Download Portfolio Management

Portfolio Management
Grenoble Ecole de Management
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Dr PHILIPPE DUPUY
Associate Professor in Finance
[email protected]
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Main Topics of Study
• The market of asset management
• The portfolio management process and the
investment policy statement
• Mean-variance analysis
• Diversification
• The Capital Asset Pricing Model (CAPM)
• Multifactor models
• Asset allocation
• The universe of investment (bonds, equities…)
• Execution and market efficiency
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Main Topics of Study
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Evaluation of portfolio performances
Revision, rebalancing and active management
Reporting
Alternative investments
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E-List
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Institutionalinvestor.com
watsonwyatt.com
investmentcompanyinstitute.com
investmentuk.org
efama.org
cob.fr
cfainstitute.org
edhecrisk.com
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Learning Objectives
Mastering the principles of the portfolio
management process:
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Risk and returns analysis
Investments objectives and policies
Diversification
Dynamic Asset allocation
Performance measurement
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Learning Objectives
At the end of the course, students should be able
to undertake positions in the asset management
industry such as:
o Sales,
o Marketing,
o Analyst,
o Middle office,
o Manager assistant
o etc…
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Assessment
• 60%
• 40%
3-hour exam
individual report
Portfolio Management
The Market of Asset Management
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Economics of Investment Management
• Relatively simple, fee driven
• Based on a percentage of the average
amount of assets under management +
Performance fees
• The value of the firm is thus a multiple of
its annual fee income.
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Economics of investment management
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portfolio managers
analysts
traders
sales
marketing
Middle office.
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Economics of Investment Management
• In recent years AM firms have reduced the
number of mutual funds
• Many funds have been merged or liquidated
• Primarily due to the downward pressure on
fees, distribution costs and compliance costs.
• Another trend in recent years has been the
growth of alternative investments such as hedge
funds, exchange traded fund (ETF), private
equity…
Portfolio Management
THE PORTFOLIO
MANAGEMENT PROCESS AND
THE INVESTMENT POLICY
STATEMENT
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The Portfolio Management Process
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Portfolio management is a process
Logical and orderly combination of activities
Dynamic and flexible concept
Portfolio management is a continuous and
systematic process complete with feedback loops
for monitoring and rebalancing.
• An integrated set of steps undertaken in a
consistent manner to create and maintain
appropriate portfolio to meet clients’ stated
goals.
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The Portfolio Management Process
Planning
Feedback
Execution
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The Planning Step
• Formulate investments objectives and policies
• Form Capital market expectations
• Establish strategic asset allocation
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The Planning Step: Investor’s
Objectives and Constraints
• objectives are desired investment outcomes in
terms of return and risk.
• Constraints are limitations on the investor’s
ability to take advantage of particular
investments. Liquidity and time horizon.
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Investment Policy Statement (IPS)
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Foundation for the process
Client’s objective and constraints
Discipline the portfolio manager
Helps ensure against ad hoc revisions in strategy
An investment policy statement (IPS) is a written document
that clearly sets out a client’s return objectives and risk
tolerance over that client’s relevant time horizon, along with
applicable constraints such as liquidity needs, tax
considerations, regulatory requirements and unique
circumstances.
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Investment Policy Statement (IPS)
Return
objectives and
Risk
Tax
Time Horizon
Liquidity
Regulatory
Unique
circumstances
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The Planning Step: Know your
customers - Investors
• Investors are institutional or individual.
• Institutional investors are entities such as
corporations, pension funds, foundations and
endowments, insurance companies.
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The Planning Step: Individual
Investor’s Objectives and Constraints
Situational Profiling:
Source of wealth,
Measure of wealth
and Stage of life
Psychological profiling:
ability and willingness to
take risk
Investor’s financial
needs and goal
IPS
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The Planning Step: The Investment
Policy Statement
• IPS is the governing document for all decisionmaking
• Also IPS details reporting requirements,
manager fees.
See example at:
http://services.assetmanagement.hsbc.co.uk/site/media/pdf/Factsheets/OS/si
mplified_prospectus/GIF_Brazil_Equity.pdf
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The Planning Step: Investment
Strategy
• Passive investment approach: portfolio composition
does not react to changes in capital market
expectations.
• Passive strategies are also called buy and hold
strategies. Indexing is a common passive approach.
• Barclays Global Investors, State Street Global,
Vanguard…
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The Planning Step: Investment
Strategy
• Active investment approach: managers will
respond to changing capital market
expectations. It’s holding differ from the
benchmark.
• Objective is to produce positive excess return,
also known as positive alpha.
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The Planning Step: Capital Market
Expectations
• Long run forecast of risk and return for choosing
portfolios that maximize expected return for
given level of risk.
• Portfolio manager may use sell-side analysts
and/or buy side analyst.
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The Planning Step: Strategic Asset
Allocation
• Determine target asset class weights using
portfolio optimization.
• maximum-minimum bounds around target
weights.
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Execution step: plans turn to reality
• Multiple investment vehicles. Many support
ETF, Securities, performance Swap, future
• Orders. Portfolio managers initiate portfolio
decisions and trading desks then implement
these decisions. Poorly managed executions
result in transaction costs that reduce
performance.
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Feedback Step
• Manager monitors and rebalances the portfolio
• Manager conducts performance evaluation
• Manager communicates to customers
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Feedback Step: Performance
Evaluation
• Performance evaluation involves the calculation
of the portfolio’s rate of return
• Performance attribution examines why the
portfolio performed as it did and tracks sources
of underperformance
• Performance appraisal enables to judge if the
manager is doing a good job compared to its
pairs.
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http://screen.morningstar.com/fundsearch/FundRank.html
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The Portfolio Management Process
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Portfolio Management
• Investment objectives and constraints are
identified and specified
• Investment strategies are developed
• Portfolio composition is decided in detail
• Portfolio decisions are initiated by portfolio
managers and implemented by traders
• Portfolio performance is measured and
evaluated
• Investor and market conditions are monitored
• And any necessary rebalancing is implemented.
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Portfolio Management
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Process
Planning
Feedback
Execution
Objectives and constraints
Return and risk
Asset allocation
IPS