AC1IJE AAD PASSIJE IAJES1MEA1 S1RA1ECIES:

PRESENTED BY:
P.SRI RAMYA

Agenda
Are Markets EIIicient?
Can Managers Add Value?
Where is Active Management Going?

Definitions
Passive (Index) Management
Two Meanings
Security Selection:
Match perIormance oI an asset class index such as the
S&P/TSX Composite Index
Asset Mix:
Match perIormance oI a policy mix (such as 50 stocks/50
bonds)

Definitions
Active Management
Two Strategies
Market Timing:
Timing asset class exposure to earn a return that exceeds the
return available by maintaining a constant asset mix (Ior e.g.
50 stocks/50 bonds)
Security Selection:
Selecting securities to earn a return that exceeds the return
available Irom investing in an index such as the S&P/TSX
Composite Index

y Market Timing is Unprofitable?

'Historical Analysis Indicates You Must Be
Right At Least 2/3 of the Time*
A. Bull markets last longer than Bear markets
B. Stocks go up more over time than go down
C. Most upward perIormance occurs in
unpredictable spurts
*Source: Bill Sharpe, 'Likely Gains Irom Market Timing Financial Analyst Journal (March/April 1975, Pg 60-69)

Active vs. Passive Investment Management

Security Selection
Issues to Consider:
Pilosopical
Is the Market EIIicient?
Practical
Can Active Managers
'Beat the Market?

A. Pilosopical: Is te Market Efficient?

eak Form
A security`s price reIlects all the inIormation contained in the
historic price record. Past prices cannot provide inIormation
oI any value in helping to determine Iuture prices.
Semi Strong Form
At any given time, all relevant public inIormation is Iully
reIlected in the security`s price.
Strong Form
All public and private inIormation is Iully reIlected in the
security`s price

Te Secret Formula of Active Investment Management

Te Fundamental Law of Active Management
umber oI Independent
Forecasts oI E ( R )
Source: Active Portfolio Management, by R. Grinold & R. Kahn, McGraw Hill, ew York, Y, 2000
InIormation Ratio Manager`s Skill Breath
Relationship Between
Forecasts and Actual
Outcomes
Information Ratio (Excess Return)/(Tracking Error)
1racking Error Standard Deviation of Excess Return

So...Can Active Managers ~Beat te Market?

Asset Class Breadt Skill Odds of Success
Cdn. Fixed Income Low Low Low
Cdn. Equity Low Avg. Avg.
Cdn. Small Cap Avg. High High
U.S. Equity High Avg. Avg.
U.S. Small Cap High High High
Global Equity High High High

Long Term Observations...

Average Manager Return Market Return
i.e., Market Return Passive PortIolios Active PortIolios
The Market Rewards DiIIerent Factors over Time
SuccessIul Active Managers eed Both Skill and Breadth
Active Management Pay OII For Managers in The Top Third oI the Universe
Active vs. Passive Management
'Properly measured, the average actively managed dollar must
under-perIorm the average passively managed dollar net oI costs.
Active management is indeed a zero-sum game
Bill Sharpe, oble Prize Winner in Economics
Source: The Arithmetic of Active Management. Does Fund Si:e Matter? Reprinted with permission Irom The Financial
Analysts' Journal Vol. 47, o. 1, by William Sharpe, January/February 1991. pp. 7-9
Copyright, 1991, Association Ior Investment Management and Research, Charlottesville, VA

Te Power of Diversification

. . . . . . . . . . .
1he Creater the Aegative Correlation Between 2
Investments, the Creater the Contribution to
Reducing Risk.
1his Relationship is Aon- linear.
C
o
n
t
r
i
b
u
t
i
o
n

t
o

E
x
c
e
s
s

R
e
t
u
r
n
/
R
i
s
k
Correlation
Sort Selling
Portable Alpa
Market Neutral
TBills LongBonds
Cdn. Equities
orld Equities

E
x
p
e
c
t
e
d

R
e
t
u
r
n
Risk
<
<
<
Long
Bonds
TBills
/
Long
Sort
< < <
Te Spectrum of Active Management Strategies
Portable
Alpa &
Market
Neutral
Equities
Small
Cap
/
Cdn.
Equity
Plus