16. Investment Management

Question 1

What’s the main benefit benefit of Active investment management?

Answer 1

Expected to give greater return

Question 2

What’s the 2 trade-offs of using Active investment management?

Answer 2

1. greater risk
2. additional costs of regular transactions and paying fund manager

Question 3

What does passive investment management involve?

Answer 3

Holding assets which closely reflect a specific index

Question 4

What’s the caveat to passive investment management

Answer 4

they are not entirely risk free

Question 5

What is tactical asset allocation?

Answer 5

A short-term technique involving switching between different investment in search of the highest returns

Question 6

Give the 3 main considerations when selecting an investment management technique

Answer 6

• expected return relative to risk
• expense of technique
• tax liability on expected returns

Question 7

What is risk budgeting?

Answer 7

Establishing how much risk should be taken and where it’s most efficient to do so to maximise returns

Question 8

What are the 2 parts to risk budgeting?

Answer 8

1. Deciding how much to allocate to active management
2. Allocating the active strategy across portfolios

Question 9

What are the 2 objectives of an investment fund?

Answer 9

1. Ensure security
2. Achieve long-term returns

Question 10

How can the balance between security and returns be set?

Answer 10

Using a strategic benchmarking

Question 11

What’s “strategic risk”

Answer 11

The risk of poor performance of the strategic benchmark relative to liabilities

Question 12

Under which management trechnique do, within guidelines, investment managers have freedom over stock selection

Answer 12

Active management

Question 13

Why is it essential to assess active fund performance at regular intervals?

Answer 13

1. The liability structure may have changed
2. manager performance may be out of line with other funds

Question 14

How can fund managers be monitored?

Answer 14

By setting performance objectives

Question 15

What’s the trade-off with setting restrictions on fund managers

Answer 15

The most restrictions on a manager, the less appropriate it is for them to be held to performance objectives

Question 16

Name the 6 risks involved in investments

Answer 16

1. Tactical asset allocation risk
2. Historic tracking error risk
3. CPD risk
4. Equity market risk
5. Duration risk
6. Forward-looking tracking error risk

Question 17

What is tactical asset allocation risk?

Answer 17

The risk of active management over-tracking a benchmark index

Question 18

What is historic tracking error?

Answer 18

Retrospective tracking between a benchmark and returns

Question 19

How can CPD risk be measured?

Answer 19

Using the capital requirement against it

Question 20

What’s duration risk?

Answer 20

The risk that assets and liabilities don’t match in terms of duration

Question 21

Give the 2 methods of monitoring the performance of an investment strategy

Answer 21

1. Comparative performance - benchmarking
2. Time Weighted Rate of Return (TWRR)

Question 22

What things need to be included when comparing to benchmarks

Answer 22

1. Fees
2. Tax

Question 23

What should be considered when deciding how frequently to compare to benchmarks?

Answer 23

short-term fluctuations

Question 24

What is the industry standard method of comparing active fund manager performance?

Answer 24

TWRR (Time Weighted Rate of Return)

Question 25

How do TWRR (Time Weighted RoR) and MWRR (Money…) differ in their benefits?

Answer 25

MWRR is better at finding a good small-fund manager whereas TWRR is better at finding a good large-fund manager

Question 26

What’s the main limitation of TWRR (Time Weighted RoR)?

Answer 26

Doesn’t penalise for deposits or withdrawals which are outside of fund manager control