Section 6 Flashcards
What is a top down asset allocation approach to fund management?
chooses the assets classes and allocations first and leave stock picking until last
wide asset classes are initially specified with long term strategic portfolio proportions, giving way to short-term tactical deviations depending on the expectations of the investment manager.
what does a bottom up approach to fund management use?
Uses fundamental analysis an construct a portfolio of opportunities (anomalies) .
What is passive investing also known as?
index tracking
what are benefits to passive
- low cost
- low tracking error - do not deviate too far from tracker being followed
what is tracking error for a passive fund?
Difference between the performance of the fund and the performance of the index selected for tracking
what is the success of a tracker fund based on
costs of managing the fund and the fund’s tracking error
what are the main advantages of a tracker fund?
lower maintenance costs (transaction costs and management charges)
this is because once securities have been selected only an occasional adjustment is required to maintain the fund’s ability to tack.
what is an issue with tracker funds / passive?
the risk/return characteristics of the market than an investor wishes to track may change - in this case the portfolio may need to be changed radically in order to achieve a new mix of risk and return.
-although these funds may produce adequate returns for investors in a bull market, in a bear market this strategy is not easy to justify.
what is active fund management
seeking mispriced opportunities (over or under priced securities) and adjust their portfolios to take advantage of this.
what are risks of active
risks involved in this approach to management are greater than in the simpler passive technique, because the fund manager will expose their portfolio periodically to the specific risk of a single security.
what are benefits of active
could potentially yield much larger returns than that of passive (but could also yield much lower)
What is portfolio tilting?
combines elements of both passive and active fund management
how does portfolio tilting work
constituents of a particular index are held however these are not held in proportion to their market values and instead are ‘tilted’ in the direction of the managers view of market potential
what is the main difficulty with combining active and passive strategy (tilting)
determining the degree to which the fund should be actively versus passively managed.
what is a value style of investing?
value fund managers aim to identify shares that are perceived to be undervalued
what companies would fund managers with a value style of investing look at?
- low absolute (or relative) price earnings ratios and high dividends yields
- price-to-book and price-to-sales ratios
what are the three sub-categories in value style investing?
1) Undervalued securities
2) contrarian
3) High yielding
what is investing in Undervalued securities
investing in stocks with low price earnings ratios focus on companies selling at low prices relative to current or future earnings. Including stocks in defensive and cyclical sectors or sectors which are currently out of favour.
What is investing contrarian
companies with low share prices relative to book value. these firms may have little or no current earnings or dividend yield but are expected to experience a cyclical rebound or benefit from a firm-specific turnaround
what is high yielding investing
high yielding stocks offering maintained or increasing dividends.
Cost is low compared to dividend being paid
what is growth investing
managers attempt to identify companies with above-average growth prospects.
what will investors be prepared to do for growth investing
pay higher current year PE for companies whose earnings are expected to grow faster than the market, or for those which have better visibility of earnings growth.
what are market-oriented funds?
these do not have strong or persistent leaning to either growth or value stocks but are generally closer to the market average of the business cycle.
May tilt occasionally with no strong restriction on their portfolio selection process
what are small cap portfolio construction
focusing on small companies
what are characteristics of typical small cap portfolio
- below market dividend yields
- high betas
- high firm-specific risk
- paucity of stock researchi
what is a PE ratio?
Price / Earnings ratio
price = future growth prospects earnings = actual performance
what are PE ratios like in a growth fund?
high PE ratios
what is momentum investing in terms of growth investing?
going with the trends and starting to buy as others by
what are PE ratios like in a value fund
low PE ratios (finding something that the market has missed)
what is large cap investing
investing in blue chip companies
