Fund Management

Question 1

Give examples of active equity strategies

Answer 1

1) Value investing
2) Growth investing
3) momentum investing
4) GARP
5) Fundamental analysis
6) technical analysis
7) quantitative investing
8) Smart Beta

Question 2

What is value investing?

Answer 2

Investing in undervalued companies

expected to return to their intrinsic values

undervalued vs intrinsic value

Question 3

Give 4 key features of value investing

(types of companies that apply)

Answer 3

1) established / mature (may pay dividend)
2) Low P/E ratio
3) Strong Brand / Patents (economic moat)
4) High price to book ratio

Question 4

What must investors be careful of when it comes to value investing?

Answer 4

Falling into a “value trap”

Question 5

What is growth investing?

Answer 5

Investing in companies whose rate of growth is expected to be greater than the markets

Question 6

Give 4 key features of growth investings

Answer 6

1) High P/E Ratio
2) Low / no dividend (newly established business)
3) May not be cash generative
4) Currently things like tech stocks

Question 7

What is growth at a reasonable price? (GARP)

Answer 7

Investing in companies who are growing but at at afforadable measure

Question 8

What is the key measure for GARP?

Give the figure as well

Answer 8

Price/Earnings to Growth (PEG)
(1:1 or less) e.g. 15 pe needs 15% growth

Question 9

What is fundamental analysis?

Answer 9

1) Analysis of companies’ financials & ratios
2) Assess current value and future growth

Question 10

What is technical analysis?

Answer 10

Using charts to review historic patterns
Expect historic patterns to re-occur

self-fulfilling to an extent (expect to sell off -> manager sells)

Question 11

What is momentum investing?

Answer 11

Invest in companies whose price has been rising
use indicators like 50 day moving average

short term strategy - uses sector rotation

Question 12

What is quantitative investing?

Answer 12

uses programs / code to quickly execute trades
identifies patterns / signals to trade off of

popular in hedge funds

Question 13

What is smart beta

Answer 13

Index tracking which avoids troublesome holdings

Adjusts weights to remove negative performers / increase strong performers

Can use factors to adjust weights of constituents (e.g. size, value etc)

Question 14

Give examples of passive equity strategies

Answer 14

1) Buy & Hold
2) Indexation

Question 15

Why do investment trusts trade at a discount?

Answer 15

1) Perception of sector / asset class (e.g. infra & rates)
2) Concern about process / team (Governance, performance etc.)
3) Investment Trust incurs costs / fees
4) Risk that liquidity is limited

Question 16

What is a reporting fund?

What tax does an investor pay?

Answer 16

A fund approved by HMRC; Reports assets, gains, dividends to HMRC.

Gains taxed @ CGT rate
Dividends taxed @ income tax rate

Question 17

What is a non-reporting fund?

What tax does an investor pay?

Answer 17

Does not report to HMRC. On sale all gain is treated as income.

All tax at marginal income tax rate.

Question 18

Give examples of indexation techniques

Answer 18

1) Full duplication
2) Stratified sampling
3) Factor Matching
4) Commingling

Question 19

What is stratified sampling

Answer 19

Holds a representative sample which has the same characteristics of the index

(e.g. same sector / style exposures)

Lower Cost (but higher tracking error)

Question 20

What is factor matching / optimisation

Answer 20

Replacing style factors of the original index

known as optimisation

Question 21

1 Pro & 1 Con of Full Replication

Answer 21

1) Low Tracking Error
2) Costly and complicated with large indexes (and those with illiquid securities)

Question 22

What risks are posed by factor investing to ESG considerations?

Answer 22

Value = Tobacco Stocks, Oil Stocks (High Dividend)
Momentum & Quality = Weapons (from tech companies)
High Dividend Yield = Higher CO2 Emissions
Small Size = Lower ESG Scores

Question 23

What benefits are posed by factor investing to ESG considerations?

Answer 23

Small = Avoid Weapons & Tobacco
Momentum = Avoid Tobacco, Oil,
New Companies = Clean Tech, provide solutions to Co2 Emissions.