Active / Passive Investment Essay Question Flashcards
What will be the layout for an active/passive investment essay style questions? Headings
- Identify styles of management
- Active
- Passive
2. Approaches to types of management Passive - Types of funds ETFs UITs - Types of replication Physical Synthetic
Active strategies - Top/bottom approach - Focus on growth/value/momentum - Stop loss? What is alpha?
What is an actively managed fund?
Actively managed investment fund has an individual portfolio manager, often with a team of stock pickers making investment decisions for the fund, combining in-depth research, forecasting and experience with the view of outperforming a specific index, e.g. SP500 or Russell100 by achieving a higher risk adjusted return.
What is a passively managed fund?
Referred to as index fund management - creates portfolio designed to track the returns of a market index or benchmark as closely as possible. Listed stocks and securities are selected and applied the same weighting as the index - mimics performance instead of outperforming.
Structured as ETF or unit investment trust.
Passive because is not proactive, does not require much research - therefore less management costs
What is an ETF?
ETF’s are marketable securities which tracks an index, commodity, bonds or a basket of goods.
An ETF is a type of fund that owns the underlying assets (shares, bonds etc) and divides ownership of those assets into shares.
Typically have higher liquidity and lower fees than mutual fund shares, making them an attractive passive management strategy.
What is a unit investment trust (UIT)?
A unit investment trust is a company which offers a fixed portfolio, generally of stocks and bonds as redeemable units to investors for a specific period of time. They are designed to provide capital appreciation and/or dividend income.
What is the difference between synthetic and physical ETFs?
Physical replication will buy and own most of the index’s constituents in order to replicate the index’s performance. This can lead to increased costs, which may in turn lead to tracking errors, whereby the additional costs of purchasing the assets causes the ETF to generate lower returns than the index, in whats known as tracking errors.
Synthetic replication ETFs hold margin and enter into a swap with a counter-party (usually a bank) and the counter-party promises the swap will return the value of the respective benchmark that the ETF is tracking. This can expose the fund to counter-party risk, and so often by regulation, counter-parties are required to provide collateral to mitigate the risk.
What is top down investing?
When investors first look at the “bigger picture” and select stocks from an industry that they believe will benefit most from the current macroeconomic environment. The investor will then seek out the most appealing stocks in the sector. Interest rates housing etc.
What is bottom up investing?
Bottom up investing involves the construction of a portfolio based upon individual attributes of a company. They seek strong companies with good prospects. This approach can however lead to, contrary to hedging, bets against other stocks within the investors portfolio.
What is growth investing?
Growth investing focuses on securities which the investor believes will have capital appreciation higher than that of the general market. These stocks are usually bought at high price to earnings ratios as it is believed that have huge growth potential. E.g. .com stocks
What is value investing?
Value investing is when investors seek to benefit from short term bad/good news in order to purchase shares in companies at below their intrinsic value. Value investors often look for established companies with good track records / consistent dividends and invest with a long term investment strategy. Often require a large margin of safety based upon book value of assets.
Problems:
Interpretation of intrinsic value?
What is momentum investing?
Investors believe that stocks face upward/downward trends in value, and hope to capitalise from this. They have short term investment horizons due to the nature of the investment, and must be capable of timing the stock trends with great accuracy in order to profit. This is considered a high risk strategy.
What is Alpha?
Alpha is the excess return on the fund that is attributable to the fund managers skill. Two methods for assessing this are based upon the Sharpe ratio and the Treynor ratios. The Sharpe ratio measures the performance of the fund a a function of its standard deviation. Whereas the Treynor ratio measures the fund as a function of its beta, e.g. the funds ability to generate returns over the systematic risk of the market.
Main Street and Wall Street
Benjamin graham
