Investment Portfolio Management and Effective Asset Allocation for Institutional and Private Banking Clients

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1 Investment Portfolio Management and Effective Asset Allocation for Institutional and Private Banking Clients Senior Managers Days 4 1

2 WHY attend this programme? This workshop provides an overview of modern active portfolio management approaches and methodologies to develop effective asset allocations for private clients. Who is this programme for? 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 asset classes Hedge funds Private equity Property Structured products WHAT will you learn and practice? DAY 1 Why Asset allocation matters (group exercise): Different allocations behave differently under different market circumstances. Difference between strategic and tactical asset allocation. 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 be better able to build and manage customized, high performing asset portfolios for your most important banking clients. You will be able to look at the whole process with all cash flow requirements. You will understand how different investment products work, assess and explain the impact of macroeconomic events on a client s portfolio and therefore be better prepared and build more credibility in interaction with others on asset allocation. You will gain a better understand of: New Trends impacting investment portfolio management and asset allocation Theories, tools and concepts Strategic and tactical asset allocation The mechanics of asset allocation Rebalancing and reallocation Asset allocation and other portfolio construction disciplines Equity allocation Integrating alternative assets with 'traditional' Elements of asset allocation: Determine the most important elements that will influence the asset allocation process Investor Characteristic Investment style Eligible instruments Financial goal setting, defining the client needs: Private banking with starting point client: What are his investment needs based upon his investment profile. Different investment profiles lead to different portfolio compositions. Setting of financial targets & goals. Lifecycle events, investment horizon We look at risk appetite vs. risk return, Cash flow management / savings requirements. Capital preservation (protection) vs. growth of asset base Purchasing power: the effect of inflation Modern portfolio theory: optimize the risk return profile of a portfolio Assumptions: efficient market hypothesis, underlying 2

3 parameterization Some models: CAPM and APT Challenge the assumptions Mean Variance optimization, what does it mean why would you do it? Economic consequences Rebalancing to a strategic portfolio vs dynamic asset allocation: what s the difference Risk, Return and correlation Expected risks of asset classes, behavior over time Expected returns of asset classes, behavior over time Expected correlations, behavior over time The Utility Function Shape of the utility function, what does it mean, how to transform preferences into utility Prospect theory: the advanced way to look at risk-return preference The optimal portfolio given someone s utility function. Different levels of asset allocation Strategic asset allocation Tactical asset allocation Dynamic asset allocation: investment horizon related (e.g. life cycles), riskreturn related (CPPI, volatility driven) DAY 2 The asset allocation process: maintenance of the target portfolio Rebalancing to a strategic portfolio vs dynamic asset allocation: what s the difference The influence of return on the portfolio composition Rebalancing: going back to your target: Changing the tactical asset allocation: ways to formalise it Formalising the implementation an economic view: the black-litterman model Advantages and disadvantages of using models to implement tactical asset allocation Beta versus Alpha, the debate Alpha versus beta: Active versus passive What is alpha, and how to measure it (Jensen s alpha, Sharpe ratio) Does alpha exist: some evidence from research How do you define the level of freedom of a manager: the tracking error Beta or Alpha, is it a choice or can you combine it: the core-satelite approach Portfolio construction What elements can you include in your allocation process? Who will manage your investments, manager selection Asset Classes Equity Fixed income Cash Alternatives Rates of return: the concept of risk premium 3

4 Explanation of the concept of risk premiums How to use the risk premium to forecast future returns Behaviour of Risk premiums over time Client Behaviour: Some patterns of client behaviour The cycle of emotion Identifying patterns of irrationality Risk profiling: How to determine a client s preferences DAY 3 Equity investments Different types of equity (common vs. pref, rights issue) Equity Valuation process: Ratios : PE, Price to Book Value, Price to sales, Price to Cash flows, Company value to EBITDA, Dividend yield Risk return profile of index investing Equity investments: passive investing Selecting the appropriate benchmarks? What is an appropriate benchmark for your equity investments Index investing: different types of equity indices. How are indices constructed Index investing: how to get index exposure ETF-investing: what is an ETF? What is the difference between a cash ETF and a synthetic ETF? How to measure the effectiveness of an ETF: tracking error, elements that can cause differences between return of the index and the ETF Other techniques to get equity exposure Use of futures Use of options in equity portfolio (hedging, extra leverage) Capital arbitrage: different instruments can achieve the same return profile. Fixed Income investing What should an advisor know to build a well-balanced fixed income investment portfolio? Various instruments: Short term vs. Long Term Bonds: Government bonds vs. Corporate bond Fixed vs. Floating What is the yield curve? Risk/ Return profile of a fixed income investment What is credit spread and the impact of credit spread on my investment What is yield and duration of a bond and how do we calculate A brief introduction to special types of bonds: inflation linked, convertible bonds Return and volatility: behaviour of fixed income investments over time Influence of rate shocks Influence of credit spread shocks Correlation with equity investments Fixed income investing integrative exercise. How to build an efficient fixed income portfolio looking at credit risk, yield, and duration. Simulation game. DAY 4 Alternative investments Do they add value? Overview of types of alternatives: 4

5 Hedge Funds, Private Equity, Real Estate, Commodities Overview of the market: evolution of assets under management in the different asset classes Reasons to invest in alternatives Risk-Return characteristics of alternative investments (including tail risks) The liquidity aspect: how liquid are alternatives? Can you use them in every portfolio Hedge funds Ways of hedge fund investing: fund of funds, individual funds, managed accounts, replicating strategies Hedge Fund strategies, an overview: Event driven (e.g. merger arbitrage) Arbitrage strategies Directional strategies: CTA s (managed futures), Global Macro Market Neutral strategies Long-short strategies Trading techniques: some examples of hedge fund investments (arbitrage example, leverage, short selling technique,etc) Hedge fund returns: risk-return characteristics The cause for hedge funds: diversification, truth or myth? Some evidence of correlation with other asset classes over time The impact of the crisis: does it lead to a different view on hedge funds? Private Equity Different types: leveraged buy out, venture capital, Mechanics of direct private equity investments: commitment, capital calls, fees, J-curve effects The benefits of private equity investments (correlation with other asset classes, the premium for illiquidity) Constructing a portfolio, the effect of spreading over vintages How to determine the value of private equity: monitoring and measuring the evolution of the underlying value Listed private equity, an alternative for direct investments? Private equity after the credit crisis: did the playing field change? Property investing How to invest in property Different types of property: commercial property, offices, housing What determines the yield of your property Listed real estate: property or equity? A comparison of the risk-return characteristics between listed real estate, direct real estate and equity Structured Solutions What are structured products, a definition Structured products, the building blocks How to transform a desired risk-return profile into a structured product: using different building blocks to create predefined pay-out profiles Structured products: sensitivity of price to market parameters Structured products, a liquid instrument? Structured products: should they be a part of asset allocation? 5

6 Summary and Closing This programme description is intellectual property of Management Centre Europe (MCE). Not to be used without permission. 6