Active Management

Question 1

Top Down

Answer 1

The top-down method is usually employed for internationally diversified portfolios/funds.

An assessment is made of the overall economic environment, rather than individual stocks, when constructing the portfolio/fund.

Question 2

Investment Committees

Answer 2

In larger organisations, asset allocation is often decided on by an investment committee or asset allocation committee that will meet regularly (eg, monthly, quarterly) and often use sophisticated and computerised quantitative models to assist them.

Once the asset allocation has been decided, top down active managers will consider how the funds should be allocated by sector within the chosen equity markets.

Question 3

Pension Funds

Answer 3

For pension funds, these decisions are often made with reference to a peer group median asset
allocation like the Combined Actuarial Performance Service (CAPS) median or World Markets (WM) median.

Question 4

Bottom Up

Answer 4

This form of investment management is more common in funds investing in a particular country or those following a particular theme.

With this technique, the manager concentrates their attention on individual stock selection in order to achieve positive returns. While other external events may be considered in the
manager’s decision-making process, their primary concern is the attractiveness or otherwise of the
individual companies operating within the market or country in which they are investing.

Question 5

Growth Investing

Answer 5

Focuses on investing
in companies with above-average growth
prospects. Two types of growth investing
include:

Momentum investing, which seeks to achieve gains through the analysis of an asset’s price momentum either up or down.

Fashion-led investing, which assumes
that a trend or fashion will continue to
outperform the market.

Question 6

Value Investing

Answer 6

Seeks established companies that appear to have been ignored in the market and are set for recovery, by looking at their intrinsic value.

Question 7

Blend Investing

Answer 7

Combines growth and value investing, thus offering the potential benefits and risks of both styles.

Question 8

Contrarian Investing

Answer 8

Is similar to value
investing, but it takes a view that the market
has overreacted to a particular situation, and
believes a company offers better prospects in the future as a result.

Question 9

Income Investing

Answer 9

Often focuses on mature, slower-growing companies paying regular dividends.

Question 10

Quality Investing

Answer 10

Focuses on creating a
portfolio of companies with strong fundamental
characteristics (eg, high return on equity, low
debt-to-equity, strong free cash flow).

Question 11

Thematic Investing

Answer 11

Aims to identify long-term global themes and trends that are transforming
the world. Then, investing in a collection of companies offering solutions to these issues.

Question 12

Absolute Return Investing

Answer 12

Seeks to generate
positive returns in all market conditions.

Question 13

Duration Switching

Answer 13

Alters the portfolio
duration with expected changes in interest
rates.

Question 14

Riding the Yield Curve

Answer 14

Involves buying
a long-term bond, but selling it before maturity, to profit from a declining yield
over the bond’s life. This is a valid strategy
when the yield curve is upward sloping.

Question 15

Bond Switching

Answer 15

Exchanges
one bond for another.

Anomaly switching moves between
two bonds similar in all respects apart from their yields and/or prices.

This pricing anomaly is exploited by
switching away from the expensive to
the cheap bond.

Policy switching switches between
two dissimilar bonds, to take advantage of anticipated changes
in interest rates, the structure of the
yield curve, or bond credit ratings

Question 16

Intermarket Spread Switching

Answer 16

Moves between government and corporate bonds with different terms (eg, coupon rate, maturity date, or credit rating) to
obtain a more positive yield spread.