Fund Management Flashcards
Give examples of active equity strategies
1) Value investing
2) Growth investing
3) momentum investing
4) GARP
5) Fundamental analysis
6) technical analysis
7) quantitative investing
8) Smart Beta
What is value investing?
Investing in undervalued companies
expected to return to their intrinsic values
undervalued vs intrinsic value
Give 4 key features of value investing
(types of companies that apply)
1) established / mature (may pay dividend)
2) Low P/E ratio
3) Strong Brand / Patents (economic moat)
4) High price to book ratio
What must investors be careful of when it comes to value investing?
Falling into a “value trap”
What is growth investing?
Investing in companies whose rate of growth is expected to be greater than the markets
Give 4 key features of growth investings
1) High P/E Ratio
2) Low / no dividend (newly established business)
3) May not be cash generative
4) Currently things like tech stocks
What is growth at a reasonable price? (GARP)
Investing in companies who are growing but at at afforadable measure
What is the key measure for GARP?
Give the figure as well
Price/Earnings to Growth (PEG)
(1:1 or less) e.g. 15 pe needs 15% growth
What is fundamental analysis?
1) Analysis of companies’ financials & ratios
2) Assess current value and future growth
What is technical analysis?
Using charts to review historic patterns
Expect historic patterns to re-occur
self-fulfilling to an extent (expect to sell off -> manager sells)
What is momentum investing?
Invest in companies whose price has been rising
use indicators like 50 day moving average
short term strategy - uses sector rotation
What is quantitative investing?
uses programs / code to quickly execute trades
identifies patterns / signals to trade off of
popular in hedge funds
What is smart beta
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)
Give examples of passive equity strategies
1) Buy & Hold
2) Indexation
Why do investment trusts trade at a discount?
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
What is a reporting fund?
What tax does an investor pay?
A fund approved by HMRC; Reports assets, gains, dividends to HMRC.
Gains taxed @ CGT rate
Dividends taxed @ income tax rate
What is a non-reporting fund?
What tax does an investor pay?
Does not report to HMRC. On sale all gain is treated as income.
All tax at marginal income tax rate.
Give examples of indexation techniques
1) Full duplication
2) Stratified sampling
3) Factor Matching
4) Commingling
What is stratified sampling
Holds a representative sample which has the same characteristics of the index
(e.g. same sector / style exposures)
Lower Cost (but higher tracking error)
What is factor matching / optimisation
Replacing style factors of the original index
known as optimisation
1 Pro & 1 Con of Full Replication
1) Low Tracking Error
2) Costly and complicated with large indexes (and those with illiquid securities)
What risks are posed by factor investing to ESG considerations?
Value = Tobacco Stocks, Oil Stocks (High Dividend)
Momentum & Quality = Weapons (from tech companies)
High Dividend Yield = Higher CO2 Emissions
Small Size = Lower ESG Scores
What benefits are posed by factor investing to ESG considerations?
Small = Avoid Weapons & Tobacco
Momentum = Avoid Tobacco, Oil,
New Companies = Clean Tech, provide solutions to Co2 Emissions.
