Constructing & Managing Equity Portfolios

Learning Objectives The course is designed for those engaged in investment management, private client advice and wealth management, asset allocation, sovereign wealth funds, pension funds as well as those focused on securities analysis in general, and equity analysis in particular. There will be a focus on the relative suitability of the wide variety of equity instruments available for investors with differing risk appetites and investment horizons, an examination of mainstream and alternative theoretical asset allocation frameworks and analytical tools, and a probing of how valuable such tools are in the post-2008 crisis financial environment. Structure of the Course The course covers four days of lectures and the focus will be on specific examples and case studies. There will also be collective exercises and analytics using quantitative techniques which will have been explained. For each day of the course there will be four separate ninety minute sessions with coffee breaks in the morning and afternoon, and with a lunch break in the middle. Course Highlights: Comprehensive overview of the key characteristics of equities as an asset class. Critical analysis of different models that have been used for deriving corporate valuations and determining the “fair value” of equities. Consideration of the value of fundamental analysis of corporate performance and equity valuation using financial statements. Explanation of different styles of asset allocation and portfolio management including innovative approaches following the 2007/8 financial crisis. Separation of the contributions to portfolio performance from the asset allocation decision making process and the selection of individual securities. Examination of the major global equity markets, the types of execution platforms and characteristics of the principal global equity indices. Explanation of the procedures for IPO’s, the lending and borrowing of equities and the nature of clearing and settlement. Analysis of the special risks associated with exposure to the currencies and equities of emerging and frontier markets. Explanation of the inter-connectedness and contagion risks resulting from the increased financial coupling of developed and developing economies. Overview of equity based derivatives and their value as hedging tools. Examination of the role of technical analysis in the selection and evaluation of equities for strategic and tactical asset allocation. Examination of the growing importance of exchange traded funds (ETF’s) and equity based structured products Review of key issues in managing risk, including “tail risk”, in equity portfolios. Who Should Attend The course is designed for those who are engaged in both the buy side and sell side of asset management and trading and who wish to expand and refine their knowledge of global equities, the markets/platforms upon which they are traded and techniques for portfolio construction and management. It would also be very useful for fund managers whose mandate entails a significant risk exposure to emerging market equities. Asset Allocators/Portfolio Strategists Private Wealth Advisors Independent Financial Advisors Sovereign Fund managers and research staff Pension Fund trustees Emerging Markets Fund Managers and Analysts Risk managers/controllers Private Investors Senior back office people Structured Product Developers Course Materials All materials will be made available in printed binders and in addition slides and research sources will be available in Microsoft Powerpoint™ and Adobe Acrobat™ formats Modeling tools will also be offered to delegates and there will be worked examples in Excel which will be provided on a CD.
Day 1 Constructing and Managing Equity Portfolios Overview of Equities as an Asset Class How does equity ownership compare to other financial claims? Position of equity vis à vis other elements in corporate capital structure Review of equity capital from an accounting perspective Characteristics of ordinary, bearer and registered shares - Cumulative, participating, and convertible preference shares - Ranking for dividends and liquidation Overview of the primary issuance of equity securities Equity markets and trade execution - Order driven/quote driven platforms Warrants and covered warrants - Behavior and relative risks of warrants and covered warrants - Calculation of the conversion premium on a warrant Contracts For Difference (CFD’s) - Explanation of the mechanics of a CFD Overview of equity based collective investment vehicles Primary Issuance and Trading of Equity Securities Listing securities – the regulatory framework, investor disclosures Structure and stages of an initial public offering (IPO) - Role of intermediaries, book building, pricing - Benefits for the issuer and investors - Underwritten versus best efforts - Principles and process of price stabilization - Oversubscribed issues and greenshoe options Role of exchanges in providing secondary market facilities, platforms Alternative trading venues Multilateral trading facilities and dark pools The meaning of ‘books closed’, ‘ex-div’ and ‘cum div’, cum, special ex, special cum, and ex rights Examination of algorithmic trading – how does it work, its prevalence, surveillance by regulators, etc. Explanation of the nature and objectives of High Frequency Trading (HFT) Global Equities Markets/Indices Principal indices/exchanges - NYSE, NASDAQ, LSE, Deutsche Boerse, DAX, CAC 40, FTSE 100, DJIA, S&P500, Bovespa, Mumbai Sensex, Shanghai, Hang Seng Emerging and frontier markets Classification systems of global equity markets – MSCI, FTSE Historical survey of performance of main global equity indices - Historical P/E ratios Regulatory and supervisory environment - Shareholder protections etc. Structure and size of markets, volumes Liquidity and transparency Trading characteristics e.g. prevalence of off exchange activities Case Study: Contrast order driven and quote driven trading platforms Examination of the LSE’s SETS trade execution system and different order types Corporate Valuation Methods Fundamental equity valuation – Discounted Cash Flow (DCF) techniques Models based on calculating the Present Value of future dividend flows - Simple model - Multi-stage model Comparing valuations across different sectors What discount rate should be used in DCF models? Determining the Weighted Average Cost of Capital (WACC) What multiples should be used for individual companies, for overall market? How to value high growth enterprises with no dividends Sustainability of profits and commercial disruptions Relationship of corporate valuations to underlying interest rate environment Return on Equity (ROE) measurements – including RAROC Risk Adjusted valuations – incorporating beta into valuation methods Importance of changes in the regulatory environment on valuation forecasting Day 2 Financial Statement Analysis Purpose, structure and use of balance sheets, income statements and cash flow statements Key classes of financial ratios: - Profitability, liquidity, asset turnover, gearing - Key Investor ratios - EPS, P/E Ratios (historic and prospective), PEG ratio - Dividend yield, Dividend/interest cover Advantages and challenges of performing financial analysis Comparing companies across and within sectors Accounting for corporate actions - Stock capitalization or consolidation - Stock and cash dividends - Rights issues, open offers, offers for subscription and for sale Calculation of theoretical effect on the issuer’s share price of bonus/scrip, consolidation, rights issues Equity Allocation and Performance Attribution Criteria for determining the relative allocations for equities, fixed income, alternative assets etc. Contribution of each to overall portfolio return - Strategic versus tactical - Core versus satellite holdings Active equity allocation – stock selection vs. passive investment Relative performance of active managers to benchmarks Performance attribution – allocation to specific securities vs. overall exposure to benchmarks Examination of contrasting styles of growth vs. value investing Warren Buffet’s investment philosophy Exercise: Performance Attribution Delegates will be provided with an Excel model to assess a portfolio manager’s performance. The manager has a mandate to invest 50/50 in US and UK equities. How should manager’s performance be evaluated with respect to asset allocation versus specific equity selection? Clearing, Settlement, Custody and Role of Securities Borrowing/Lending Intermediaries Explanation of the role of prime brokerage and equity finance Principles of Delivery versus Payment (DVP) and free delivery International Central Securities Depositories (ICSD) Examination of the role of custodians/nominees - Designated nominee, pooled nominee accounts - Details in share register, legal ownership/beneficial ownership Purpose, requirements and implications of securities lending SBLI’s Benefits and risks for borrowers and lenders Function of SBLI’s and market makers Short selling, collateral management, re-hypothecation etc. Case Study: Characteristics of a fully automated settlement and clearing system Examination of the organization of the UK Crest System for integrated settlement Exchange Traded Funds (ETFs) Compare availability and range of ETF’s traded on US, European platforms Number of funds, assets under management, growth trajectories Contrast features of ETF’s to other collective investment vehicles (CIV’s) Fiduciary/trust architectures, role of sponsors, creation units Contrast passive index tracker ETF’s (the majority) with actively managed funds (not yet mainstream products) Examination of MSCI geographical indices which many ETF’s track Features of inverse ETF’s, leveraged funds Contrast between funds which hold “physicals” versus those which are synthetic – hold futures, swaps, structured products. Replication strategies – stratified sampling vs. full replication, use of synthetics Examination of tracking error for exchange traded products Risks associated with ETF’s, liquidity risk, risks with synthetic ETF’s Day 3 Portfolio Theory and the Risk/Return Trade off Cornerstones of Capital Asset Pricing Model (CAPM) - Securities market line (SML), beta, alpha, risk free rate etc. - The concept of the efficient frontier - Systematic risk and idiosyncratic or specific risk Modern Portfolio Theory (MPT) and diversification - Markowitz model and covariance matrix analysis Risk Adjusted Return - Sharpe Ratio, Sortino Ratio, Treynor Ratio, Calmar Ratio, Total Expense Ratio (TER), etc - Risk-adjusted return on capital (RAROC) Difference between CAPM and Arbitrage Pricing Theory (APT) Active and passive strategies – index tracking, stock picking, transaction costs Hedging and use of derivatives in risk management Survivorship bias phenomenon Case Study – Why is Alpha so elusive? When individual asset return dispersions are at very low levels how feasible is it for fund managers to gain an edge by seeking out alpha? "All 500 S&P companies have the same chairman and his name is Ben Bernanke" Portfolio Management Styles Detailed analysis of fundamental, bottom up analysis based on “micro” factors versus top down “macro” asset allocation models Relative value strategies – convertible arbitrage Long/Short versus long only strategies Explanation of beta and related strategies Examination of key correlations between sectors/geographical regions Trading versus investment – long term/short term strategies New risks in wake of 2008 crisis and new views of risk Fat tail events are more common- expect the unexpected Explanation of the risk premia allocation model and the Factor Investing style Risk On/Risk Off Portfolio Strategies (RORO) Explanation of the risk on/risk off paradigm Evidence of heightened correlations for cross sectional asset returns Episodic market liquidity concerns - References to tutor’s book on Systemic Liquidity Risk Dynamic hedging strategies – can they be applied in illiquid markets? Statistical arbitrage strategies break down through lack of liquidity Challenges of RORO to MPT on portfolio diversification Eurozone risk – implications of a (partial) break-up of the EMU China bubble risk – property bubble, over-extended banks Inter-market correlation strategies executed by algorithms Case Study: Equity Markets & HFT Risks - The Flash Crash Preparation Text: FINDINGS REGARDING THE MARKET EVENTS OF MAY 6, 2010 Report of the staffs of the CFTC and SEC Technical Analysis of Equity Markets Charting techniques – different charting methods, candlesticks, chart patterns Analysis of short and long term trends, support/resistance levels, moving averages Correlations amongst different sectors and geographical equity markets – relationships to FX market Is there evidence of mean reversion in equity returns? Is there any evidence of equity returns having cyclical behaviour? Discerning technical divergences/dissonance patterns in equity indices Determining market inflection points – multi-period highs/lows, retracements Brief review of Elliott Wave Theory Quantitative and statistical tools – back testing, regression analysis etc. Day 4 Special Risk Factors for Emerging Market Equities Examination of how capital flows into emerging markets are influenced by the intention of central banks especially Federal Reserve to push asset managers into risk assets Globalization of resourcing and capital flows has invalidated much traditional macro-economic theory regarding economic cycles Differentiation between EM economies which have trade surpluses/deficits Examination of negative feedback loops for EM markets when advanced economies reduce their accommodative monetary policy Examination of ETF’s which provide exposure to emerging market equity and debt Analysis of correlation between emerging market equities and commodities Challenges and strategies for hedging and managing risk of emerging market equities because of lack of depth in markets for hedging exotic currencies Case Study/Exercise: Examining the risk/return trade-off for investing in emerging and frontier markets Comparison of the total returns for the MSCI World Equity Index, Emerging Markets Index and returns from several frontier markets What proportion of international equity portfolio should be devoted to Emerging Markets? Equity Based Collective Investment Vehicles and Structured Products Characteristics of Collective Investment Schemes (CIV’s) Mutual Funds, Unit trusts, Investment trusts, Real estate investment trusts (REIT’s) What is Net Asset value – why do some trade at discount/premium to NAV? Risks, valuation and yield characteristics of structured products Examination of several examples of retail structured products – equity linkers, barrier notes, “kick-outs” etc. Contrast between the promise of absolute returns versus relative return strategies Main strategies of equity flavored hedge funds - Global Macro – success of George Soros, Bridgewater etc. - Market neutral and long/short equity - Special Situations – takeovers and privatizations - Distressed Securities - bankruptcies and restructurings - Arbitrage strategies – different kinds of equity, convertibles Overview of Equity Based Derivatives Terminology – underlying, spot markets, options, futures, swaps - Initial margin, variation margin, cost of carry, basis risk - Equity index futures contracts - Options on individual equities and equity indices - American, European, Asian style Puts and calls – perspective of buyer and writer Risk elements of derivatives - Counterparty risk, Market risk, Liquidity risk - Risks to the buyer of futures/options - Risks to the writer/seller of futures/options Explain the key contrasts between Exchange traded versus OTC derivatives Central clearing versus counterparty risk Role of options/futures in hedging equity portfolios Case Study/Exercise: Determining the appropriate hedge ratios for an international equity portfolio Calculation of the correct number of index futures required to hedge a portfolio with European, US, and emerging market equities Managing Risk for Equity Portfolios Main types of portfolio risk - Market risk – asset price volatility, currency, interest rates etc. - Investment horizon and holding period - Systemic and tail risk Principles used to mitigate portfolio risk: Seeking relatively uncorrelated assets Benefits/limitations of diversification Use of derivatives in hedging and risk management Modeling risk scenarios – stress testing, stress regression based on outlier values, tools of statistical analysis, Monte Carlo Simulations, back testing Tail risk protection strategies Concluding Discussion: Using insights from prior discussions on correlations and tail risk, delegates are tasked with outlining a strategy to reduce portfolio drawdowns during a major correction/market crash. Course summary and close