRIFTING VS. SHARES
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IMPORTING TO PRTU
Date you are importing from (copy from this date)
Date you are Importing to (Pasting on this date)
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• CHECK POINT: ANY date we made ANY changes on the portfolio, ANY date we inputted / removed ANYTHING from our portfolio
PRTU: CHECK POINTS
TODAY01/01/10 03/01/11
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• BBU<GO> is a way for clients to automatically upload their portfolio holdings without having to manually go into PRTU and change them.
• Types of uploads:• FTP Upload – Portfolio holdings come directly from 3 rd
party (accounting service, holding company, etc.)• Basic – Portfolio holdings are stored on clients
computer and are uploaded by the client. • ***Note: basic uploads can be scheduled to run
“automatically once per day”
UPLOADING USING BBU<GO>
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Basic FTP
Client must be logged in to terminal for upload to take place
File will automatically be uploaded even if the client is not logged in
No additional software or configuration needed
Small additional cost for software needed for setup
Must be run from the same location/machine as Bloomberg terminal
Can be run on any machine
BASIC VS. FTP
• Both are limited to 2 years of history when uploading • Both can update up to 50 portfolios a day
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Prepare Upload File• The required columns will be different
depending on the type of portfolio you want to upload. For all uploads Security ID and Quantity are needed. • Valid Security ID’s : ISIN, CUSIP, SEDOL,
Equity Ticker, Any ID with Yellow market sector key• Quantity values: Shares or weights (short
positions are not available for weights)• Margin and Cash: • Ticker for short margin = CASH SHORTS• Ticker for futures margin = CASH FUTURES• Cash ticker is just spot ticker. USD CURNCY
BBU<GO> STEPS TO UPLOAD
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Format• The file should be a list of end of day holdings for the dates you made changes to the portfolio, even for positions that did not change on that day. • For example if you have 100 shares of IBM and 100
shares of GOOG on 1/1/2011 and then you sell 25 shares of IBM on 3/1/2011 the file should look like:
STEPS TO UPLOAD
Port name Security ID Quantity Date
Sample IBM 100 01/01/2011
Sample GOOG 100 01/01/2011
Sample IBM 75 03/01/2011
Sample GOOG 100 03/01/2011
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• Upload the file• Save the sheet to your computer. Run BBU<GO>
choose the fi le using the fi le paths on the top half of the screen then 4) Upload
• Map the file• Once the fi le is uploaded choose “CLICK TO MAP”• The idea is to tell which columns in the sheet represent
the columns in PRTU.
• Map unknown identifiers• Any errors that appear from the upload (unknown
identifiers, wrong tickers) can be fixed
• Set file and portfolio defaults
STEPS TO UPLOAD
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• What are the two tools we can use to create a portfolio? How do they differ?
• If I want to upload two portfolios with history, how many columns do I need in my excel sheet?
• If I create a portfolio today and want to see my total return for the last year, how do I go about doing this?
REVIEW OF CREATING PORTFOLIOS
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• Classification: a way to place a security in a particular group according to their characteristics • Examples: GICS sectors, market cap, analyst• PCLS<GO>• You can also upload custom classification using BBU<GO> uploads
CLASSIFICATIONS
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Cash Margin – a dollar amount . They type is mainly used when clients get their daily holdings from their back office and they simply upload this to our system.
Percentage – Allows users to assume that they are posting x% of the total market value of the short positions without having to calc the dollar amount.
MARGIN TYPES
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Individual Functions PORT<GO> Tabs
PRT<GO> Intraday
PSD<GO> Characteristics
HPA<GO>, BBAT<GO> Holdings
Holdings
HFA<GO> Performance
BBAT<GO> Attribution
VAR<GO> VaR
RSKF<GO> Tracking Error
WRST<GO> Scenarios
INDIVIDUAL FUNCTIONS VS. PORT<GO>
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Attribution: BBAT<GO> or Attribution tab• Definition: Analysis of the impact of a
portfolio manager’s decisions
• Looks at both Allocation and Selection effects of active return • Helps to determine whether investing with
a specific fund has been money well spent
ANALYZING RETURNS- ATTRIBUTION
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Value at Risk• Technique used to analyze potential portfolio
losses. • Portfolio is subjected to a series of scenarios in
order to simulate returns over a given period.
• Two primary methodologies in calculating VaR:• Monte Carlo• Historical
ANALYZING RISK - VAR
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• Shares/Par amount, Fixed or Drifting weight• Review of the columns on PRTU• Being able to back date to generate
history• Importing option on PRTU and
“checkpoints”
PRTU REVIEW
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• PRTU<GO> does NOT automatically adjust for corporate actions• Two ways to fix this• Go to PRTU<GO> and manually adjust for
your corporate actions• Use PMNT<GO> to adjust for your
corporate actions
• Sharing portfolios: PDIS<GO>
PORTFOLIO MAINTENANCE
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Fixed Income View on PORT<GO>
Released to all clients with no additional cost
Currently we do not support balanced portfolios, equity and fixed income on separate views COMING SOON!
FIXED INCOME PORTFOLIOS
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PRTU Settings: need to ensure that the asset
class of the portfolio is set to Fixed Income
Entry of position Divide by 1000 on PRTUOption on BBU divide by 1000Entry of a unique ID: ex. VOD 4.625 Corp, VOD 7
7/8 2030 Corp Position types supported for Fixed
IncomeNo shortsOnly Cash/Par amount (no weighted portfolios)
CREATING AND SETTING UPFIXED INCOME PORTFOLIO
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Assess total return of portfolio AbsoluteRelative to benchmark
Assess risk of portfolioInterest rate risk
Sensitivity to curve changesSensitivity to tenor changes
Credit riskSensitivity to credit spread changes
WHAT DO FIXED INCOME PORTFOLIO MANAGERS LOOK AT?
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YAS<GO> What is Duration (Macauley’s)? What is modified duration? What is DV01?
Is yield to maturity accurate? Is it realistic?
Credit spread What is Spread to benchmark? What is G spread, I spread? Why do we have OAS (conceptually)?
This is standard when looking at portfolios (most logical)
LETS START WITH ONE BOND…
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Basics of the overall portfolioYield, Average life, Coupon (ALM)Want to see this compared to the benchmark?
How do I want to define relative characteristics? Credit (overall)
OASComposite credit rating
Interest rate sensitivity measures (overall)DV01Modified Duration
This is a current snapshot, Use “As of” date on top right to see historical
CHARACTERISTICS TAB
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How has my portfolio done? What is the total return? How much have I outperformed / tracked the benchmark?
Total return for a FI portfolio: Where does it come from? How to break it down?
Can I see components of total return?
HISTORICAL PERFORMANCE
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Explaining the total return values In equity we have Attribution, Selection, and Currency, in Fixed Income how do we break this down?
What can we quantify? Currency (for sure)
How do price and yield move?Curve change (how has the change in curve
affected my return)Curve carry (How much has this contributed to
my return): This is quantifiable as we can directly observe the change – what is remaining is “Excess Return”
FIXED INCOME ATTRIBUTION
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Excess Return broken down intoAllocationSelection
But this depends on the Model – There are 4 choices Brinson (Total Return)*Excess Return (% Market Weighted)Excess Return (Spread Duration Weighted)
Spread Return (Spread Duration Weighted)
FIXED INCOME ATTRIBUTION – EXCESS RETURN
Like Equity
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Brinson (Total Return) More for equities than Fixed Income Only breaks down total return into
allocation, currency, selection, [interaction] (Curve return is not there)
Excess Return (% Market Weighted) Breaks it down in to Curve return and excess Everything that is not explained by curve is
Excess The excess is then broken down into
Allocation and Selection
FI ATTRIBUTION MODELS
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Excess Return Model (SD weighted) Similar to the previous: Still have curve return, in fact the curve return will be identical
Difference is the way its weighted: using spread duration (sensitivity to credit)
More applicable for corporates rather than govies Excess is broken down into: Currency, Allocation, selectionInterpretation of Allocation and Selection similar to
previous: if a sector’s credit spread (relative to benchmark) widens (more risky), decision to LONG sector would generate negative return
Spread ↑ Price ↓ Negative return ➔ negative allocation effect
If credit spreads of portfolio constituents widens Portfolio less sensitive to credit (relative to benchmark) in terms of spread duration ➔ positive selection effect in the case where credit spreads have widened.
FI ATTRIBUTION MODELS
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Spread Return (Spread duration weighted) Again – curve Return is the same Weighting are the same as previous Only difference is that Attribution and Selection effects now broken down furtherAllocation (spread) carry, Allocation (spread)
changeSelection (spread) carry, Selection (spread)
Change Don’t worry about this, specifics not in exam, BUT if curious: IDOC 2065864<GO>
FI ATTRIBUTION MODELS
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Assessing sensitivity: See which sector/group/breakdown has the highest sensitivity so you know what to address first Identify where your interest risk is highly concentrated Identify versus benchmark where your interest risk lies
Passive PM does not want differences between benchmark (immunization)
Active PM will want to outperform the benchmark (therefore want negative)
Key rates – partial sensitivity Relative to benchmark – Long or Short duration?
What is my expectation? Why have I taken this bet? How to configure which curve? What is Key rate and what is DV01? How to show DV01?
KEY RATES ON PORT
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Similar to PORT Shift in interest rates is 1BP UPWARD shift
Cannot do it relative to a benchmark Shows dollar/monetary sensitivity (can see this on PORT as well, cannot change on KRR)
Algorithmics (supports Swaps as well which PORT does not)
KEY RATES ON KRR<GO>
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Similar to equity, factors are differentSpreadYield CurveCurrency
Decompose risk to these factors
Non-factor: cannot be explained
TRACKING ERROR
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Same as equities in methodology
Only factors used in the model are differentCurrencyYield curveSpread
NOTE: If portfolio has swaps and other non-cash instruments, use VAR<GO> instead
VAR ON PORT
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Look at scenarios and how that will affect your position
Assessing how your return changes pending the different scenarios You expect Market value to go UP when interest rates go
DOWN (vice versa) Can it be that Market value go UP when interest rate go UP?
WHY? HINT: Think of what is contributing to my returns
Creating Custom Scenarios Can change the nature of the shock
Instantaneous At horizon date
Security list supported on BSA<GO> help pages
SCENARIOS ON BSA<GO>
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Can do custom shifts like BSA, but also have preset scenarios (Scenario detail tab)
Can stress other factors too (FX rates, Macro etc)
Same reasons/rationale as BSA essentially
SCENARIOS (PORT)