Active Equity Investment Strategies

Question 1

How can we categorize active management ?

Answer 1

Fundamental

Quantitative

Question 2

Elaborate on Fundamental approach

Answer 2

Fundamental approach is more about analyzing the financial statement and the firm economic underlying. It focuses on relatively small group of companies with an in-depth analysis on each of them which allow them to define a view of the company outlook and identify the catalyst that will generate future growth. The risk decision lies at the security level.
Fundamental focus on : 
 -Business model 
 -Competitive advantage 
 -Governance and management

Question 3

Elaborate on Quantitative approach

Answer 3

Quantitative does not depend on individual companies but rather on factors and model underlying. Quant focus on a relatively large group of stocks. Conceptually, quant aim to predict future returns using conclusion derived from analyzing historical data. The risk decision lies at the portfolio level. Quant models are not correlated with fundamental hence they may add some diversification. They require huge amount of data.

Question 4

Elaborate on bottom-up approach

Answer 4

The bottom-up approach focuses on companies financial statement and disclosures to assess attributes such as profitability leverage, absolute peer relative valuation. Bottom-up focuses on:

• Business model
• Competitive advantage
• Governance and management

They are qualified as value or growth oriented

Question 5

Elaborate on top-down approach

Answer 5

Focuses on sectors, countries information. Uses large amount of data but process them in systematic way.

• Country and geographic allocation
• Sector and industry allocation
• Volatility-based strategy
• Thematic investment

Question 6

Elaborate on factor approach

Answer 6

A factor is a variable or characteristic with which individual asset returns are correlated. The most important test is the “smell” test.
Does the factor makes intuitive sense, does it make common sense.
-Value
-Price momentum
-Growth
-Quality

Question 7

Elaborate on other approach

Answer 7

- Statistical arbitrage or micro structure  
  Pair trading (used with stop order)

-Event driven strategies
(MARB)

Question 8

What are the pitfalls in fundamental bias

Answer 8

• Behavioral bias

- Value and growth traps

Question 9

Elaborate on the IC (information coefficient)

Answer 9

The higher the IC, the Higher the predictive factor. In the US, a factor of 5% to 6% is considered very strong.

Question 10

What are the portfolio constrain in quant investements

Answer 10

Risk model 
Transaction costs
Survivorship bias 
Lookahead bias 
Data mining  
Overfitting

Question 11

Elaborate on Equity investment style based classification?

Answer 11

Characteristic based

• Value growth & blend core
• Capitalization
• Volatility

Membership

• Sector
• Country
• Market

Position based

• Long
• Short
• Neutral

Question 12

How to improve a portfolio risk return profile

Answer 12

Multiple asset classes

PM with different investment styles

Question 13

Elaborate on value growth & blend core

Answer 13

Using the classification framework
Value will generate very strong negative number
Growth will generate very strong positive number
Core will generate around zero.

Question 14

Elaborate on style based analysis

Answer 14

Holding based analysis is generally more accurate than return based analysis because it uses the actual portfolio holding. However the use of derivative and their limited disclosures or availability of data makes holding based analysis less effective.

Return based analysis are often more used