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Portfolio management (1) (Investment management styles (active…
Portfolio management (1)
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Growth stocks
Stocks that are expected to experience rapid growth of earnings, dividends and hence price.
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Active vs passive
Active
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e,g, stock selection, sector selection, switching, market timing
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index tracking
advantages
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tracking well-diversified index ensures fund is well-diversified, reducing specific risk and volatility of returns
disadvantages
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full replication involves forced buying/selling when index constituents change and fragmented portfolio
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Passive
Selecting securities that best meet investor's objectives and/or make up investor's benchmark portfolio
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e.g. index tracking, liability matching/hedging
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Top-down vs bottom-up
Top-down
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next, how to distribute between different sectors within asset classes
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better control of risk of portfolio, as it ensures diversified portfolio and matching of liabilities
focuses more on asset class choice, which has greatest overall effect on investment performance
bottom-up
selects best value individual investments, irrespective of geographical or sectoral spread.
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Types of analysis
Fundamental
analysis of company's share value and potential for future profits and dividends based accounting and economic information
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Technical
analysis of historical market data on prices, yields and/or trading volumes to predict future market movements
Core-satellite approach
majority of fund ("core" portfolio) managed on passive, low-cost basis
Specialist "satellite", active managers employed to provide increased performace
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Anomaly switching
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techniques
compare current yield difference between two similar bonds to recent average value to determine if one seems cheap or dear relative to the other
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use price and yield models. If actual price or yield differs from model prediction, then may be a mis-pricing
policy switching
involves taking view on future changes in shape and/or level of yield curve and moving into bonds with different volatilities e.g. if yields expected to fall switch into longer-dated, more volatile stocks
potentially high-risk, high-return approach
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