Finance Chapter 11 Fundamental Strategies Exhibits Topdown Investment Process Begins With Analysis Broad Country And

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CHAPTER 11

EQUITY PORTFOLIO MANAGEMENT STRATEGIES

11.1 Passive versus Active Management (Exhibit 11.1)

▪ Passive equity portfolio management is a long-term buy-and-hold strategy. It is also known

as indexing.

▪ Active equity portfolio management refers to attempts to outperform an equity benchmark on

a risk-adjusted basis.

11.2 An Overview of Passive Equity Portfolio Management Strategies

11.2.1 Index Portfolio Strategy Construction Techniques

▪ Full replication

11.2.2 Tracking Error and Index Portfolio Construction (Exhibit 11.2)

▪ The goal of the passive manager should be to minimize the portfolio’s return volatility

11.2.3 Methods of Index Portfolio Investing (Exhibits 11.3, 11.4)

1. Index Funds

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in part.

▪ For an indexed portfolio, the fund manager will typically attempt to replicate the

composition of the particular index exactly—will buy the exact securities comprising

the index in their exact weights and then alter those positions anytime the

composition of the index itself is changed.

2. Exchange-Traded Funds

11.3 An Overview of Active Equity Portfolio Management Strategies (Exhibits 11.5, 11.6)

▪ The goal of active equity management is to earn a portfolio return that exceeds the return of a

11.3.1 Fundamental Strategies (Exhibits 11.7, 11.8)

▪ Top-down investment process begins with an analysis of broad country and asset class

allocations and progresses down through sector allocation decisions to the bottom level,

where individual securities are selected.

11.3.2 Technical Strategies (Exhibits 11.9, 11.10)

▪ A contrarian investment strategy assumes that stock returns are mean reverting, indicating

11.3.3 Factors, Attributes and Anomalies (Exhibits 11.11, 11.12)

▪ Factor investing

– Manager forms portfolios that emphasize certain characteristics of a collection of

▪ Earnings momentum strategy

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in part.

▪ Anomalies

– Investment strategies can also be based on anomalies that are believed to occur in

financial markets on a regular basis (the weekend effect, the January effect).

11.3.4 Forming Momentum-Based Stock Portfolios: Two Examples (Exhibit 11.13)

11.3.5 Tax Efficiency and Active Equity Management (Exhibit 11.14)

▪ Reichenstein (2006) and Horan and Adler (2009) note that many other investors need to

worry about the tax efficiency of the active portfolio because this is an expense that they will

11.3.6 Active Share and Measuring the Level of Active Management (Exhibit 11.15)

11.4 Value versus Growth Investing: A Closer Look (Exhibits 11.16, 11.17, 11.18, 11.19, 11.20)

▪ Growth Investing

– A growth-oriented investor focuses on the current and future economic “story” of a

company, with less regard for share valuation.

11.5 An Overview of Style Analysis (Exhibits 11.21, 11.22, 11.23)

▪ Style analysis

– Attempts to explain the variability in the observed returns to a security portfolio in

▪ Style grid

– Used to classify a manager’s performance along two dimensions: firm size (large cap,

mid cap, small cap) and relative value (value, blend, growth) characteristics

11.6 Asset Allocation Strategies

11.6.1 Integrated Asset Allocation (Exhibits 11.24, 11.25)

11.6.2 Strategic Asset Allocation (Exhibit 11.26)

▪ Used to determine the long-term policy asset weights in a portfolio

11.6.3 Tactical Asset Allocation

▪ Frequently adjusts the asset class mix in the portfolio to take advantage of changing market

11.6.4 Insured Asset Allocation

▪ Results in frequent adjustments in the portfolio allocation, assuming that expected market

returns and risks are constant over time, while the investor’s objectives and constraints