Intro Flashcards
Portfolio Management Process
Integrated set of steps
undertaken in a consistent manner
to create and maintain
a portfolio appropriate to meet clients’ stated goals
Investment Policy Statement
Written document that clearly sets out client’s:
- Return objective
- Risk tolerance
- Relevant time horizon
- Applicable constraints:
- Liquidity needs,
- Tax considerations,
- Regulatory Requirements,
- Unique circumstances
PortManProc Elements
- Planning
- Execution
- Feedback
Capital Markets Expectations concern…
Risk-Return Characteristics Of capital market instruments
Strategic Asset Allocation
Establish Acceptable exposures to InPoSt-permissible asset classes to achieve client’s long run Objectives & Constraints
Investment Management
The service of professionally investing money
An investment management firm’s size is judged by…
the amount of assets under management
An investment manager’s revenue…
is fee driven
Investment manager’s Fees are based on:
- A percentage of the average amount of assets under management
- The type of investment program run for the client
Types of investors
- Institutional
- Individual
Institutional Investors
- Pension funds
- Foundations and Endowments
- Insurance Companies
- Banks
Individual Investors
- Individuals
- Families
The Investment Policy Decisions of Institutional Investors
Are typically made by investment committees or trustees. They also bear a fiduciary relationship to the funds. Such a relationship imposes some legal standards regarding processes and decisions.
Institutional investors committees or trustees
Bear a fiduciary relationship to the funds. Such a relationship imposes some legal standards regarding processes and decisions.
Family Offices
Organized and owned by a family.
Are entities that assume responsibility for investment services: Financial planning, Estate planning, Asset management. Some family offices open access to their services to other families (multifamily offices)
Investment Management Companies employ
- Portfolio managers,
- analysts,
- traders
- Marketing and support personnel
Portfolio managers may use
- Outside research produced by sell-side analysts (employed by brokerages) and
- Research generated by buy-side (in-house) analysts
The staffing of in-house research departments depends on
- The size of the investment management firm.
- The variety of investment offerings.
- The investment disciplines employed.
The Portfolio Perspective focus is…
on the aggregate of all the investoris holdings: the portfolio
Modern Porfolio Theory
The analysis of rational portfolio choices based on the efficient use of risk
MPT revolutionized investment management
The importance of the portfolio perspective in achieving investment objectives is recognized. MPT helped spread the knowledge and use of quantitative methods in portfolio management
Three Developments in the Investment Community that Created Demand for the Portfolio Perspective
- Institutional investing plays a dominant role in financial markets so controlling the risk is imperative.
- The advance in technology and lower cost allows for implementing MPT portfolio concepts.
- The investment management field is professionalized
Portfolio Management As a Process
An integrated set of activities that combine in a logical, orderly manner to produce a desired product
Portfolio Management As a Process view applies to:
- To all types of portfolio investments
- bonds,
- stocks,
- real estate,
- gold,
- collectibles
- To various organizational types
- trust companies,
- investment counsel firms,
- insurance companies,
- mutual funds
- To a full range of investors
- individuals,
- pension plans,
- endowments, foundations,
- insurance companies, banks
Portfolio Management As a Process view is independent of…
- Manager
- Location
- Investment philosophy
- Style
- Approach
Elements in Managing any Business Process
- Planning
- Execution
- Feedback
The Planning Step
- Identify and specify the investor’s objectives and constraints
- Create the investment policy statement
- Form capital market expectations
- Create the strategic asset allocation
Investment objectives
Are desired investment outcomes (risk and return)
Constraints
Limitations
on the investor’s abilitiy
to take full or partial adventage
of particular investments
Types of constraints
- Internal
- Liquidity needs
- Time horizon
- Unique circumstances
- External
- Tax issues
- Legal and regulatory requirements
The IPS serves as the…
governing document
for all
investment decision making
IPS elements
- Brief client description
- Purpose of establishing policies and guidelines
- Duties and investment responsabilities of parties involved
- Statement of
- Investment goals
- Objectives
- Constraints
- Schedule of review of
- Investment performance
- IPS
- Performance evaluations
- Performance measures
- Benchmarks
- Any considerations in the developement of Strategic Asset Allocation
- Investment Strategies and Investment Styles
- Guidelines for rebalancing portfolio based on feedback
Investment strategy
Manager’s approach to
investment analysis and
security seletion
Types of investment strategies
- Passive
- Active
- Semiactive (risk controlled active or enhanced index)
Pasive Investment Strategies
Portfolio composition does not react to changes in capital expectations
Pasive Investment Strategies Types
- Indexing
- Buy and hold
Indexing Strategy
Hold a portfolio of securities
designed to replicate the returns on a
specified index of securities
Buy and hold strategy
Buy and hold
the investment until maturity
or the end of the investment period
Active Strategies
- A portfolio manager will react to changes in capital market expectations
- Its holdings differ from the portfolio benchmark
- Attemps to produce positive excess risk-adjusted returns (positive alpha)
- Securities held in different-from-benchmark weights reflect expectations of the porfolio manager
Semiactive strategies
Seek positive alpha while
keeping tight control over risk relative to the portfolio’s benchmark
Investment style
Group investment disciplines
that have some predictive power in explaining
the future dispersion in returns
Forming capital market expectations
Create long-run forecasts of
risk and return characteristics
for various asset classes
to optimize the risk-return relationship.
Creating the strategic asset allocation
The manager combines the
IPS and Capital Market Expectations
to determine target assets class weights.
May consider both single-period and multiperiod perspectives.
A multiperiod perspective can address…
- The liquidity and tax considerations that arise from rebalancing portfolios overtime
- Serial correlations in returns
Execution step decisions…
- Portfolio selection/compsition decision
- Select specific assets for the portfolio
- Portfolio implementation decision
- Initiate
