Investment Portfolio Management Techniques for Fixed Income, Equity and Alternative Investments

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1 Investment Portfolio Management Techniques for Fixed Income, Equity and Alternative Investments Senior Managers Days 4 1

2 WHY attend this programme? Managing an investment portfolio successfully requires a good combination of knowledge and skill. Applying the right methodologies, tools and techniques is even more important in today s competitive markets which are characterized by risk and uncertainty. This workshop will give you the skills you need to build a portfolio, customized to needs, manage risks, and manage the portfolio profitably. Who is this programme for? This workshop provides vital skills to anyone involved in building an managing investment porfolios in the banking industry, whether it is for the bank s treasury or for clients. Typical participants comes from the following bank functions: From Investment Management: CIO, Portfolio Managers, Buy-Side Market Analysts, Risk Management, Performance Management From Treasury:Treasurer, Department management, ALM officers, Liquidity management officers, Risk Management, Performance Management Senior Managers Leaders with at least 15 years of experience, with P&L responsibility or leading group support functions. Generally, they lead groups of more than 100 people at business unit, division, country, regional and international levels. HOW will you benefit? As a result of participating in this workshop, you will have a solid command of how to customize an investment portfolio, the different types of assets, and what to consider when including them in a portfolio. You will take away tools for valuation and performance measurement in order to better manage the investment portfolio. WHAT will you learn and practice? Module 1: Overview of Portfolio Management and Asset Allocation The different universes of Portfolio Management What is Portfolio Management? Different management for different client segments: Stand-alone management: Mass retail investors Affluent & private banking Institutional Balance-sheet driven portfolio management Own assets: ALM and CPM External managers: LDI s, Tailored mandates & managed accounts Management styles: Passive portfolio management: Traditional strongly benchmarked mutual funds and ETF s Active portfolio management: Longonly algorithmic strategies, Long-only discretionary strategies, Alternative investment strategies Update on Portfolio Management Models The CAPM model: Efficient frontier and investors preferences (utility/value function) The benefits of diversification Asset Pricing Model Market portfolio Statistical tools used in real life to apply Modern Portfolio theory Modelling assets returns Modelling assets risks Modelling inter-assets relations (correlation) Investors characteristics: Modelling utility/value functions Historical approaches vs. forward looking assessment Strategic asset allocation Apply CAPM framework (Assessing the efficient frontier & investor preferences) Reviewing real life constraints (incl. case study) Excel based interactive work-session 2

3 Tactical asset allocation Modelling market views Example of the Black & Litterman model Practical constraints and limitations The overall asset allocation process for balancesheet driven investors Review of the process and operational aspects Check lists for practical elements the implementation of an asset allocation study Real life cases & constraints Impact on governance and organisation Module 2: Fixed Income Portfolio Management Fixed income instruments valuation and sensitivity analysis How to derive zero-coupon curve & discounting factors from the yield curve Valuation of a bond Duration & Convexity Interest rates risk immunisation strategies Interest rates risks vs. credit risks: the risky duration conundrum Limitations Instrument valuation and sensitivity analysis using Excel Practical exercises: forecasting the value of a basic bond portfolio for changes in yield curves. Standard practices for Fixed Income Fund managers How traditional fund managers typically structure and manage their portfolio s given the clients they target Retail funds Institutional funds The specific case of Liability-Driven Investment (LDI funds) Fixed income portfolio management in the context of ALM How portfolio management theory can be used to mitigate the interest rates risks of a financial institution What is ALM? The several dimensions of ALM Differences between the ALM of a bank, of an insurance company and of a pension fund How to model interest rates risks of loan books: Specificities of loan books (e.g. prepayment options, etc.) Currency risks Capital management constraints Liquidity management constraints Use of Repo s, swaps and other fixed income derivatives to manage interest rates & liquidity risks How derivatives can be used in Fixed Income portfolio management and how those impact the risk profile of the portfolio What hedging instruments are available Morphology of interest rates derivatives and of their market How those instruments are used in the context of ALM (steepners, flattners, etc.) Mitigating currency risks Liquidity risks: Using repo s to manage liquidity risks ( Managing cash-flow matching risks using repo s) Consequences of derivatives on liquidity risks (incl. Collateral requirements) What are the high level impacts of Capital Requirements and Accounting (under IFRS) for: Banks (under Basel II/III) Insurances (under Solvency II) Credit risk modeling Consequences of credit risks on Fixed income portfolio management Typology of credit risks and credit spreads Basic building blocks of credit risks modelling Introduction to Credit Portfolio Modeling Credit risks and Credit Portfolio Management (CPM) Loan books specificities Some common credit risks assessment tools and systems Case Study: Moody s KMV Portfolio Manager How is CPM usually implemented in a modern bank Typical credit risk mitigation strategies 3

4 Module 3: Equities and Real Estate Fundamentals of equity valuation The typical equity valuation process Some common equity valuation models (technical overview, applications and limitations) Dividend Discount Model Free Cash Flow Valuation Market Based Multiples Valuation Model calibrations Information sources to perform equity valuations Equity portfolio management Equity risk premiums and benefits of diversification Modelling baskets of equities Stock picking approaches: different selection processes Some typical equity portfolio s Key Risk Indicators Exercise comparing several equity portfolios for their expected risk -return profile given their relative weightings, sectorial & geographical allocation, etc. Risks and benefits of equity portfolios in global asset allocation Estimating the potential benefits and risks of including equity allocations in larger cross-asset class portfolio s Applications in the context of ALM (given economic, accounting & regulatory constraints) for: Banks, Insurance Companies, Pension funds Equity Indices & funds Asset class review (risks & benefits) Modelling equity indices Modeling equity indices futures Modelling benchmarked equity funds ETF s Equity risks fat tails Basic approach to stochastic modeling of equity prices Equity prices leptokurtic behavior ( fat tails ) & the limits of volatility-based models Mitigating tail risks Via dynamic asset allocation strategies Via derivatives strategies Real Estate investments Real estate investments and impact on portfolio management Some different forms of Real-Estate investment & how they can be valued Direct investments REIT s Derivatives Developments vs. existing buildings Some key real estate sectors and their specificities Natural exposure Risks and benefits for different types of investors Retail investors Banks Insurances Pension funds Module 4: Alternative Investments and Risk Hedge Funds A short overview of the universe of Hedge Funds Alpha: a key rationale for investing in hedge funds The limitation of traditional risk return metrics in the case of Hedge Fund Measuring Skewness Typical risks in Hedge Fund investment Necessary due diligence process Hedge fund performance benchmarks and indices Private Equity What to consider when selecting Private equity investments and monitoring their performances Short overview of the private equity market The life cycle of a private equity investment Some typical structure in private equity Typical performances and risk characteristics of private equity Some private equity investment vehicles Infrastructure investments: a particular form of Private Equity What are infrastructure investments The different types of infrastructure investment 4

5 Why are some institutional investors considering infrastructure investments Typical risks in infrastructure investments Key acquisition issues faced by infrastructure investors Some typical ris mitigation practices Real life examples and case studies Summary and Closing This programme description is intellectual property of Management Centre Europe (MCE). Not to be used without permission. Commodities What to consider when selecting Commodities investments and monitoring their performances The forward curve of commodities: Contango, backwardation and seasonal effects Short overview of the major commodities markets Energy Precious Metals Industrial metals Soft Commodities Some important elements of the risk-return profile for the different commodities asset classes Benefits and risks How to invest: Funds, trackers, derivatives and structured investments Some tools to follow commodities price evolution Performance attribution & reporting in portfolio management Overview of performance attribution assessment techniques Asset total return vs. transaction return Return Decomposition Analysis Modified Dietz Return Sub-period returns and segments returns Time- and dollar-weighted rates of return Contribution analysis Attributing Value Added to management decisions CFA Performance measurement standard: the Global Investment Performance Standards (GIPS) Risk management for asset managers Standard practices Trends & evolution Best practices & recommendations Designing Risk & performance dashboards + case studies Goals of a dashboard A proposed methodological framework 5

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