Chapter-17-Equity-Portfolio-Management-Strategies(

LecturePresentationSoftwaretoaccompanyInvestmentAnalysisandPortfolioManagementSeventhEditionbyFrankK.Reilly&KeithC.BrownChapter17Chapter17-EquityPortfolioManagementStrategiesQuestionstobeanswered:•Whatarethetwogenericequityportfoliomanagementstyles?•Whatarethreetechniquesforconstructingapassiveindexportfolio?•Howdoesthegoalofapassiveequityportfoliomanagerdifferfromthegoalofanactivemanager?•Whatisaportfolio’strackingerrorandhowisitusefulintheconstructionofapassiveequityinvestment?Chapter17-EquityPortfolioManagementStrategies•Whatisthedifferencebetweenanindexmutualfundandanexchange-tradedfund?•Whatarethethreethemesthatactiveequityportfoliomanagerscanuse?•Whatstockcharacteristicsdifferentiatevalue-orientedandgrowth-orientedinvestmentstyles?•Whatisstyleanalysisandwhatdoesitindicateaboutamanager’sinvestmentperformance?Chapter17-EquityPortfolioManagementStrategies•Whattechniquesareusedbyactivemanagersinanattempttooutperformtheirbenchmark?•Whataredifferencesbetweentheintegrated,strategic,tactical,andinsuredapproachestoassetallocation?•Howcanfuturesandoptionsbeusefulinmanaginganequityportfolio?PassiveversusActiveManagement•Passiveequityportfoliomanagement–Long-termbuy-and-holdstrategy–Usuallytracksanindexovertime–Designedtomatchmarketperformance–Managerisjudgedonhowwelltheytrackthetargetindex•Activeequityportfoliomanagement–Attemptstooutperformapassivebenchmarkportfolioonarisk-adjustedbasisAnOverviewofPassiveEquityPortfolioManagementStrategies•Replicatetheperformanceofanindex•Mayslightlyunderperformthetargetindexduetofeesandcommissions•Costsofactivemanagement(1to2percent)arehardtoovercomeinrisk-adjustedperformance•ManydifferentmarketindexesareusedfortrackingportfoliosIndexPortfolioStrategyConstructionTechniques•Fullreplication•Sampling•QuadraticoptimizationorprogrammingFullReplication•Allsecuritiesintheindexarepurchasedinproportiontoweightsintheindex•Thishelpsensureclosetracking•Increasestransactioncosts,particularlywithdividendreinvestmentSampling•Buysarepresentativesampleofstocksinthebenchmarkindexaccordingtotheirweightsintheindex•Fewerstocksmeanslowercommissions•Reinvestmentofdividendsislessdifficult•Willnottracktheindexasclosely,sotherewillbesometrackingerrorExpectedTrackingErrorBetweentheS&P500IndexandPortfolioSamplesofLessThan500StocksExhibit17.250040030020010002.01.03.04.0ExpectedTrackingError(Percent)NumberofStocksQuadraticOptimization(orprogrammingtechniques)•Historicalinformationonpricechangesandcorrelationsbetweensecuritiesareinputintoacomputerprogramthatdeterminesthecompositionofaportfoliothatwillminimizetrackingerrorwiththebenchmark•Thisreliesonhistoricalcorrelations,whichmaychangeovertime,leadingtofailuretotracktheindexMethodsofIndexPortfolioInvesting•IndexFunds–Attempttoreplicateabenchmarkindex•Exchange-TradedFunds–EFTsaredepositoryreceiptsthatgiveinvestorsaprorataclaimonthecapitalgainsandcashflowsofthesecuritiesthatareheldindepositbyafinancialinstitutionthatissuedthecertificatesAnOverviewofActiveEquityPortfolioManagementStrategies•Goalistoearnaportfolioreturnthatexceedsthereturnofapassivebenchmarkportfolio,netoftransactioncosts,onarisk-adjustedbasis•Practicaldifficultiesofactivemanager–Transactionscostsmustbeoffset–RiskcanexceedpassivebenchmarkFundamentalStrategies•Top-downversusbottom-upapproaches•AssetandsectorrotationstrategiesSectorRotation•Positionaportfoliototakeadvantageofthemarket’snextmove•Screeningcanbebasedonvariousstockcharacteristics:–Value–Growth–P/E–Capitalization–SensitivitytoeconomicvariablesTechnicalStrategies•Contrarianinvestmentstrategy•Pricemomentumstrategy•EarningsmomentumstrategyValueversusGrowth•Growthstockswilloutperformvaluestocksforatimeandthentheoppositeoccurs•OvertimevaluestockshaveofferedsomewhathigherreturnsthangrowthstocksValueversusGrowth•Growth-orientedinvestorwill:–focusonEPSanditseconomicdeterminants–lookforcompaniesexpectedtohaverapidEPSgrowth–assumesconstantP/EratioValueversusGrowth•Value-orientedinvestorwill:–focusonthepricecomponent–notcaremuchaboutcurrentearnings–assumetheP/EratioisbelowitsnaturallevelStyle•Constructaportfoliotocaptureoneormoreofthecharacteristicsofequitysecurities•Small-capitalizationstocks,low-P/Estocks,etc…•Valuestocksappeartobeunderpriced–price/bookorprice/earnings•Growthstocksenjoyabove-averageearningspershareincreasesDoesStyleMatter?•Choicetoalignwithinvestmentstylecommunicatesinformationtoclients•Determiningstyleisusefulinmeasuringperformancerelativetoabenchmark•Styleidentificationallowsaninvestortodiversifybyportfolio•StyleinvestingallowscontrolofthetotalportfoliotobesharedbetweentheinvestmentmanagersandasponsorDeterminingStyle•Stylegrid:–firmsize–value-growthcharacteristics•Styleanalysis–constrainedleastsquaresBenchmarkPortfolios•Sharpe–T-bills,intermediate-termgovernmentbonds,long-termgovernmentbonds,corporatebonds,mortgagerelatedsecurities,large-capitalizationvaluestocks,large-capitalizationgrowthstocks,medium-capitalizationstocks,small-capitalizationstocks,non-U.S.bonds,Europeanstocks,andJapanesestocksBenchmarkPortfolios•Sharpe•BA