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PC1-OVERVIEW OF EQUITY PORTFOLIO MANAGEMENT - Coggle Diagram
PC1-OVERVIEW OF EQUITY PORTFOLIO MANAGEMENT
The roles of equities in a portfolio
Capital appreciation • Capital appreciation is the main driver of long-term equity returns • In general, equities tend to outperform other major asset classes during periods of strong economic growth, and underperform during periods of weak economic growth. Capital appreciation in equities often happens when investing in: o Growth-oriented companies like small tech firms o Mature companies that can maintain profitability
Dividend income • Dividend is the most common source of income for an equity portfolio • Dividends have represented a significant component of long-term total returns for equity investors. • Dividend yield tends to be more stable than return due to price change
Diversification benefits • In a portfolio context, equities can provide meaningful diversification benefits when combined with other asset classes (assuming less-than-perfect correlation) • During periods of market crisis, correlations across all asset classes and among equities often increase → Reduce diversification benefit
Hedge against Inflation: Some individual equities or sectors can provide protection against inflation
Client consideration • Equities are included in a client’s portfolio based on their specific goals and needs. These considerations are outlined in an investment policy statement (IPS) • ESG considerations, which have increasingly captured investors’ interest, include: o Negative screening: which excludes companies or sectors that do not meet client standards. o Positive screening: which seeks to uncover companies or sectors that rank most favorably with clients. o Thematic investing: which screens equities based on a specific theme, such as climate change o Impact investing: aims to achieve specific social or environmental goals while generating measurable financial returns
Equity investment universe
There are wide range of investment options and clients' varying risk and return objectives
→ Need to segment companies into groups with similar characteristics
→ Better evaluation and analysis of potential investments and aid in portfolio diversification
Segmentation by Size and Style
• Size is measured by market capitalization and is often categorized into large cap, mid cap, and small cap
• Style can be categorized as growth, value, blend. Investment style is determined by analyzing company metrics
Segmentation by Geography
Segmentation by Economic Activity
Segmentation by Indexes and Benchmarks
Portfolio income and costs
Dividend Income
Securities Lending Income
Ancillary Investment Strategies
Dividend capture: involves buying a stock right before its ex-dividend date, holding it to receive the dividend, and then selling it soon after the ex-dividend date → The goal of the dividend capture strategy is to generate income through dividends while managing the risks and costs associated with frequent trading
Option strategies: income is generated through the writing of options o Covered call: sell the call options o Cash-covered put: sell the put option
Management Fees
Performance Fees
Administration Fees
Marketing and Distribution Costs
Trading Costs
Explicit costs
o Brokerage commission costs
o Taxes
o Stock exchange fees
Implicit costs
o Bid–offer spread
o Market impact
o Delay costs
Investment Approaches and Effects on Costs
Equity portfolio costs vary based on their strategy:
• Index-based strategies have lower management fees than active strategies due to lower research costs and less frequent trading
• Index funds face hidden costs from potential predatory trading (ngày tái cơ cấu danh mục)
• Some active investing approaches “demand liquidity” from the market (usually have higher trading costs), while some are more likely to “provide liquidity” to the
market
Shareholder engagement
Shareholder engagement: Investors and managers interacting with companies in ways to potentially favorably impact the stock price. When shareholders engage with companies, several issues may be discussed, including:
Benefits of Shareholder Engagement
o From Company’s perspective: Shareholder engagement can assist in developing a more effective corporate governance culture
Disadvantages of Shareholder Engagement o Time consuming and costly for both parties o Pressure on company management to meet near-term targets at the expense of long-term decisions o Selective disclosure of important information to a certain subset of shareholders → Insider trading o Potential conflict of interest: stakeholders can gain or lose influence with companies depending on the outcomes of shareholder engagement
The Role of an Equity Manager in Shareholder Engagement
Activist investing
Voting
Equity investment across the active management spectrum
Confidence to Outperform
Client Preference
Suitable Benchmark
Client-Specific Mandates
Risks/Costs of Active Management
Taxes
Rationales for tilting to passive management side along spectrum: • Efficient Market Hypothesis: After accounting for costs, most active investors are unlikely to consistently outperform the market • Few resources requirement: The cost of index-based investing is lower than the cost of active management • Managers seeking to track an index can generally achieve their objective
Benchmark selection
Indexes for Index-Based Strategies
a. Rules-based
Index rules must be objective, consistent, and predictable
Transparent
Index managers expect to understand the rules underlying their investment choice → Transparency may be the most important requirement
Investable
• Index benchmarks are investable when their performance can be replicated in the market
Considerations When Choosing a Benchmark Index
Desired factor exposuresBe driven by the objectives and constraints in the investor’s investment policy statement (IPS)
Index construction methodology
Exhaustive: select every constituent of a universe
elective: target only securities with certain characteristics
Index concentration • An index that has a high degree of stock concentration (low effective number of stocks) may be relatively undiversified • HHI index is the valid measure of stock-concentration risk in a portfolio:
Rebalancing and Reconstitution
Investability