Equity Flashcards
What is optimisation
It uses mean variance analysis to minimize tracking error. It typically maximizes a desirable result or minimises an undesirable characteristics
Process of fundamental active investment process
1) Define the investment universe in accordance with fund mandate
2) prescreen the investment universe to obtain manageable set of securities for detailed analysis
3) analyse the industry, competitive position and financial reports to the companies
4) forecast performance, most commonly based on cash flows or earnings
5) convert forecast to valuations
6) construct portfolio with desired risk profile
7) rebalance portfolio as needed
What is the process of quantitative active investment strategy
1) Define the market opportunity
2) Acquire and process data
3) back test the strategy
4) evaluate the strategy
5) construct the portfolio
What is active share
Active Share is a metric that measures how different a portfolio is from its benchmark in terms of holdings. It tells you what percentage of a portfolio’s investments are not shared with its benchmark. This helps in assessing how actively managed a portfolio is.
What is active risk?
Active risk is the standard deviation of active returns
Active risk (also known as tracking error) measures the variability or deviation of a portfolio’s returns from its benchmark due to the portfolio manager’s active investment decisions. It tells us how much risk is being taken by deviating from the benchmark.
What is thematic screening
Thematic investing focuses on investing in companies within a specific sector or following a specific theme such as energy efficiency or climate change
Rationale for choosing active management over passive
Confidence the manager has the expert knowledge and skill
Client preferences
Mandate from clients to invest in certain companies
Risks of active management
- reputation risk
- key person risk
- higher portfolio turnover
Market oriented approach
Segments companies by markets served, how products are used by consumers and how cash flows are generated
Production oriented approach
Segments companies by products manufactured and inputs required during production process
Define tracking error
Tracking error refers to the standard deviation of the differences between index portfolio returns and published index futures
Causes of tracking error
- management fees
- commissions on trades
- sampling
- intra day trading
- cash drag
Morningstar style box
In a style box - 2 factors - value and size - are each split into 3 groups
value based approaches
- Relative value
- Contrarian investing
- High quality investing
- Income investing
- Deep value investing
- Restructuring and distressed debt investing
- special situations
Growth based approaches
- Consistent long term growth
- Shorter term earnings momentum
- GARP (often uses peg ratio)
