...Active Portfolio Management: Country vs. Sector Characteristics Executive Summary This project sets out to invest between 7bn and 9bn Euros for a large pension fund in European equities, chosen from the MSCI Europe Index, which also serves as the benchmark to measure performance against. Two portfolios need to be created, one to reflect asset allocation focussed on countries and the other on sectors, with the number of assets in each portfolio being no more than 150. Both portfolios must be actively managed, having at least an active risk of 3% when compared to the benchmark. To achieve this, I followed a three step top-down approach for our investment decision process. Firstly, I started with an analysis of the macroeconomic environment in Europe, followed by forming opinions on the relative strengths and weaknesses of the constituent countries and sectors, using the macro-analysis to determine which are most likely to perform well, given the long-run trends identified. Finally, I invested in all mid-cap companies within the selected countries and sectors, based on our judgement that middle sized firms are poised to prosper the most in this difficult economic environment, which I predict to remain tough for the foreseeable future. After finalising the initial portfolios in this way, I used BarraOne to optimise them. Following optimisation, I compared the risk profile of each portfolio to the benchmark. Our findings show that an actively managed portfolio, especially one constrained...
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...Definition: In an active portfolio strategy, a manager uses financial and economic indicators along with various other tools to forecast the market and achieve higher gains than a buy-and-hold (passive) portfolio. Tracking error is a measure of how closely a portfolio follows the index to which it is benchmarked. The most common measure is the root-mean-square of the difference between the portfolio and index returns. Many portfolios are managed to a benchmark, normally an index. Some portfolios are expected to replicate, before trading and other costs, the returns of an index exactly (an index fund), while others are expected to 'actively manage' the portfolio by deviating slightly from the index in order to generate active returns or to lower transaction costs. Tracking error (also called active risk) is a measure of the deviation from the benchmark; the aforementioned index fund would have a tracking error close to zero, while an actively managed portfolio would normally have a higher tracking error. Dividing portfolio active return by portfolio tracking error gives the information ratio, which is a risk adjusted performance metric. If tracking error is measured historically, it is called 'realised' or 'ex post' tracking error. If a model is used to predict tracking error, it is called 'ex ante' tracking error. The former is more useful for reporting performance, whereas ex ante is generally used by portfolio managers to control risk. The individual investors who wish...
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...Drift and Portfolio Management for Active Australian Equity Funds † Andrew B. Ainsworth ∗ Kingsley Fong David R. Gallagher Current Draft: 30 April 2007 Australian School of Business, The University of New South Wales, Sydney, N.S.W. 2052 Abstract Using monthly active equity fund portfolio holdings, we examine the magnitude of style drift and decompose it into active and passive components. We find that while fund style tilts are consistent with their self-stated investment objective, there is variation in the degree of style bias within style groups. We document that funds actively adjust their portfolio holdings in response to passive style drift to retain a desired portfolio tilt. The degree of adjustment varies with the frequency over which the drift is measured, with funds being most responsive to changes in book-to-market and momentum drift. We also find that certain types of style drift affect portfolio turnover. Keywords: Investment style, style drift, consistency, portfolio management, investment performance. † This research was funded through an ARC Linkage Grant (LP0561160) involving Vanguard Investments Australia and SIRCA. The authors thank Adrian Lee and an anonymous referee for helpful comments and suggestions. We also thank Vanguard Investments Australia for research support. ∗ Corresponding author. Email: andrew.ainsworth@student.unsw.edu.au. Electronic copy available at: http://ssrn.com/abstract=1004670 Style Drift and Portfolio Management for Active...
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...which aims to achieve the same level of returns of following the returns , and catch up the market growth at the same time. The index fund is a kind of passive management fund which is just opposite to the actively management fund. There are many characteristics of index fund. 1, Index Investing uses passive operation of tracking the benchmark index, which can make the costs of the fund's operating and transaction into a minimum. Portfolio strategy can be adjusted by According to the change of the index’s Composition, and what’s more, no fees will be paid about the investment research and analysis. So a lower management fee will be charged. On the other hand, the index investors tend to buy long-term holders of stocks, as opposed to active management by actively trading the formation of high turnover and must pay higher transaction costs, the investment of index funds does not take any adjustment to the investment portfolio initiatively, and the low cost of turnover transaction will be paid. These are quite different while compared with the actively managed fund. 2, The index fund has a high utilization of its money. All the investments of index funds are used to track the benchmark index, and it has no cash drag problems. But the traditional open-end fund with actively management will keep 5% -10% of cash in the portfolio at least to prepare for redemption. In...
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...Topic 2 : Should retail investors invest in index-tracker funds rather than actively-managed funds? Topic 2 : Should retail investors invest in index-tracker funds rather than actively-managed funds In recent years, investment has been interested by the majority of people more than in the past as basically everyone would like generate income and try to find the ways that can actually make money. Not only do investors need to know more knowledge that how to make money investing, but also they have to update news which has information about money’s movement. Moreover, the majority of investors is supposed to follow international news and monitor that show their money in real time. In today’s world, there are many capital markets for investing because if the number of investors increases, it will make the number of investment products in the capital market increased. Thus, investors in these days are supposed to have the way in order to choose which stock will make them make the most investment return. Then, there are two investing’s types in funds for retail investors in order to invest between index- tracker funds and actively- managed funds and most investors are supposed to understand and know which one they have to use. This essay will be discussed investing in index-tracker funds and actively-managed funds that follow by pros and cons, and also provide knowledge that why are retail investors supposed to put their money in index-tracker funds rather than in actively-managed...
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...beta approach as a strategy lies between traditional active management in which the fund managers actively pick stocks for their portfolios, and the passive management in which the investor simply replicate the market index. One way to create smart beta portfolios is to substitute the market cap weighting method with an alternative weighting, and the other more popular way is to track certain stocks or certain parts of the market using certain risk factors. These certain risk factors have been recognized to provide risk premium in academia. For example, we have learned in this semester that there are many return anomalies existed in past several decades such as small cap stock, value stock and momentum effect. Those factors are not new to investors, so investors can decide whether take these factors into consideration when forming their investment portfolios. The central questions to ask are: What sources of returns are accounted for smart beta strategies? Can smart beta strategies offer consistent higher risk-adjusted return over time? From the perspective of efficient market theory, any excess return over a market index is due to higher risk bearing. As we can learn from the two FT articles, the answer to the first question is debatable and unsolved. Supporters believe smart beta offers additional returns that are not result of bearing additional risk. On the contrary, critics believe smart beta has risk similar to active managers because smart beta involves stock selections...
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...T H E J O U R N A L THEORY & PRACTICE FOR FUND MANAGERS O F FALL 2013 Volume 22 Number 3 RISKBASED PORTFOLIOS special section The Voices of Influence | iijournals.com Pursuing the Low Volatility Equity Anomaly: Strategic Allocation or Active Decision? ERIK KNUTZEN ERIK K NUTZEN is the chief investment officer at NEPC LLC in Cambridge, MA. eknutzen@nepc.com FALL 2013 JOI-KNUTZEN.indd 75 I n the past several years, asset managers have built investment strategies based on historical evidence that lower volatility stocks earn superior risk-adjusted returns. These approaches are being called low volatility, managed volatility, minimum variance, or similar names. They seek to exploit what has been identified in studies by academics and practitioners alike as an equity pricing anomaly. This anomaly joins previously identified persistent stock market inefficiencies associated with low price-tobook and smaller company shares. This article evaluates the low volatility anomaly, its potential causes, whether it is likely to persist, and the role, if any, of low volatility equity investing in long-term investment programs. Based on historical information, we conclude that the low volatility equity anomaly appears to exist and can be explained by certain behavioral and structural biases of investors. But its continued existence into the future is less certain. We also observe that even well-documented anomalies experience multi-year...
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...The optimal risky portfolio asked me to shortsell the market for -1.6081 and invest 280.1% of my investable wealth in the active portfolio. Within the active portfolio itself, among 16 different tickers that I chose, my optimal weights were to invest in Kraft, General Mills, Visa, and Walmart. Running a regression of Risky Portfolio HPR against Market Portfolio HPR, we obtain the below line fit plot. Though the fit may not look all that bad, it is actually quite low with a R^2 of roughly 0.3. This does not come as too big of a surprise, though, as the risky portfolio utilizes active portfolio management that itself aims to break from the market. Also, the 16 tickers I used in this exercise could not possibly reflect all of the movements of the S&P market index. To extend our analysis of the relationship between the risky portfolio and market portfolio, we consult the following graph modeling their quantitative movements over roughly the past four months. As one would expect, the Risky HPR fluctuates a lot wilder than the Market HPR does. However, it does not consistently stray in any one direction away from 0%. Interestingly, looking at the dollar paths tells us a completely unexpected story. Usually we would expect an actively managed, risky portfolio to generate higher returns (barring transaction fees) than a passive, market portfolio. Yet here, we see that the dollar path of the market in fact outgrows the dollar path of the risky portfolio. In fact, by the...
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...small stocks provide greater returns than large stocks for the same amount of volatility. Their strategy was to invest in small cap stocks based on deciles. They started with the “DFA 9-10 Strategy”, in which they invested in companies chosen from the 9th and 10th deciles of the NYSE, the American Stock Exchange and the NASDAQ. Later, they added the “DFA 6-10 Strategy” and the “DFA 6-7-8 Strategy”. The implemented an active strategy by searching for attractive purchases. They screened stocks. They looked for impatient or desperate sellers. They rejected stocks that were expected to divulge news soon. They questioned themselves about the seller and the nature of the sells. Once they ensured that sellers were not selling because they had adverse information or negative private information about the stock, they then negotiated for a good price. DFA had an additional competitive advantage by creating trading efficiencies to reduce transaction cost. They charged an active management fee that was higher than passive management fees, but smaller than what the average active manager charges. It was part of their core beliefs to offer low transaction costs. They traded in blocks to extract a discount on the stock purchase, which in turn reduced transaction costs was able to extract a discount on the stock purchase. When stocks became too large, they sold them. They eventually added to their original product line until they had a full product line. They turned new academic findings into...
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...Executive Summary The purpose of this report is to evaluate the relevance and accuracy of the theories used by DFA, especially the value premium and the size premium where almost all of their funds are based upon. The company used for this report is Dimensional Fund Advisors, which is an investment fund company. The source of information that is used is from websites and some journals. The main finding in this report is that DFA focusing their investment in small cap stock, as small stock tends to outperform large stock. To conclude, this report will provide evidence on the usefulness of these theories to increase return of DFA’s funds as well as recommendations about changes in strategy that will enhance the performance of DFA overall. Introduction Dimensional Fund Advisors is an investment company that uses its strategy based on academic research as well as related theories. It is based in Santa Monica, California and founded in 1981 by Booth and Rex Sinquefield. They work together with advocate of the efficient market hypothesis, indicating a relatively strong belief in this theory and thus in efficient markets. DFA believe that skilled traders have the capability to pitch in to the fund’s profits, although the investments are inherently passive. Additionally, they also adjust their strategy to new findings in the field. This report will discuss the next step that DFA should implement in order to perform better compared to the other managed funds. DFA’s Business Strategy ...
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...Case 5: Research Affiliates International Portfolio Management 31.03.2014 Executive Summary Tower Watson, an investment consultant company, has for main objective toward its pension clients to increase their return as high as possible while keeping as low as possible the risk taken by their investments. We are asked to analyze the pertinence for TW to recommend to its clients the Research Affiliate Financial Index (RAFI) strategy over traditional indexing and over a more actively managed strategy. The RAFI is presented to Tower Watson as a new efficient B2B tool to invest, to help investment advisory firms to better establish their strategy. Indeed this index is based on fundamental criteria instead of market capitalization criteria (and thus it has an economic-centric view instead of a market-centric view). It has been proved through studies that portfolio weights decided by fundamentals are more reliable than by price. This interesting strategy, halfway between active and passive, has shown some significant higher returns over the past years, a fact that many pension funds have already noticed since the trend today for these funds is to invest more and more in passively traded funds. Even if such strategies seem to increase the investment exposure to market fluctuation they can still be considered as “smart-beta” strategies. In the end we will have understood that TW should follow that investment tendency and purchase RAFI’s license to offer a better performing...
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...following two cases studies in your cart. Make sure Digital Download is selected which will cost $3.40 per case. o Burgundy Asset Management: The Wescast Investment Decision https://www.iveycases.com/ProductView.aspx?id=31479 o Valuing Wal-mart 2010 https://www.iveycases.com/ProductView.aspx?id=48332 o Download the Wal-mart case spreadsheet for free. o Valuing Wal-mart 2010 – Spreadsheet for students https://www.iveycases.com/ProductView.aspx?id=52705 Case Report Guidelines 1. Place case title at top of first page with team member names (maximum four members per team). 2. Answer questions in numerical order. 3. Include graphs and tables if appropriate. 4. Print out case report and hand-in at the beginning of class. Harvard Management Company (2001) Questions 1. Is HMC’s recent payout policy consistent with the goal of preserving the real (adjusted for Harvard’s expense growth) value of the endowment and its distribution into perpetuity? 2. Could payout be raised to meet recent budget pressures without changing the risk-return profile of the portfolio? 3. What value has the HMC’s policy portfolio asset allocations (compared to TUCS median) added to the endowment from the period 1992-2000? 4. What value has active portfolio management (deviating from the policy portfolio indexes and weights) added to the endowment from the period 1992-2000? 5. Does this justify their controversial compensation plans...
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...Would you invest in DFA? Yes due to steady returns provided by the company and as investors are generally past performance chasers, one has no reason not to invest in DFA. The company was founded on a sound investment style based on its core belief in sound academic research, passive fund management. Until almost the end of the 20th century DFA had found a way to make money actively with a passive investment strategy. But looking forward, according to me it needs to evolve with the times and look for questions regarding its own strategy and its evolution with the times and the questions facing the financial future. As highlighted by the boom in the I.T sector towards the end of the last century that DFA missed out on completely, DFA on principle is always poised to miss out on new technology companies, as they intrinsically have low book to market value. Also my another objection to DFA’s selection of small cap stocks only is that these category of companies are among the worst hit companies during a financial crisis because of their limited access to credit and most of these companies don’t survive a major recession. Even some proponents of the efficient market hypothesis have argued that due to DFA and similar companies investing in this particular style, this style’s edge had been eroded. Lastly many prominent academicians and financial institutions have called into question the efficacy of the efficient market theory due the financial bubble created in...
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...research. For example, DFA’s founders believed that small-stock investing could yield high returns to investors. They formulated this belief on the Ph.D. dissertation research of Rolf Banz of the University of Chicago, which showed that small stocks had consistently outperformed large stocks between 1926 and the late 1970s. 3. The ability of skilled traders to contribute to a fund’s profits even when the investment is inherently passive. DFA’s investment fund had a semi-active strategy between those of actively managed funds and those of pure index funds. * DFA counts on market behavior that reflects the following concepts: 1. The Beta is Dead. Stocks with high-beta do not have consistently higher returns than low-beta stocks. That is, greater risk does not guarantee greater reward. 2. The Size Effect (Small Minus Big). Based on the research that small stocks historically outperform large ones, DFA strategically built a micro-cap portfolio (9th and 10th NYSE deciles) and a small-cap portfolio (6th to 10th NYSE deciles). The company expanded this strategy to international markets such as the UK, Japan, Europe, and Pacific Rim. Regarding the liquidity problem of small companies, DFA engaged in block trading; DFA bought large blocks...
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