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CFA L3 Matheus > Section 3 - Equity PM > Flashcards

Section 3 - Equity PM Flashcards

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1
Q

Functions of Equity PM

A
  1. Capital Appreciation
  2. Dividend Income
  3. Diversification
  4. Hedge Against Inflation (e.g. Commodities)
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2
Q

Client Considerations

A
  • Growth
  • Income
  • Factor Exposure (Inflation, Rates etc)
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3
Q

ESG Considerations in Equity PM

A
  1. Negative Screening (Exclude)
  2. Positive Screening (Include)
  3. Thematic Investing (Energy Efficiency)
  4. Impact Investing (Targeted Objectives)
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4
Q

Segmentation of Equity PM

A
  1. Investment Type: Value, Core, Growth
  2. Company Size: Small, Mid and Large Cap
  3. Geography
  4. Economic Activity (Industries & Sectors)
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5
Q

Sources of Income (Equity PM)

A
  1. Dividends
  2. Securities Lending (Aluguel)
  3. Ancillary Investment Strategies (Comprar Equity antes de Ex-Dividend, Covered Calls e Cash Covered Puts)
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6
Q

Sources of Fees in Equity PM

A
  1. Management Fee (over AUM)
  2. Performance Fees (subject to Hurdle, Water Marks, Clawbacks)
  3. Adm Fees
  4. Marketing & Distribution Costs
  5. Trading Costs (Explicit as Fees and Implicits as Bid-Offer and Delay Costs)
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7
Q

Passive Equity PM Advantages

A
  1. Low cost
  2. Broad diversification
  3. Tax Efficient
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8
Q

Equity Benchmark Selection Rules

A
  1. Rules Based
  2. Transparency and Disclosure
  3. Investable
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9
Q

Buffering (Concept)

A

Create ranges between breakpoints to determine if asset is mid or large cap.

Increases the effective numer of stocks hold in a portfolio (?)

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10
Q

Packeting (Concept)

A

Split a stock between two parts put each part into its respective budget

Ex: 50% da posição cheia de AMER3 consta no peso reservado a Small Caps no Portfolio e 50% em Distressed Assets

Reduces turnover
Reduce trading costs

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11
Q

Index Types

A
  1. Market Cap Weighted: Mean-Variance is Optimal
  2. Equal Weight: Less Concentrated in some Stocks
  3. Factor-Based: Growth, Size, Momentum, Value, Yield
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12
Q

Equity Portfolio Strategies (Types)

A
  1. Return-Oriented (relative, absolute)
  2. Risk-Oriented
  3. Diversification-Oriented (e.g. No Single Stocks)
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13
Q

Equity Porfolio Asset Options

A
  1. Pooled Investments: Mutual Funds, ETFs
  2. Derivatives: Options

Includes Basis Risk (Future Price ≠ Spot Price) and Counterparty Risk (if OTC)

  1. Separately Managed Accounts: Portfolios Exclusivos
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14
Q

Tracking Error (Formula)

A

TE = √Var(Rp-Rb) caused by fees, # of constituents, trading intraday, cash drag

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15
Q

HHI (Formula)

A

HHI = ∑ wi²

Effective # Stocks = 1 / HHI

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16
Q

Value Active Strategies (List)

A

Relative: Peers

Contrarian: Oposto do sentimento de mercado

High Quality: Intrinsic Value + Signs of Financial Strength (ITUB)

Income Investing: Dividend focused

Deep Value: Finding extremely low valuations for good assets

Restructuring: AMER3

Special Situations: Outras reestruturações (operacional, por ex)

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17
Q

Growth Active Strategies (Example)

A

STNE US
PAGS US

18
Q

Active Strategies (List)

A
  1. Value
  2. Growth
  3. Top Down
  4. Bottom Up
  5. Activist Strategies
19
Q

Fundamentalist Building Portfolio (What to Do)

A
  1. Pre-Screening
  2. OW Outperformers and/or
  3. UW Underperformers
20
Q

Quantitative Building Portfolio (What to Do)

A

Maximizes Function (Risk / Return)

21
Q

Active Equity Investing Process (List)

A
  1. Define Universe
  2. Prescreen
  3. Understand
  4. Forecast Company Performance
  5. Build Portfolio
  6. Rebalance
22
Q

Active Equity Investing Pitfalls (List)

A
  1. Biases

a. Behavior Bias: Cognitive and Emotional

b. Confirmation Bias: Searches information to confirm previous feeling

c. Illusion of control: Overestimate your own ability

d. Availability Bias: Mental Shortcuts to estimate the probability of an outcome based only in available information and how easily it comes to mind

e. Loss Aversion

f. Overconfidence Bias

  1. Value Trap: Low P/E for AMER3 may become even lower
  2. Growth Trap: Getnet split to unlock value
23
Q

Quantitative Investing Process (List)

A
  1. Define investment thesis
  2. Acquire data and process
  3. Backtest (Info Coefficient - Pearson / Spearman)
  4. Evaluate (Out-of-The-Sample test)

Pitfalls: Survivorship Bias, Look-Ahead Bias, Data Mining, Turnover

Issues: Risk Models, Trading Costs

24
Q

Quant Pearson Information Coefficient (Concept)

A

Pearson IC = Correlation (Factor; Period Return t+1)

High = Good

Disadvantage: Sensitive to outliers

25
Q

Quant Spearman Information Coefficient

A

Correlation (Factor Score Rank; Stock Return Rank t+1)

Advantage: Better predictor due to lower sensitive to outliers

26
Q

Factor Based Strategies (List)

A
  1. Value: Low P/E, High E/P, Low P/B (Higher Premium on Risk of Financial Distress)
  2. Price Momentum: Carry of 12 months Return
  3. Growth: Stone & Pags
  4. Quality: Earnings Quality, Profitability, Solvency, Analyst Sentiment
  5. Unconventional: Satellite
  6. Activist: Board Nominations, Engage with Letters, Propose significant changes in General Meetings, Reduce Management Compensation, Launch Legal Proceedings, Breakup a Conglomerate to Unlock Value
27
Q

Factor Activist Strategy Targeted Companies (Concept)

A

Targets: Companies with Low Revenues, Negative Price Momentum, Weaker Corporate Governance

28
Q

Factor Statistical Arbitrage Strategy (Description)

A

Use statiscal and technical analysis to exploit pricing anomalies.

  1. Traditional
  2. Time-series with econometric models
  3. Machine-Learning techniques

Ex: Pairs Trading, Market Microstructure

29
Q

Sources of Active Return (List)

A
  1. Exposure to rewarded factors
  2. Alpha
  3. Luck
30
Q

Blocks for Portfolio Construction (List)

A
  1. Factor Weightings: OW/UW relative to benchmark
  2. Alpha Skills: Exposure to unknown factors or Timing of Known Rewarded Factors
  3. Position Sizing:
    a. Factor Orientation: Target Specific Exposure to Factors + Keep Diversification

b. Stock-Picker: Confia no αlpha
Concentrated portfolio assuming high level of idiosyncratic risk

31
Q

Breadth of Experience (Formula)

A

E(Ra) = IC * √BR * σRa * TC, where

E(Ra) = Expected Active Return
IC = Information Coefficient
√BR = # Independent Decisions Each Year
Ra = Std Dev of Active Return
TC = Transfer Coefficient

32
Q

Active Share (Concept and Sources)

A

Measures the extent to which number & sizing positions differ from benchmark

Sources:
1. Hold diferent weights
2. Hold different securities (100% different weight)

33
Q

Active Share (Formula)

A

Active Share = 1/2∑ |WPortfolio - WBench|

WEIGHTS

34
Q

Active Risk (Concept)

A

Tracking Error = √Var(Rp-Rb)

Increases with:
- Cash
-New Assets w/ High Covariance versus Portfolio

Decreases with:
- Diversification
- Low correlation between assets

STANDARD DEVIATION OF RETURNS

35
Q

Sources of Passive Return (List)

A
  1. Attribution analysis (choosing assets)
  2. Securities Lending
  3. Activism
36
Q

Portfolio Construction Process (Fundamental v. Quantitative)

A

Fundamental: Judgmental @ stock level
Quantitative: Use optimizers @ portfolio level

37
Q

Active Strategies: Bottom-up and Top Down (List)

A

Bottom-Up:
a. Value-Based: Contrarian Investing, High Quality, Income Investing, Deep Value, Special Situations
b. Growth Based Approaches: Hybrids between Growth and Value. Rely on PEG and less worried on expensive P/Es, EV/EBITDA and P/Bs.

Top-Down:
a. Country, Geographic
b. Sector, Industry Rotation (OK to bottom-up as well)
c. Volatility Based Strategies (Derivatives Long/Short Vol)
d. Thematic (Macro, Demographics, Disruptive Tech)

38
Q

Hedged Approach (Factor Based Strategy Concept)

A
  1. Choose factor
  2. Divide stocks in quantiles
  3. Long the Best and Short the Worse

Drawbacks:
a. Ignores intermediate quantiles
b. Assumes linear factor v. return relationship
c. Tends to be concentrated
d. Requires shorting stocks
e. Not a pure factor strategies (comes with other risks)

39
Q

Sector Neutralization Strategy (Concept)

A
  1. For Momentum Strategies, long best and short worse may imply sector bets
  2. If you do not want to bet in an industry, neutralize sectors and keep momentum factor only
40
Q

Event-Driven Strategies (Concept)

A

M&As, Earnings Event, Restructuring

41
Q

Investment Styles per Type

A
  1. Characteristics Based: Value, Growth, Capitalization, Volatility
  2. Membership Based: Sector, Country, Market
  3. Positions: Long/Short
42
Q

Style Classification Approaches (List and Limitations)

A
  1. Holdings-Based: Value, Growth, Size. Requires discretionary specifications. More accurate than 2.

Limitations 1: Requer abertura de todos os constituintes do portfolio

  1. Returns-Based: Comparation between Portfolio and Bench Style XPTO. Multivariate Regression against various indexes. More widely applied.

Y = a + b1x1 +b2x2 + error where b1 and b2 are excludent

Here, R² = Index and
(1-R²) = Selection

  1. Manager Self-Identification: Discretionary Mandate

CFA L3 Matheus (18 decks)

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