Active / Passive Management Flashcards
Passive market strategies
- not attempting to outperform market
- should not require active intervention
- 2 techniques:
- buy and hold
- tracker
3 types of tracker strategy
- full representation (buy shares in a all FTSE 100 companies in same split as the index) I.e. arithmatically weighted
- this can be very expensive if the index has a lot of very small cap shares in it eg FTSE all share
- stratified sampling - in a few companies for each sector in index
- this brings in element of active management
- biases often come in l, usually towards companies with an above average earnings
- manager may not be able to stratify to a sufficient level of detail to represent market accurately
- optimisation
- uses computer modelling
- synthetic
- getting exposure to index via derivatives rather than direct stocks
Active management style - top down
1) top down - asset, geographic location, sector, stock
* uses fundamental analysis - company accounts, chairman’s statements etc
* Chartists - chart trends in stock prices regardless of company accounts
- assets allocation, uses:
1) strategic asset allocation for the long term
2) tactical asset allocation for the short term (quick wins)
Active management - bottom up
- stocks picked on own merit
- stock picking e.g. value investing or GAARP (growth at a reasonable price) where stock is not cheap but good quality e.g. Amazon
Advantages of using trackers (5)
- low cost
- less admin
- improved diversification
- reduces risk (especially non systematic/specific risk)
- easy to monitor performance
- easy to understand
- ability to plan taxable events
- Changes within the tracker attract no CGT
- often outperform active funds
- no limit to up side
- partial encashment possible
- covered by FSCS
Disadvantages of selling shares to buy trackers / using trackers (5)
- less control
- potential CGT on sale of shares
- selling costs on existing portfolio
- no outperformance
- ongoing charges vs single shares
- index can be dominated by small number of stocks
- tracking error
- can not tailor portfolio to specific requirements
How is FTSE 100 composed? (5)
- largest 100 companies
- weighted by market capitalisation
- listed in the UK in £
- that meet rules
- revises every 3 months
Why is FTSE 100 not a good benchmark (when investing in a small number of shares) (3)
- FTSE100 does not reflect dividends
- index takes no account of tax or charges
- different composition / FTSE has more shares in it
List and explain 4 stages of top down portfolio management (8)
- asset allocation
- manager decides split - eg 60% equity, 20 property, 10 bonds and 10 cash
- would be based on clients ATR
- allocate geographic distribution
- might mean investing in different parts of the world e.g. North America, UK, Europe and Far East
- chose sector weighting
- manager/adviser would look at particular sectors of the economy eg pharmaceutical or utilities
- stock or fund selection
- manager actually then chooses which particular stocks to invest in eg M & S
- alternatively could chose to invest in a fund which already has an appropriate stock selection
What is technical analysis? (3)
- involves looking at past share prices
- and making investment decisions based on trends in those prices
- analysts use charts to determine their investments
What is fundamental analysis (3)
- analysis of the company
- and sector the company operates in
- objective is to decide if they are undervalued or over valued
- analysis differs depending on if they are looking for value, growth or income shares
How is FTSE 100 value calculated? (3)
- top 109 companies
- weighted by market cap
- with reference to a starting point of 1000
How does a passive strategy which weights companies in FTSE 100 based on price to book value, free cashflow and dividend yield work? (4)
- stocks are selected on fundamentals
- not based on market cap
- may lead to outperformance
- can tailor strategy to client
How are:
- price to book
- free cash flow
- dividend yield
calculated for a company
(6)
- Price to book. = market cap/ net assets (or share price/ net assets per share)
- free cashflow = operating cashflow / net assets
- div yield = div per share / share price
What is the purpose of using a benchmark in the investment process (4)
- sets the asset allocation/. Starting point
- to manage risk and return
- to measure relative performance
- Independant measure
- measure value added by manager
