active equity management styles Flashcards
bottom up strategies
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
with a bottom up strategy, the ability to find a company with strong or weak fundamentals depends on what?
on the analyst’s in depth knowledge of each company’s industry product lines, business plan, management abilities and financial strength
after identifying individual companies, what does the bottom-up approach do?
uses economical and financial analysis to assess the intrinsic value of a company and compares it with current market price
with the bottom up approach, fundamental investors focus on which company parameters?
business model and branding
competitive advantages
company management and corporate governance
how do evaluate companies using a bottom up approach
DCF or preferred market multiple
business model
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
branding
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
competitive advantages
allow company’s to outperform peers in terms of return it generates on capital
company management
allocate’s ressources and capital to maximize the growth if the enterprise value for the company’s shareholders
management long term or short term view is more likely to add value to shareholders?
long term
the best way to assess management effectiveness
financial statements
qualitative analysis of the company’s management requires attention to what?
- the alignement of management’s interest with those of shareholders to minimize agency problems
- the competence of management in achieving the company’s objectives and long-term plans
- the stability of the management team and the company’s ability to attract and retain high-performing executives
- risk considerations and opportunities related to a company’s ESG attributes
also sale and purchase of shares to assess managements confidence in the company
how are bottom up approaches often categorized?
value-based approaches
growth based approaches
value-based approaches
focusing on companies with attractive valuation metrics
–> reflects in low earnings or asset multiples
the father of value investing
Benjamin Graham
the different value-based approaches
relative value
contrarian investing
high-quality value
income investing
deep-value investing
restructuring and distressed investing
special occasions
relative value
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
contrarian investing
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
high-quality value
place big emphasis on financial strength and demonstrated profitability
income investing
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
deep value investing
focuses on undervalued companies that are available at extremely low valuation relative to their assets
often companies in financial distress
restructuring and distressed investing
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
special occasions in value based approach
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
growth based approach
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
GARP (growth at a reasonable price)
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
top-down strategies
begins at macro level
manager study variables affecting many companies
the different top-down strategies
country and geographic allocation to equities
sector and industry rotation
volatility-based strategies
thematic investment strategies
country and geographic allocation to equities
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
sector and industry rotation
forming portfolios by investing in different sectors and industries across borders
can use both top-down macroeconomic and bottom-up fundamental analysis
volatility-based strategies
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)
index straddle strategy
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
thematic investment strategies
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
portfolio overlays
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
