AMSTERDAM BOSTON HEIDELBERG LONDON NEW YORK OXFORD PARIS SAN DIEGO SAN FRANCISCO SINGAPORE SYDNEY TOKYO Academic Press is an imprint of Elsevier

Transcription

1 Trading and Money Management in a Student-Managed Portfolio Brian Bruce Jason Greene ELSEVIER AMSTERDAM BOSTON HEIDELBERG LONDON NEW YORK OXFORD PARIS SAN DIEGO SAN FRANCISCO SINGAPORE SYDNEY TOKYO Academic Press is an imprint of Elsevier

2 Introduction Acknowledgments About the Authors xi xiii xvii Chapter 1: Investment Philosophy and Process 1 The Student-Managed Investment Fund as an Investment Management Firm 2 Investment Philosophy and Process 4 Investment Philosophy 6 Scope of an Investment Philosophy 6 Statement of Beliefs 7 Statement of Opportunities 7 Statement of Ability 8 Statement of Value 9 Examples of Investment Philosophy 10 Investment Process 14 Examples of Investment Process 20 Internal and Externa! Uses of the Investment Philosophy and Process 23 Appendix A: Common Investment Strategy Classifications 30 Appendix B: The Role of Investment Philosophy in Evaluating Investment Managers: A Consultant's Perspective on Distinguishing Alpha from Noise 32 What Is an Investment Philosophy? 33 How Does Analysis of a Manager's Investment Philosophy Aid in Distinguishing Alpha from Noise? 34 Common Ways of Failing the Investment Philosophy Test 35 Uncommon Ways of Passing the Investment Philosophy Test 37 Concluding Thoughts: Implications for Managers and Consultants 38 Endnotes 39 References 40 v

3 Chapter 2: Organization 41 Organizational Structure 42 Oversight 44 Roles and Responsibilities 46 Student-Managed Investment Fund as a For-Credit Course or a Volunteer Student Organization 51 Challenges to a Student-Managed Investment Fund 56 Personnel Recruiting and Turnover 57 Academic Calendar 65 Fund Structure 67 Appendix: Operating Guidelines for Philip M. Dorr and Alumni Endowed Investment Fund 71 Baylor University Hankamer School of Business 71 Chapter 3: Security Selection 77 Quantitative Analysis 79 Security Analysis 85 Company Analysis 86 A Good Company Versus a Good Investment 87 Valuation 88 Dividend Discount Model 88 Steps to Using the Multistage Dividend Discount Model 90 Discounted Cash Flow Model 93 Steps to Using the Multistage Discounted Cash Flow Model 94 Free Cash Flow to Equity Model 98 Steps to Using the Free Cash Flow to Equity Model 99 Valuation Using Earnings 99 Steps to Using the Earnings Model 100 Market Valuation Measures 100 Price-to-Earnings 101 Price-to-Sales 102 Price-to-Cash Flow 103 Security Analysis Application 104 Example: Texas Christian University's Educational Investment Fund 104 Valuation 104 Checks and Balances 106 DDM and FCFE Models: An Illustration 106 Potential Variations 109 vi

4 Appendix: Cutting Through the Hype 112 The Role of Analysts 112 Resources and Bibliography 130 Chapter 4: Portfolio Construction 133 Portfolio Weights and Returns 134 Relative Returns and Active Weights 135 Expected Returns 142 Total Risk of a Portfolio 145 Tracking Error and Relative Risk 152 Tracking Error and Relative Risk Using Active Weights 159 Portfolio Optimization 161 Minimize Total Risk 162 Minimize Tracking Error 168 Maximize Sharpe Ratio 170 Maximize Information Ratio 172 Trading and Rebalancing 172 Practical Considerations 173 Chapter 5: Presentations 179 Internal Presentations 180 General Presentation Style and Delivery Guidelines 186 External Presentations 240 Chapter 6: Performance Evaluation 269 Performance Calculation 270 Performance Reporting 295 Performance Analysis 300 Performance Attribution 300 Performance Attribution Examples 304 Performance Attribution Commentary and Interpretation 307 Performance Attribution Complexities 312 Trading and Rebalancing Effects 312 Attribution over Multiple Periods 314 Geometrie Attribution vs. Arithmetic Attribution 315 Returns-Based Performance Analysis 316 Single Factor Model 317 Average Returns in the Single Factor Model 318 Analysis of Portfolio Risk in the Single Factor Model 320 vii

5 Multifactor Models 321 Fama-French 3-Factor Model 322 Style Analysis Using a Multifactor Returns Model 323 Example of Returns-Based Attribution Using the Fama-French 3-Factor Model 326 Beyond the Fama-French 3-Factor Model 332 Risk-Adjusted Return and Reward-to-Risk Measures 332 Transactions Cost Analysis 334 Chapter 7: Tools 337 Primary Data Sources 338 Other Information and Data Sources 344 Web Portals, Search Engines, and Business News 364 Brokers and Financial Service Providers 372 Index Providers 373 Licensed Services 373 Chapter 8: Forums, Symposiums, and Competitions 407 Texas Investment Portfolio Symposium (TIPS) 408 Overview 408 Hi story 409 Portfolio Managers Finals Competition 412 The CFA Institute Global Investment Research Challenge 423 History and Growth of the CFA Institute Global Investment Research Challenge 423 Investment Research Challenge Texas ( ) 424 R.I.S.E.: Redefining Investment Strategy Education 425 TVA Investment Challenge 429 Overview 429 History 429 Structure 430 Investment Guidelines 431 University Investment Manager Guidelines 431 Trading Process 434 Performance 435 Performance Awards 435 Future 435 The Cornell-Fidelity MBA Stock Pitch Competition 436 What Happens at the MBA Stock Pitch Competition? 436 VIII

6 Chapter 9: The Present and Future of Student-Managed Portfolios 439 The Role of Security Trading Rooms in Business Schools 440 Why a Trading Room? 440 How to Develop These Rooms 441 Equipment and Data 442 The Impact of Trading Rooms on the Stakeholders 443 Summary and Conclusions 444 Student-Managed Investment Funds: An International Perspective 448 Previous Studies 449 The Survey 450 The Growth and Size of Programs 451 SMIFs Versus Professional^ Managed Funds 454 Funding Sources and Organizational Structure 455 Student Participation 456 Faculty and Professional Involvement 457 Investment Activity 458 Comparisons of US and Foreign Funds 460 Benefits to the University Community 460 Recent Developments 461 Conclusion 464 References 464 Index 467 ix