OVERVIEW OF EQUITY PORTFOLIO MANAGEMENT

Question 1

What are the advantages to segmenting equity by size and style

Answer 1

• Managers can better address the clients consideration in term of risk and returns characteristics.
• Potential for greater diversifications benefits by investing in different sectors/industries
• Ability to construct relevant benchmark that matches the same style/industries
• Ability to analyze how a specific stocks changes style over time.

Question 2

Identify advantage and disadvantages of doing geographic segmentation for equity

Answer 2

Advantage :
For an investor that has a lot of exposure in his domestic market, it can give a better view of how to achieve diversification in international markets.

Disadvantage :
- Investing in international markets can add currency risk

• Can overestimate the diversification benefits

Question 3

Identify advantage and disadvantages of doing economic activity segmentation for equity

Answer 3

Advantage :
Allow managers to analyze, compare and construct performance benchmarks based on specific industry/sectors

Disadvantage:

Some companies may have business operations that cannot easily be assigned to one specific sectors/industry

Question 4

What are include in the administration fees of an asset manager

Answer 4

• Custody fees
• Depository fees
• Registration fees

Question 5

What are the risk of active management strategies

Answer 5

Key person risk : A person essential to the success of the fund leaving the firm

High portfolio turnover : Can lead to higher tax burdens.

Question 6

What are the elements that a equity benchmark must have

Answer 6

Has to be :
Rules based : Rules for including and excluding stocks, weighting scheme and rebalancing frequency must be consistent, objective and predictable.

Transparent : Rules of the index must be public, clearly stated and understandable to investors.

Investable : Investor can replicate the return and risk performance.

Question 7

Explain reconstitution and how a manager can mitigate the cost associated with this

Answer 7

Process of removing and replacing stocks that no longer fits the desired market exposure. Rebalancing incurs trading cost and will decrease returns.

To mitigate this :

Buffering : Refers to the practice of establishing a threshold level for the change in a firm’s capitalization rank that must be met before moving it from one index to another on a reconstitution date. Consider a large-cap index comprising the stocks of the 200 largest firms in a market and a mid-cap index of the next 300 stocks in capitalization rank. If a firm in the mid-cap index increases in capitalization so that it is one of the largest 200 firms, it is not actually moved into the large-cap index until its rank increases beyond the buffer zone—for example, until it has reached the size rank of 150 or higher at the next reconstitution date.

Packeting : when a mid-cap company’s capitalization increases so that it qualifies as large-cap stock, half of the portfolio position is moved to the large-cap index on the reconstitution date. If the stock still meets the criteria for inclusion in the large-cap index at the next reconstitution date, the remainder of the position is moved from the mid-cap to the large-cap index.