active equity management styles

Question 1

bottom up strategies

Answer 1

begin the asset selection process with data at the individual asset and company level before forming opinion on the wider sector or market

–> price momentum and profitability

Question 2

with a bottom up strategy, the ability to find a company with strong or weak fundamentals depends on what?

Answer 2

on the analyst’s in depth knowledge of each company’s industry product lines, business plan, management abilities and financial strength

Question 3

after identifying individual companies, what does the bottom-up approach do?

Answer 3

uses economical and financial analysis to assess the intrinsic value of a company and compares it with current market price

Question 4

with the bottom up approach, fundamental investors focus on which company parameters?

Answer 4

business model and branding

competitive advantages

company management and corporate governance

Question 5

how do evaluate companies using a bottom up approach

Answer 5

DCF or preferred market multiple

Question 6

business model

Answer 6

refers to company’s overall strategy for running the business and generating profit

helps investors evaluate the sustainability of competitive advantages and make informed investing decisions

Question 7

branding

Answer 7

defining the company’s business for the market in general and retail customers in particular

can be understood as the company’s identity as well as promise to its customers

Question 8

competitive advantages

Answer 8

allow company’s to outperform peers in terms of return it generates on capital

Question 9

company management

Answer 9

allocate’s ressources and capital to maximize the growth if the enterprise value for the company’s shareholders

Question 10

management long term or short term view is more likely to add value to shareholders?

Answer 10

long term

Question 11

the best way to assess management effectiveness

Answer 11

financial statements

Question 12

qualitative analysis of the company’s management requires attention to what?

Answer 12

1. the alignement of management’s interest with those of shareholders to minimize agency problems
2. the competence of management in achieving the company’s objectives and long-term plans
3. the stability of the management team and the company’s ability to attract and retain high-performing executives
4. risk considerations and opportunities related to a company’s ESG attributes

also sale and purchase of shares to assess managements confidence in the company

Question 13

how are bottom up approaches often categorized?

Answer 13

value-based approaches

growth based approaches

Question 14

value-based approaches

Answer 14

focusing on companies with attractive valuation metrics

–> reflects in low earnings or asset multiples

Question 15

the father of value investing

Answer 15

Benjamin Graham

Question 16

the different value-based approaches

Answer 16

relative value

contrarian investing

high-quality value

income investing

deep-value investing

restructuring and distressed investing

special occasions

Question 17

relative value

Answer 17

evaluating companies by their value indicators (such as P/E or P/B) and comparing them to companies in the same industry sector

–> want to find stocks that offer value relative to their sector peers

we need to understand why a company is value as it is now by looking within before understanding the sector

Question 18

contrarian investing

Answer 18

purchase and sell shares against prevailing market sentiment

–> buying poorly performing stocks at valuation they think is gyu and selling it later at higher prices

–> buy wank stocks and expect them to bounce back with gyu earnings

these investors try to assess whether the market overreacted or is rational

Question 19

high-quality value

Answer 19

place big emphasis on financial strength and demonstrated profitability

Question 20

income investing

Answer 20

focuses on shares that offer relatively high dividend yields and positive dividend growth rates

these companies supposedly have a greater ability to withstand a market decline

Question 21

deep value investing

Answer 21

focuses on undervalued companies that are available at extremely low valuation relative to their assets

often companies in financial distress

Question 22

restructuring and distressed investing

Answer 22

generally counter cyclical relative to the overall economy or the business cycle of a particular sector

restructuring investors seek to purchase the debt or equity of companies inn distress

–> still has valuable assets after restructuring

–> often done before or during a bankruptcy process

Question 23

special occasions in value based approach

Answer 23

focuses on identification and exploitation of mispricings that may arise as a result of corporate events

usually short term opportunities

often disregarded by many investors which offers even more of an opportunity

requires knowledge of company, industry, and legal expertise

Question 24

growth based approach

Answer 24

focuses on companies that are expected to grow faster than their industry or faster than the overall market

measured by revenues, earnings, or cash flows

investors look for strong companies with high consistent growth or companies with strong earnings momentum

companies usually have an above average return on equity

investors have a higher tolerance for above average valuation multiples

Question 25

GARP (growth at a reasonable price)

Answer 25

sub discipline within growth investing

used by investors who seek out companies with above average growth that trade at reasonable valuation multiples

often referred as a hybrid between growth and value investing

many investors rely on the P/E to growth (PEG) ratio

Question 26

top-down strategies

Answer 26

begins at macro level

manager study variables affecting many companies

Question 27

the different top-down strategies

Answer 27

country and geographic allocation to equities

sector and industry rotation

volatility-based strategies

thematic investment strategies

Question 28

country and geographic allocation to equities

Answer 28

forming portfolios by investing in different geographic regions depending on our assessment of the region’s prospects

can use both top-down macroeconomic and bottom-up fundamental analysis

Question 29

sector and industry rotation

Answer 29

forming portfolios by investing in different sectors and industries across borders

can use both top-down macroeconomic and bottom-up fundamental analysis

Question 30

volatility-based strategies

Answer 30

based on investor’s view of volatility

usually implemented using derivative instruments

manages can use an index straddle strategy (what you messed up in theFINA 385 final wanker)

Question 31

index straddle strategy

Answer 31

purchasing a call and put options (on the same underlying index) with the same strike price and expiry date

we incur loss if the market remains flat with no volatility

maximum loss is the amount paid for put and call premiums

Question 32

thematic investment strategies

Answer 32

another board category of strategies

can use board, demographic, or political drivers, or bottom up ideas on industries and sectors, to identify investment opportunities

important to identify if any new trend is long term or short term

Question 33

portfolio overlays

Answer 33

a way of minimizing macro risk on a bottom-up stagey

an array of derivative positions managed separately from the securities portfolio to achieve overall portfolio characteristics that are desired by the portfolio manager