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22-1 overview of equity portfolio management (6 equity investment across…
22-1 overview of equity portfolio management
2 the roles
of equities
in a
portfolio
capital
appreciation
long-term driven predominantly by capital appreciation // historically the highest amoung major asset classes
occurs when investing in company with growth in earnings, cash flows and/or revenues and competitive success
dividend
income
large well-established corporations often provide dividend that increase in value over time
diversi
fication
when combined with other asset classes
assuming less than perfect correlation
note that correlations not constant over time
during markete crisis - increase
hedge
against
inflation
typically varies by country and dependent on the time period assessed
inflation - lagging indicator of business cycle
equity prices - leading indicator
client considerations
for equity in a portfolio
investment policy statement IPS: return objectives, risk tolerance, constraints and unique circumstances
characterized by attributes as growth potential / income generation / risk / return volatility / sensitivity to various macro-economic variables
ESG
negative screening / exclusionary screening
excluding certain sectors or
companies deviate from accepted standards
positive screening / best-in-class approaches
to identify sectors or companies that score most
Thematic investing
focuses on within specific sector or theme
impact investing: seek to achieve targeted social or environmental objectives
1
introduction
rationales
potential participation in growth and earnings prospects of economy's corporate sector
an ownership interest in a range of business entities by size, economic activity and geographical scope
more liquid to mor easily monitor price trends and with low transaction costs
3 equity
investment
universe
segmentation
segmen
-tation
size - captitalization: large / mid / small cap
style - value / growth / blend / core
the size/style
matrix
core: neither value nor growth dominate
blend: combination of both growth and value
*more of a scatter plot
advan-
tages
construct in straghtforward and manageable way
diversification across economic sectors or industries
can construct performance benchmarks for specific segments
allow to reflect maturity and potentially changing growth/value orientation - helps adjust holings over time
disadvantages
the categories may change over time
may be defined differently among investors
segmentation
by geography
typically based on the stage of market's macroeconomic development adn wealth
common categories
developed / emerging / frontier markets
usefu to who have considerable
exposure to domestic market
key weakness: may provide lower-than-expected exposure to that market
potential currency risk
segmentation
by economic
activity
using either production-oriented or market-oriented approach
four main global classification systems:
GICS / ICB / TRBC / RGS
key disadvangate： business activities of companies may include more than one industry or sub-industry
segmentaion of equity
indexes and benchmarks
a more focuesd - uses industries or sectors
some indexes reflect specific investment approaches - ESG
*better evaluate and analyze and diversification
6 equity investment
across the passive-
active spectrum:
rationales
confidence to outperform
client preference
suitable benchmark
client-specific mandates
risks / costs
of active
reputation risk
key person risk
taxes