Vous êtes sur la page 1sur 9


Portfolio Management
Spring Term Lecture 20+21
ActEd Chapter 20

Management styles
Tells you how the manager will run the
 Helps distinguish between different asset

Management styles.
Top-down and bottom-up approaches.
 Active and passive management.

Growth style.
Manager invests mainly in growth stocks.
Style of investing that emphasizes capital
 Growth stocks:


Value style.

Manager invests mainly in value stocks.

Seeks out stocks that are considered to be
undervalued based on certain accounting

Price-to-book ratio
Dividend yields.

Less volatile than growth stocks.

 Value stocks often outperform the rest of the
market during recovery stages of the general
economic cycle.


Bond portfolio management.

Earnings expected to grow at an above average

rate relative to the market.
Pay low dividends (earnings reinvested in
Higher price to earnings ratio than other
E.g. technology companies.

Growth and value styles.

There are growth and value variants of
indices for benchmarking purposes.
 E.g. consider S&P 500.
 All the 500 companies are ranked by
their Price-to-Book ratios.
 Resulting list is then divided in half by
market capitalisation.

Growth and value styles.

Those companies with half of the market
cap of S&P 500 and having lower PBR
are included in the value index.
 The remaining companies are added to
the growth index.

Growth and value styles.

An alternative method identifies 5

growth factors:

Growth and value styles.

The 5 value factors are:


Price-to-book ratio (PBR)

Dividend yield
Earnings yield
Cashflow yield
Sales to price

These factors are used to distinguish

between growth and value securities.

Other management styles.

Rotational moving between value and

growth depending on which style is
believed to be attractive at a particular
point in time.

Sales growth
Earnings growth
Forecast earnings growth
Return on equity
Earnings revisions

And 5 value factors

Other management styles.

Momentum buying (selling) stocks that
have recently risen (fallen) significantly in
price on the belief that they will continue
to rise (fall) owing to an upward
(downward) shift in their demand curves.
 Contrarian going against market
sentiment in the belief that investors in
the market over-react to news.

Top-down and bottom-up

How do you start assembling a


Top-down and bottom-up approaches

are the two widely used.

Top-down approach

Begins with the `big picture - of studying the

macro-economic environment.

Rate of economic growth.

Political conditions.
Regulatory environment.

This will help the manager decide the

 Within the region, consider the industries that
offer the best investment opportunities.

Bottom-up approach
Starts with micro-analysis at the
company level.
 Analyse various factors like:

Management quality + track record

Market share
 Business plans for the future

Top-down approach
For example, during periods of low
inflation, consumer spending increases,
which might be a good time to buy
automobile stocks or retail stocks.
 Finally select individual stocks, based on
fundamental share analysis.

Bottom-up approach
Next consider forecasts for the industry
 Finally consider the general (macro)
economic conditions.

Top-down and bottom-up

As long as the company's future

prospects look strong, the economic,
market or industry cycles are of no

Top-down is better because

Better risk control, because you build a
balanced, well-diversified portfolio.
 Argument: it is asset allocation that
matters, not stock selection.
 Dont lose out on industries/regions that
have a promising outlook this is a risk
with bottom-up approach.

Bottom-up is better because

Investment performance depends on individual
asset performance this is where you should
concentrate your analysis.
 Even if its industry is doing poorly, a strong
company may still outperform the market.
 Argue: macroeconomic forecasts are actually
major distractions for investors as the
projections might turn out to be wrong.
 Warren Buffet used bottom-up approach!

Active management
All the techniques we have seen so far
are examples of active management.
 It is an attempt to outperform

the market
the funds peers (where appropriate).

The verdict

An investment style that combines the

two approaches is better.

Passive management
Makes no attempt to distinguish attractive from
unattractive securities, or forecast securities
prices, or market sectors.
 Investors willing to accept average returns.
 Makes little or no use of the information active
investors seek out.


Multi-asset or balanced.

Active or passive?

Advantages of active management:

Expert analysis experienced investment
managers making decisions based on
market trends, economic factors, own
judgement, etc.
 Possibility of higher than average returns.
 Managers can take action if they believe the
market may take a downturn.


Liability hedging

Active or passive?

Disadvantages of active management:

Higher expenses fees, transaction costs.
No guarantee of higher returns riskier
strategy than passive investment.
 Style may conflict with current market
conditions, leading to lower returns.

Active or passive?

Advantages of passive management:

Active or passive?

Lower expenses.
 Lower volatility.
 Will at least make average returns for each
asset class.

Active vs passive: returns

Disadvantages of passive management:

Loss of upside potential.

Investment restricted to markets and
sectors where suitable benchmarks exist.

Index-tracking: Definition

Attempt to replicate the performance of a

market index, either by:
holding all the shares in the index in the
appropriate proportions;
 hold some shares (sample);
 synthesising the index using derivatives a
complicated way of saying use index

Index-tracking - Assumptions

Markets are relatively efficient.

Any out-performance via active
management is not worth the extra

Full replication
Use this strategy if the investment fund is
 Aim is to minimise tracking error (gross
of tax and expenses).

Tracking error divergence between the

performance of the fund and the
performance of the index.

Sampling or Partial Replication

Hold a stratified sample of the index.

Involves dividing up the stocks in the index by
size and sector and just buying samples of each
group, where the chosen assets perform closely
in line with the sector as a whole.
Lower transaction costs than full replication.
Assets chosen based on statistical analysis.
If analysis is incorrect, this technique will
produce a higher tracking error than full

Index-tracking in practice

Applied at an asset class level

actively select asset allocation, then within

each asset class, use index-tracking.

Applied to certain sectors:

Where there is less scope for active style.

Where there is greater risk or less
information about a market/sector.

Synthesising using derivatives

Same as hedging using a combination of
cash and index futures.
 See ActEd example in Chapter 20.
 See other examples we worked through
in class + home exercises.

Active or passive? Verdict

Manage core portfolio on a passively.
 Appoint specialist satellite managers for
the remaining portfolio to try and achieve
better returns.
 Increasingly satellite managers are
hedge fund and private equity


Bond Portfolio Management

Active bond portfolio management

achieved by switching.
 Selling one bond and buying another,
hoping to achieve a higher return.
 You need a market with a variety of
highly liquid, marketable bonds.
 Two types: anomaly and policy


Three types of trends in bond markets:

Permanent trend the effect of passage of
 Temporary trends changes in the general
level of interest rates and changes in the
shape of the yield curve.
 Fluctuations fluctuations around the yield


Policy switch

Take advantage of expected temporary trends.

Risk of loss incurred if trend takes place in the
opposite directions to that expected.

Anomaly switch a.k.a Jobbing switch

Take advantage of fluctuations.

Risk incurred if:

Anomaly Switching

Involves moving between stocks with

similar volatility, thereby taking
advantage of temporary anomalies in


4 ways to identify anomalies:

yield differences
price ratios
price models
yield models.

measures sensitivity of the price of the

bond to change in yields.

V =

Low-risk strategy, but

the use of computer-based analysis
limits opportunities for significant

Volatility of a fixed-interest bond:

Define volatility of a fixed interest bond.

Anomaly Switching

fluctuation does not reverse soon enough, or

unfavourable temporary trend develops.

1 dP
P dy

where P is the price and y is the bond yield.

Anomaly Switching
Yield differences are usually used to
identify cheap and dear bonds.
 High gross redemption yield usually
means the bond is cheap.
 However, this is may be misleading,
especially if there are tax-related
 So analyse carefully before making a
decision to switch.

Anomaly Switching
Price ratios can also be used, but
 For two bonds A and B, keep a historical
record of the values of the price ratio
 When the ratio reaches an extreme high
or low point, then it usually indicates an
opportunity for a switch.

Anomaly Switching


Adjusted the prices used in the calculation

of the ratios e.g. allow for accrued

However, price ratios will still be

influenced by changes in general level of
interest rates.
 Need to consider whether anomaly is
suitable for the fund to exploit.

Policy Switching
Entails taking a view on future changes
in shape or level of the yield curve and
moving into gilts with quite different
terms to maturity and/or coupon.
 More risky
 involves taking a view on future
changes to shape and level of yield

Anomaly Switching

Price ratios have trends, due to the

following reasons:
The price of a low-coupon bond accrues
faster than that of a high-coupon bond as
maturity is approached.
 Even if coupons are the same, the price of a
shorter bond tends to accrue faster than the
price of a longer bond.
 Short-term bonds are less volatile than longterm bonds.

Anomaly Switching
Price models can be built to assess the
theoretically correct price of a bond. A
bonds price is anomalous if the actual
price differs from the price derived from
the model.
 Yield models that compare a bonds
yield with the par yield curve can also be

Policy Switching
E.g., if yields in general are expected to
fall, the portfolio may be switched into
longer-dated more volatile stocks.
 3 methods for identifying policy switches:

Volatility (or duration).

Reinvestment rates.
 Spot rates and forward rates.

Spotting a Policy Switch Volatility

Calculate volatility (or duration) and look
at forecast changes at different points in
the yield curve.
 Gives an idea of the area of the market
that will give the best returns if the
forecasts prove accurate.

Spotting a Policy Switch

Reinvestment Rates Example
Consider 2 bonds A and B.
B has longer term to maturity.
 So we can calculate the rate at which
proceeds of A have to be re-invested, up
to the maturity of B, to match Bs total
 If reinvestment rates are particularly high
or unattainable, then B offers better

Spotting a Policy Switch

Reinvestment Rates
Method involves selecting representative
bonds at various points along the
maturity range.
 Then work out the reinvestment rates
between each bond and the next.
 Examining the series of reinvestment
rates can identify areas that are
cheap/dear in relation to neighbouring

Spotting a Policy Switch Spot

rates and forward rates
Derive spot rates and forward rates from
the yield curve.
 This may reveal unusual features in the
term structure of interest rates which
give rise to a policy switch opportunity.

Portfolio management could involve
using other assets like interest rate
swaps instead of direct bond investment.
 When using such alternatives, check
whether you are rewarded adequately for
the risks taken:

Marketability and liquidity risks.

Credit risks.