7. (+4) FUND MANAGEMENT Flashcards

Question

Smart beta

Answer 1

passively follow indices, while also considering alternative weighting schemes such as volatility, liquidity, quality, value, size and momentum(not passive) Goal of smart beta strats= generate alpha/lower vol/diversification @ lower cost vs trad active management combines benefits of active and passive smart b funds use rules systematic approach to choosing secs from an index

Answer 2

Factor investing is a strat that involves choosing secs on attributes associated with higher returns attributed of the STOCK not the COMPANY e.g. beta, value, momentum, vol factors exhibit cross correlation which could lead to overlaps and unintended risk concentration

Answer 3

Compromise between trans costs of complete indexation and tracking error of stratified sampling describes portfolio comprising multiple unit trusts/OEICS/ITs blended together suitable for smaller portfolios

Answer 4

Correlated well with changes in corp earnings - earnings up, value tends to perform well from a low base when corp earnings momentum slows, growth outperforms as managers favour comps with greater potential for earnings recovery Unusually low rates have led to outperformance of growth in last 15 yrs - with rates close to zero attractive to take longer duration equity risk rates 22 - tech stocks plumet and value outperforms, war in ukraine compounds this. regional banking crisis 2023 hit financials - important value component mag 7 and nvidia driving growth momentum into 2024

Answer 5

Fund objectives - Investment philosophy Fund strategy Asset selection Perf eval

Answer 6

Client risk pref - ratios between assets, client circs (time horizon, need and ability to take risks, liquidity, tax position, restrictions), beta/durations of equities/bonds, portfolio exposure to systematic risk, currency and liquidity of UL Currency risk - can take active steps to hedge risk with futures/swaps, currencies fluctuate a lot over LT - macro (inflation, rates, stability). Can also purchase hedged share classes. Currency risk can be significant in MM/low risk assets due to: lower return potential (big impact), long term horizon Liquidity constraints - short term liquidity reqs, funds will have a requirement to meet need for liquidity in certain circs TIme horizon Liability matching Tax status (domi/resi) Legal and ethical reqs

Answer 7

Pension funds = tax efficient pool of savings to be invested DB = defined benefit/final salary (or career average) - amount paid depends on length in scheme and salary earned when you leave/retire - pay out secure income for life which increases in line with inflation - most closed to new members, unpopular with employers as they have to cover any deficit between actuarial estimates of the sum required to meet future payments and how much is available in the pension fund DC = defined contribution/money purchase - essentially an investment savings pot for each individual scheme member - most common type of workplace pension now - at retirement, sum invested (+ any returns) is used to generate income either from investments or with annuity purchases Longevity risk on a DB scheme lies with the fund but for a DC pension it's with the individual Low gilt yields have put pressure on DB schemes (ass has increased life expectancy) because discount rates used to value liabilities were v low so the PV of liabilities grew faster than fund assets but rising yields have reduced this pressure

Answer 8

Past performance/consistency - against benchmark but also vs factor/style and peer group. Sharpe ratio Consistency of management personnel - experience on strategy, at fund house, in asset class etc Process/style drift - drift in strat if style is out of favour, renaming, changing BM Internal risk and control measures - internal liquidity constraints, position sizing etc, size and independence of auditors Admin Dealing Fund strategy Manager compensation Location/regulatory oversight Tax domciile Reporting status Succession planning fee structure - increasingly, high fees challenged given advent of passive investing

Answer 9

Ethical/socially responsible investments Macro strats - use derivs (IR swaps, swaptions, CFDs, FX swaps/forwards, TR swaps, options, futures) to gain exposure to wide variety of asset classes - many HF macro strats Quant/quali approached - quant associated with computer algos that analyse data and generate both ST and LT AA decisions Quali - manager skill/judgement/market knowledge to determine asset (classes) that will achieve either SAA or TAA FX issues - to hedge or not? Do you want exposure to currency, if no still may not hedge as hedging is expensive. What is directional view on each currency. may win on stock/fund and lose on currency or vice versa

Answer 10

Refers to manager looking after assets as steward on behalf of other stakeholders - rather than seeing themselves as a ST trader Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society. No wide agreement on what stewardship is More to stewardship than just engagement/voting (roundtables, industry collabs etc)

Answer 11

Retail distro review - 20212 RDR required advisors to raise knowledge to a level 4 diploma quali Banned UK advisors from receiving product commission for retail customers in UK Customers had to pay for investment advice they received

Answer 12

Aims to raise standards of governance and increase individual accountability Applies to all FSMA auth firms 2 parts - SMR and CR SMR = focuses on most senior indivs who hold key roles/have overall responsibility firms must ensure each SM has a statement of responsibilities they are personally accountable for FCA is very keen to be able to apportion responsibility for a regulatory failure to those in positions of authority within firms. CR = applies to material risk takers - any staff who have a significant harm function to company/customers or any staff subject to dual regulated firms remuneration code

Answer 13

Intro in 2022 aims to set higher and clearer standards of consumer protection across FS firms promotes responsible behaviour fosters culture of client focused service

Answer 14

Published 2018 with various updates regulates company not investor set of Principles that emphasize the value of good corporate governance to long-term sustainable success Sets out standards of good practise in relation to 5 areas - Board leadership and company purpose - Division of responsibilities - Composition, succession and evaluation - Audit, risk and internal control - Remuneration Operates on a comply or explain basis 18 principles (new principle added to 2024 version) Mandatory for fully listed comps on LSE to explain how they have applied principles in their annual report

Answer 15

designed to be two sides of same coin FRC sees common thread between two no stewardship code = nothing to bind listed companies to the governance code stewardship code encourages investors to examine credibility of comps explanations/justifications in corp gov code in gov code - LT SH = key stakeholder LT returns to SH are key objective of company directors of comp should enter dialogue with SH so they can hear their views and run company in their interests

Answer 16

2020 - sets high stewardship standards for those investing money on behalf of UK savers and pensioners ( or support them) Applies to UK companies not overseas investors that own UK shares Applies exclusively to investment managers and not other entities in investment chain Applies to asset owners (pension schemes, insurers, foundations, endowments), asset managers (who invest on behalf of UK clients or in UK assets) and service providers (e.g. consultants, proxy advisors, research providers) comprises of 12 apply and explain principles for asset managers/owners and 6 prins for service providers voluntary but once you sign you must adhere 4 sections - purpose and governance, investment approach, engagement, exercising rights and responsibilities

Answer 17

Voting rights can be powerful way to send message to corporate directors Instit shareholders under increasing pressure to vote shares tho not a legal requirement Ways to register dissatisfaction with votes - withhold/abstain - vote against reelection of one/more directors - vote for appointment of alternates

Answer 18

Lending = essentially a full sale and buy back so all voting rights attached to shares are transferred but lender retains financial exposure to shares since they are returned@end and any divis reimbursed Lending generally increases around divi announcements/votes Can state intention to recall shares in order to vote them but this makes people less likely to borrow as often voting is part of the reason borrower wants shares (so people rarely do this) FMs should disclose lending and recalling policy as must weigh ability to generate income from lending against loss of ability to discharge stewardship activities

Answer 19

Voting can be more effective when part of ongoing engagement with comp/board - w/out this the voting is anon and reported as summary stat May not have resource to engage with all investee comps important tht engagement is timely as less likely to be ignored

Answer 20

FMs may be dissatisfied if divi deviated more than expected/guided can express by communicating with board/finance director/voting to replace directors bond covenants can restrict asset sales to fund extra ord divi payments

Answer 21

Regular and timely reporting can prevent fraud and mismanagement Helps stakeholders determine risk profile and estimate comp value Reduces potential for info disclosure to differ markedly from expectations

Answer 22

Direct = SHs who were harmed, indirect = corporation harmed Class action: direct litigation - 1/more Shs/reps bring lawsuit against comp onn behalf of other SHs of same class - Principal aim is usually financial compensation Secs class action - usually in response to large sudden drop in share price in response to negative unexpected news - brought by those who suffered loss as result of purchasing @ earlier price that reflect misstatement/overly optimistic announcement - claim = vio of secs law that seeks to protect investors from reporting irregularities/misleading/inaccurate info and inadequate risk management and oversight Derivative/indirect litigation - comp files claim against 1/many of its own officers/directors - focuses on removal of conflict of interest, director appointment, terms of contract, remuneration, share valuation, terms of proposed takeover, acquisition/disposal of assets

Answer 23

UK gov commissioned Paul Myners - carry out review of investment decision making in UK pension schemes 2001 made recs known as Myners' principles (6) - encourages adoption of best practice Effective decision making - trustees are central to this, should have in house support and out of house consultants, recommends investment subcommittees - trustees should have necessary skill and should spend more time on AA decisions and consider all asset classes Clear objectives - investment obj should be relevant to scheme and communicated to all managers -should relate to fund's liabilities (not perf vs peers/benchmark) - liabilities should be basis of investment policy Risk and liabilities - Awareness and understanding of risks and tolerance in the funds managed Perf assessment - Formal assessment of management + trustees/board/IMs/consultants Responsible ownership - trustees should have policy to discharge resp as investor (voting, monitoring, intervention) - trustees should use SH power to intervene when appropriate in running of comps they invest in Transparency and reporting - keep mentors and stakeholders informed with regular comms