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Chapter 16

The document discusses various strategies for passive and active equity portfolio management. It covers index portfolio construction techniques, tracking error, and methods for index investing including index funds and ETFs. The document also discusses active management strategies such as fundamental analysis, technical analysis, tax efficiency, and asset allocation approaches including strategic, tactical, and insured asset allocation.

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48 views

Chapter 16

The document discusses various strategies for passive and active equity portfolio management. It covers index portfolio construction techniques, tracking error, and methods for index investing including index funds and ETFs. The document also discusses active management strategies such as fundamental analysis, technical analysis, tax efficiency, and asset allocation approaches including strategic, tactical, and insured asset allocation.

Uploaded by

mahrukh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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EQUITY PORTFOLIO

MANAGEMENT STRATEGIES
1
PASSIVE VERSUS ACTIVE
MANAGEMENT

2
AN OVERVIEW OF PASSIVE EQUITY PORTFOLIO
MANAGEMENT STRATEGIES
 Index Portfolio Construction Techniques
 Full
replication
 Sampling
 Quadratic optimization
 Completeness funds

3
TRACKING ERROR AND INDEX
PORTFOLIO CONSTRUCTION

4
CALCULATE THE ANNUALIZED
TRACKING ERROR
 Suppose an investor has formed a portfolio designed to
track a particular benchmark. Over the last eight
quarters, the returns to this portfolio, as well as the index
returns and the return difference between the two, were:

5
EXPECTED TRACKING ERROR BETWEEN THE S&P
500 INDEX AND PORTFOLIOS COMPRISED OF
SAMPLES OF FEWER THAN 500 STOCKS

6
INVESTMENT STYLE AND TRACKING
ERROR

7
METHODS OF INDEX PORTFOLIO
INVESTING
 Buying shares in an index mutual fund
 Managed by professional investment companies
 Replicate the composition of the particular index
 Vanguard’s 500 Index Fund (VFINX)

 Buying shares in an exchange-traded fund (ETF)


 A portfolio of securities is placed on deposit at a financial
institution or into a unit trust, which then issues a single type
of certificate representing ownership of the underlying
portfolio.
 Standard & Poor’s 500 Depository Receipts

8
EQUITY PORTFOLIO INVESTMENT
PHILOSOPHIES AND STRATEGIES

9
ACTIVE EQUITY PORTFOLIO MANAGEMENT
STRATEGIES - FUNDAMENTAL STRATEGIES
 Time the equity market
 Shift funds among different equity sectors and industries
or among investment styles
 Find undervalued stocks

 Asset class rotation strategy - tactical asset allocation


 Sector rotation strategy

10
TECHNICAL STRATEGIES
 Contrarian investment strategy
 Price momentum strategy
 Earnings momentum strategy
 Anomalies and Attributes
 The weekend effect and the January effect
 Firm size, P/BV ratio and P/E ratio

11
TAX EFFICIENCY AND ACTIVE EQUITY
MANAGEMENT
 There are two potential costs associated with active stock
trades.
 Additional transaction costs
 Capital gain taxes

 Fund’s portfolio turnover


 The portfolio turnover ratio is typically measured as the total
dollar value of the securities sold from the portfolio in a year
divided by the average dollar value of the assets managed by
the fund.
 An active manager that sold $75 million worth of stocks
in a year from a portfolio that averaged $100 million in
assets under management would have a turnover ratio of? 12
TAX COST RATIO

13
VALUE VERSUS GROWTH INVESTING:
A CLOSER LOOK

14
AN OVERVIEW OF STYLE ANALYSIS

15
STYLE ANALYSIS MODEL
 As developed by Sharpe (1992), returns-based style
analysis is simply an application of an asset class factor
model:

16
17
18
ASSET ALLOCATION STRATEGIES -
INTEGRATED ASSET ALLOCATION

19
OPTIMAL PORTFOLIO SELECTION: AN
EXAMPLE

20
STRATEGIC ASSET ALLOCATION
 One way to think of the strategic allocation process is as
being equivalent to the integrated asset allocation
process but without the feedback loops.
 Once this asset mix is established, the manager does not
attempt to adjust the allocation according to temporary
changes in market and investor circumstances.

21
TACTICAL ASSET ALLOCATION
 Frequently adjusts the asset class mix in the portfolio to
take advantage of changing market conditions.
 With tactical asset allocation, these adjustments are
driven solely by perceived changes in the relative values
of the various asset classes; the investor’s risk tolerance
and investment constraints are assumed to be constant
over time.
 This is equivalent to an integrated approach to asset
allocation that removes the feedback loop involving
investor-specific information (i.e., I2).

22
INSURED ASSET ALLOCATION
 Continual adjustments in the portfolio allocation, assuming
that expected market returns and risks are constant over
time, while the investor’s objectives and constraints
change as his or her wealth position changes.
 Often, insured asset allocation involves only two assets,
such as common stocks and T-bills.
 As stock prices rise, the asset allocation increases the stock
component. As stock prices fall, the stock component of
the mix falls while the T-bill component increases.
 Insured asset allocation is like the integrated approach
without the feedback loop on the capital market side (i.e.,
C2 ). 23
SELECTING AN ACTIVE ALLOCATION
METHOD
 Perceptions of the variability in the client’s objectives
and constraints
 Perceived relationship between past and future capital
market conditions

24

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