Ch 20 - Portfolio Management (1) Flashcards

1
Q

The most common investment management styles and stock selection approaches are

A

Growth

Value

Momentum

Contrarian

Rotational

Top-down

Bottom-up

Passive

Active

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2
Q

When the market is confident and rising - growth stocks tend to

A

out-perform

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3
Q

When the market is falling - investors prefer

A

value stocks

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4
Q

Growth stocks

A

Expected to experience rapid growth of earnings, dividends and hence price

Typically have high price-to-book values

Tend to be more volatile than value stocks

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5
Q

5 growth factors

A

Sales growth

Earnings growth

Forecast earnings growth

Return on equity

Earnings revisions

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6
Q

Value stocks:

A

Appear good value in terms of certain accounting ratios, such as P/E ratio or book value per share

Seen to be the safer bet - due to more asset backing and higher cashflow

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7
Q

5 value factors

A

Book to price

Dividend yield

Earnings yield

Cashflow yield

Sales to price

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8
Q

Momentum

A

Purchasing (selling) those stocks which have recently risen (fallen) significantly in price on the belief that they will continue to rise (fall) owing to an upward (downward) shift in their demand curves

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9
Q

Contrarian

A

Doing just the opposite to what most other investors are doing in the market in the belief that investors tend to overreact to news

i.e. Short term markets tend to overreact to news

Aims to take advantage of excessive volatility in investment markets

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10
Q

Rotational

A

Moving between value and growth depending on which style is believed to be attractive at any particular point in time

This approach requires considerable skill in reading the market

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11
Q

Top-Down

A

Involves a structured decision-making process which starts by considering the asset allocation at the highest level (between asset classes).

Within each asset class an analysis is then made of how to distribute the available fund between different sectors

and finally the selection of the individual assets to purchase is made.

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12
Q

The top-down approach would usually follows these steps:

A

Decide upon the long-term benchmark or strategic asset allocation of assets between countries and between the main asset categories

Decide on the short-term tactical split of investments, again between countries and between the main asset categories based on a shorter-term view of global economic and investment issues

Given the chosen tactical asset allocation, decide upon the sector split within each asset category

Finally, within each sector decide which particular stocks are “best value”

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13
Q

Types of data that are important to consider for strategic asset allocation

A

Inflation (short-term and long-term)

Interest rates (same as above)

Economic growth

Currency movements

Equity and bond market yields

Investment objectives, attitude to risk and/or liabilities of the investor

Investment strategies by peer group

Structural shifts within the economy

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14
Q

Bottom-Up

A

Seeks to identify the best value individual investments, irrespective of their geographical or sectoral spread

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15
Q

Analyses Used to Aid Stock and Sector Selection:

A

Fundamental analysis

Quantitative techniques

Technical analysis

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16
Q

Relative merits of Top-down approach

A

More balanced, diversified portfolio

Argued that the biggest difference in portfolio performance come from differences in asset allocation rather than individual stock selection

Concentrates on the bigger picture

17
Q

Relative merits of Bottom-up approach

A

Argue that the whole is always simply the sum of the parts - thus should concentrate on performance of individual assets

Less diversification

Less time spent on the bigger picture (strategic issues)

18
Q

Approaches to passive management include:

A

Index tracking

Commercial matching

Immunisation (as a method of passively managing a bond fund)

19
Q

Advantages of index/passive investments:

A

Lower dealing and research costs

Risk of under-performing the index in question - and indirectly also your competitors - is greatly reduced

Tracking a well-diversified index will ensure that the fund itself is well-diversified

Appropriate if the particular market is believed to be efficient

20
Q

Disadvantages of index/passive investments:

A

Loss of upside potential

Implicit restriction to markets and asset classes where a suitable benchmark exists

Insufficient regard to the investor’s objectives and hence result in unacceptable levels of actuarial risk

A fully replicating index tracker is forced to buy new constituents of an index at inappropriate times (artificially high price as other index-tracking investors are also trying to buy the new share), and also be a forced seller of shares that drop out of an index

21
Q

The available approaches to index tracking include:

A

Full replication
Sampling (also called stratified sampling or partial replication)
Synthesizing the index using derivatives

22
Q

Main advantages of sampling and synthetic replication (compared to full replication):

A

Management costs ought to be lower

Dealing costs are likely to be lower

23
Q

Main disadvantages of sampling and synthetic replication (compared to full replication):

A

Tracking error is likely to be greater

Research costs of deciding which shares or derivatives to hold may be higher

24
Q

Active investment managers can be divided into two groups:

A

Multi-asset (balanced) mandates

Specialist mandates

25
Q

Why actively manage? (Advantages)

A

Offers the prospect of large returns

Limitation of “peer group” risk

26
Q

Disadvantages of active management:

A

Hard to successfully select active managers (past performance does not indicate future performance)

Timing the changes to the line-up of active managers is also very difficult

COSTS!

27
Q

Anomaly Switching:

A

Involves moving between bonds with similar volatilities, thereby taking advantage of temporary price anomalies

It is a low-risk strategy

28
Q

Techniques used to identify possible anomalies include:

A

Yield differences
Price ratios
Yield models
Price models

29
Q

Are low-coupon bonds less or more volatile than high-coupon bonds

A

more

30
Q

Fixed interest bond volatility

A

sensitivity of the bond price to a change in its gross redemption yield

31
Q

5 step guide to a anomaly switch (based on yield difference here):

A
  1. Check that the yield is genuinely an anomaly
  2. Find the stock in our portfolio that has the closest volatility to the target stock
  3. Simultaneously sell (buy)our similar stock and buy (sell) the anomaly stock
  4. Wait for the anomaly to disappear (price reverts to normal)
  5. Switch back (reasons are):

Avoid a more fragmented portfolio

Fund managers like to “crystallise” their profits

32
Q

Policy Switching:

A

Involves moving between bonds with different volatilities, to take advantage of predicted changes in the level and/or shape of the yield curve.

This changes the overall characteristics of the portfolio whereas anomaly switching does not

Is a riskier strategy

33
Q

Policy switching may be aided by the analysis of:

A

Bond volatilities (and duration)
Reinvestment rates
Spot/forward rates

34
Q

Alternatives to Government Bonds

A

CHICAS DAME - sexier than government bonds and thus managers may use these rather than policy and anomaly switching to try and deliver additional returns

Agency bonds

Investment grade corporate bonds

High yield bonds

Convertible bonds

Distressed debt

Event-linked bonds

Interest rate and inflation swaps

Credit default swaps

Mortgage backed securities

Asset backed securities

35
Q

The additional return (/premium) that a non-government bond offers over a government bond is generally regarded as being made up of two elements:

A

Credit risk premium

Illiquidity risk premium

36
Q

Where a bond portfolio is used to match specific liabilities, techniques that may be used to control bond portfolio risk include:

A

Immunisation

Stochastic ALM

VaR calculations

Multifactor modelling