16. Investment Management Flashcards
What’s the main benefit benefit of Active investment management?
Expected to give greater return
What’s the 2 trade-offs of using Active investment management?
- greater risk
- additional costs of regular transactions and paying fund manager
What does passive investment management involve?
Holding assets which closely reflect a specific index
What’s the caveat to passive investment management
they are not entirely risk free
What is tactical asset allocation?
A short-term technique involving switching between different investment in search of the highest returns
Give the 3 main considerations when selecting an investment management technique
- expected return relative to risk
- expense of technique
- tax liability on expected returns
What is risk budgeting?
Establishing how much risk should be taken and where it’s most efficient to do so to maximise returns
What are the 2 parts to risk budgeting?
- Deciding how much to allocate to active management
- Allocating the active strategy across portfolios
What are the 2 objectives of an investment fund?
- Ensure security
- Achieve long-term returns
How can the balance between security and returns be set?
Using a strategic benchmarking
What’s “strategic risk”
The risk of poor performance of the strategic benchmark relative to liabilities
Under which management trechnique do, within guidelines, investment managers have freedom over stock selection
Active management
Why is it essential to assess active fund performance at regular intervals?
- The liability structure may have changed
- manager performance may be out of line with other funds
How can fund managers be monitored?
By setting performance objectives
What’s the trade-off with setting restrictions on fund managers
The most restrictions on a manager, the less appropriate it is for them to be held to performance objectives
Name the 6 risks involved in investments
- Tactical asset allocation risk
- Historic tracking error risk
- CPD risk
- Equity market risk
- Duration risk
- Forward-looking tracking error risk
What is tactical asset allocation risk?
The risk of active management over-tracking a benchmark index
What is historic tracking error?
Retrospective tracking between a benchmark and returns
How can CPD risk be measured?
Using the capital requirement against it
What’s duration risk?
The risk that assets and liabilities don’t match in terms of duration
Give the 2 methods of monitoring the performance of an investment strategy
- Comparative performance - benchmarking
- Time Weighted Rate of Return (TWRR)
What things need to be included when comparing to benchmarks
- Fees
- Tax
What should be considered when deciding how frequently to compare to benchmarks?
short-term fluctuations
What is the industry standard method of comparing active fund manager performance?
TWRR (Time Weighted Rate of Return)
How do TWRR (Time Weighted RoR) and MWRR (Money…) differ in their benefits?
MWRR is better at finding a good small-fund manager whereas TWRR is better at finding a good large-fund manager
What’s the main limitation of TWRR (Time Weighted RoR)?
Doesn’t penalise for deposits or withdrawals which are outside of fund manager control
