Investment Planning Principles Flashcards
What are the 3 models of asset alocation?
The scientific/theoretical approach
The pragmatic approach
Stochastic Model
How does the scientific approach to asset allocation work?
Uses mathematical analysis to find the optimum balance of assets to achieve the best return for a client given their attitude to risk.
What is the most popular theoretical position?
Optimisation
What is the aim of the scientific/theoretical model?
To sit on the correct point of the efficient frontier as per MPT.
How is the theoretical model set up
Based on asset allocations that provide the highest risk adjusted return in light of historic underlying returns, underlying risk, and correlation between the underlying investments.
What are the criticisms of the theoretical model?
Only works when the world is normal, especially in regards to correlation.
Relies too heavily on past returns
May sit bellow optimisation due to clients’ ethical preferences.
How does the pragmatic approach to asset allocation work?
Ignores mathematical constructs of MPT. Combines analysis of the past with the judgment of the advisors’ belief of the future.
What is the aim of the pragmatic approach?
To build a portfolio based on rational analysis of the past whilst taking into account the changing world.
What are the criticisms of the pragmatic approach?
Places too much reliance on the subjective judgement of the advisor/fund manager.
Poor judgement can lead to poor results.
How does the stochastic profiling method work?
Uses complex mathematics, modelled by actuaries to establish the likely returns from a given asset allocation as a spread.
What are the issues with stochastic profiling?
Too hard to just sit down and work out at home.
Very sensitive to changes in assumptions
Clients often regard the output of these as fact rather than educated guesswork.
What is the strategic allocation of assets?
Sets asset allocation and doesn’t change unless there is a very good reason for changing.
Long-term approach
What is the tactical allocation of assets?
Gives the portfolio manager the ability to vary allocation within agreed parameters.
Short-term approach
What is core-satalitie management?
Using active funds to attain higher returns
How does top-down portfolio construction work?
Start with asset allocation
Look at the geographical split
Look at the sector
Pick the stocks using either fundamental or technical analysis.
What is fundamental analysis?
A detailed analysis of the company and related industry
What is technical analysis?
Share price and trend analysis.
Focused on analysis of charts and uses of mechanical trading
How does bottom-up portfolio construction work?
Simply picking the stocks the fund manager believes are the best stocks
Some investment houses use this and top-down approaches.
What are the different fund manager styles?
Value - looking for good stock holding for the long term.
Growth at reasonable price (GARP) - companies with good fundamentals and future prospects for growth.
Contrairaism - finding what the market has missed.
Momentum - looking for trends that are likely to persist.
What criteria should be used to select for the sutability of a fund?
Objective of the fund
Costs and charges
The fund management group
The fund manager
The type of fund and its risk
Performance
Consideration to passive management
What shows the overall level of ongoing charges for a fund?
The TER (total expense ratio) does not include dealing costs for exam.
What is esg sorted into
Environmental - waste, pollution, climate change
Social - diversity, community interaction
Governace - board structure, corruption, Bribery
What is negative screening?
Ruling out of companies deemed inappropriate by investor.
What is positive screening?
Focusing on companies that actively aim to do certain things the investor likes
