Portfolio Management Techniques
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Understand the principles of portfolio management & key concepts of risk
The course starts with the principles of portfolio management and key concepts of risk and return for a portfolio, before taking a detailed look at the major asset classes commonly found in portfolios; namely equity and debt instruments and how these instruments are valued and combined in an investment portfolio.
You will also look at non-traditional asset classes such as alternative investments and the benefits and challenges associated with incorporating such investments into a portfolio. Finally, the programme concludes with the fundamentals of performance measurement to enable participants to assess the success or failure of a portfolio in the context of the risk taken.
Using case studies throughout and concluding with an assessment of a mixed portfolio of different asset classes drawing on the previous days’ content, the overriding objective of the course is to provide an understanding of the investment management process from beginning to end and the key challenges faced throughout this process.
How will this course assist you?
On completion of 4-day training course you will:
- Gain an understanding of the key elements of the investment process including modern portfolio theory.
- Understand the valuation and investment approaches for bonds, equities and alternative investments.
- Appreciate the specifics of portfolio construction in different markets.
- Gain an insight in alternative investment strategies and the key differences between alternative asset classes from an investment management perspective.
- Learn about performance measurement, evaluation and attribution.
We begin the course with an introduction to the fundamentals of portfolio management which will cover the portfolio management process in its entireity. We will explore concepts such as indifference curves, efficient frontier, calculation of risk and return, risk/return tradeoffs, diversifying risk and the asset allocation process.
Principles of portfolio management Introduction and objectives
- Introduction to portfolio management
- The fund management process
- The client
- The portfolio manager’s role
- Portfolio analysis
- The decision making process – strategic and tactical asset allocation
- Active vs passive fund management
- Asset allocation vs stock selection
Case study – Asset allocation
Portfolio analysis – returns and risk
- The client – the risk/return trade off
- Fundamentals of calculating returns
- Money weighted returns
- Time weighted returns
- Unit pricing
- Dealing with currencies and fees
Case study – Calculating expected returns
- Measuring risk
- Standard deviation and variance as risk measures
- Normal distribution – beware the black swan
- Risk vs. return tradeoff
Case study – Risk return trade-off
- Managing risk in a portfolio
- Diversification in a portfolio – covariance and correlation
- Reducing risk in a portfolio
Case study – Optimising a portfolio via diversification
Case study – Portfolio management decisions
Participants will be given a historical portfolio of common stock, debt securities and other assets and will be asked to calculate related portfolio statistics: expected returns, standard deviation of returns, covariance, correlation coefficients and beta of the assets. Participants will then use this information to construct an efficient portfolio.
Equity portfolio management is often a critical component of overall investment success since equity securities often represent the largest portion of many investment portfolios. After a review of equity valuation techniques, we will discuss the role of equities in an investment portfolio, the major approaches employed to manage equities and conclude with a look at strategies used to manage international and emerging market equity portfolios.
Equity portfolio management
The principles of equity investment
Valuing equity securities
- The two key approaches to equity valuation, absolute and relative valuation techniques
- Fundamental equity valuation – Discounted cash Flow (“DCF”) Valuation
- What discount rate? - Weighted Average Cost of Capital (“WACC”)
- Using the Capital Asset Pricing Model (“CAPM”)
- Current issues in valuation – the risk free rate and beta
- Relative valuation techniques – Multiple Based Valuation
Case study – applying fundamental and multiple based valuation to a case company
Equity portfolio management
- Equity investment, return and risk profile of equity investments
- Equity style management.
- Security selection approaches: top-down or bottom up.
- Establishing relevant benchmarks.
- Long-short vs. long-only strategies
- Alpha / Beta separation.
- Applications of portable alpha.
Case study – evaluating equity funds
Participants review several equity portfolios, discussing relative weightings, sector allocation and other important attributes affecting performance
- Weighting schemes of major indices.
- Equity index futures and their role.
- Index mutual funds.
- Exchange-traded funds.
- Strategies and benchmarking approaches
International equity portfolio management
- Constructing international equity benchmarks.
- Major emerging market classifications
- Adjusting the cost of capital in emerging markets
- To hedge or not to hedge FX risk.
Case study – equity portfolio construction
Participants will first examine some of the major issues confronting equity portfolio construction, including high correlations during crisis, cost of capital computation difficulties, and non-normal return distributions
The fixed income market is one of the largest and fastest growing areas in the global financial marketplace, as government and private debt constitute nearly half of the wealth in international financial markets. Day 3 explores the fundamentals of fixed income investments, sensitivity measures to evaluate bond performance, and several commonly employed strategies used by fixed income portfolio managers.
Managing fixed income portfolios Fundamentals of fixed income
- The key attributes of fixed income securities
- Sovereign debt
- Corporate debt
- Asset backed securities
- Commercial paper
- Collateralised debt obligations
- The key risks in investing in bonds
- Market value risk
- Interest rate risk
- Income risk
- Credit risk
- Liability risk
- Call and prepayment risk
Exercise: Calculating bond sensitivity to risk
Understanding yield spreads
- Yield curve shapes
- Term structures of interest rates
- LIBOR (and its successor?)
- Valuing fixed income instruments: duration and convexity
- Valuation under conditions of certainty
- Bond values and interest rates
- Macaulay and modified duration measures.
- Calculating effective convexity.
- Convertibles – hybrid instruments and their valuation
Exercise: Calculating the price of a bond
Participants will be given a various bonds and convertible instruments to value
Fixed income portfolio management
- Objectives and constraints.
- Active vs. Passive strategies.
- Using diversification to minimize risk.
- Immunisation strategies.
Case study: Portfolio pricing
Participants are given a group of bonds from a portfolio of a fixed income manager and must forecast their price changes as interest rates fluctuate. Participants will also determine the appropriate amount of hedging bond needed to immunise the portfolio.
The different alternative asset classes and their return and risk profiles
- Hedge funds – investment styles, risk profiles, examples of hedge funds success and failure
- Private equity – capturing the liquidity premium
- Commodities – mind the yield gap
- Real estate – an investment you can improve
Alternative investment management & strategies
Exercise: Alternative investment analysis
Participants will evaluate different alternative investments and select suitable investors to match various portfolios.
Portfolio analysis - Performance measurement, risk and attribution
- Calculating risk – analyzing portfolios for different types of risk
- Defining risk
- The various risk measures
- Absolute risk measures
- Relative risk measures
- Downside risk measures
- Using benchmarks – relative and absolute benchmarks
- Indices and composite indices
- Portfolio attribution
- Fama decomposition
- Portfolio attribution – sector/stock level analysis
- Presenting performance – Global Investment Performance Standards (GIPs)
Case study: Putting it all together
Participants will use all topics covered to evaluate a group of investment portfolios, determining the strengths and weaknesses