Portfolio Management. Bertrand Groslambert. Skema Business School

Transcription

1 Portfolio Management Bertrand Groslambert Skema Business School International Portfolio Management Asset Management Industry 1 Course Outline Introduction (lecture 1) Presentation of portfolio management Chap.2,3,5 Introduction to Bloomberg Modern Portfolio Theory (lectures 2-4) The risk return framework Chap.1 Efficient capital markets Chap.6 The price of risk Chap.7,8 Asset pricing models Chap.9 Fundamental Analysis (lectures 5-8) Analysis of financial statement Chap.10 Industry analysis Chap.12,13 Absolute and relative valuation analysis Chap.11, 14 Stock market valuation analysis Chap.12 Technical analysis (lecture 9) Chap.15 The asset management industry (lecture 10) Portfolio management strategies Chap.16 The different types of investment companies Chap.24 Evaluation of portfolio performance Chap.25 NB: chapters refer to Reilly & Brown 8th and 9th ed. International Portfolio Management Asset Management Industry 2 1

2 The different types of investment companies Structure and Evolution Private Management and Advisory Firms Investment Companies Investing in Alternative Asset Classes adapted from Analysis of Investments and Management of Portfolios, by Keith C. Brown & Frank K. Reilly International Portfolio Management Asset Management Industry 3 The Asset Management Industry: Structure and Evolution Two Organization Forms Contract directly with a management and advisory firm Commingling of investment capital of several clients in an investment company Differences between These Two Forms Private management and advisory firms develop a personal relationship with clients A Investment company offers a general solution See Exhibit 24.1 International Portfolio Management Asset Management Industry 4 2

3 Exhibit 24.1 International Portfolio Management Asset Management Industry 5 The Asset Management Industry: Structure and Evolution Contract directly with a management and advisory firm Relationship with client Assets under management (AUM) Separate accounts Customized Commingling of investment capital of several clients in an investment company Invest a pool of funds belonging to many individuals in a single portfolio of securities Issue new shares representing the proportional ownership of the fund. International Portfolio Management Asset Management Industry 6 3

4 Private Management and Advisory Firms The majority of private management and advisory firms are still much smaller More narrowly focused on a particular niche of the market Investment Strategy Each client s assets are held in a separate account The security portfolio are likely to be guided by the firm s overall investment philosophy While the specific stock allocations might vary, the same fundamental orientation toward stock selection will be applied to all accounts International Portfolio Management Asset Management Industry 7 Organization and Management of Investment Companies Investment Companies They are the financial intermediaries that pool the assets of individual investors and invest the fund in securities or other assets Major Duties Investment research Management of the portfolio Administrative duties The management fee is generally stated as a percentage of the total value of the fund Family of funds helps achieve economies of scale International Portfolio Management Asset Management Industry 8 4

5 Organization and Management of Investment Companies Valuating Investment Company Shares The NAV for an investment company is analogous to the share price of a corporation s common stock. The NAV of the fund shares will increase as the value of the underlying assets (the fund security portfolio) increases Fund NAV= ( Total Market Value of Fund Portfolio )-( Fund Expenses ) ( Total Fund Shares Outstanding ) International Portfolio Management Asset Management Industry 9 Closed-End Versus Open-End Investment Companies Closed-End Investment Company Functions like any other public firm and its stock trades on the regular secondary market The fund generally doesn t issue or redeem shares once it is established The price of the fund is different from its NAV It is a puzzle for modern finance why close-end funds often sell at a discount from NAV It is often a means of investing in a pool of assets from a foreign country International Portfolio Management Asset Management Industry 10 5

6 Example Close-End Fund International Portfolio Management Asset Management Industry 11 Example Close-End Fund Morgan Stanley China A Share Fund International Portfolio Management Asset Management Industry 12 6

7 Example Close-End Fund NAV Discount or Premium International Portfolio Management Asset Management Industry 13 Closed-End Versus Open-End Investment Companies Open-End Investment Companies The company continues to sell and repurchase shares after their initial public offerings The fund stands ready to issue or redeem shares at the net asset value (NAV) Investors who buy or sell the shares may have to pay sales charges (the load) These funds are normally called mutual funds See Exhibit 24.8 International Portfolio Management Asset Management Industry 14 7

8 Example Open-End Fund International Portfolio Management Asset Management Industry 15 Example Open-End Fund next Palatine Amérique performance versus DJIA International Portfolio Management Asset Management Industry 16 8

9 Exhibit 24.8 International Portfolio Management Asset Management Industry 17 Investing in Alternative Asset Classes Basic Concepts Alternative Assets Hedge funds Private equity Real estate Natural resources and commodities Management Structure Structured as a limited partnership rather than as a mutual fund to manage the commingled assets The Fund alpha (See Exhibit 24.14) Excess returns generated by the fund, implying the superior performance by the fund management International Portfolio Management Asset Management Industry 18 9

10 Exhibit International Portfolio Management Asset Management Industry 19 Hedge Funds The Development One of the most significant developments in the professional asset management industry over the past 20 years has been the emergence of the global market for hedge fund investing Hedge fund investing is not new and can be traced back to 1949, structured as a partnership structure with an incentive fee for superior performance Form a portfolio that combines both long and short position in the equity market with the use of financial leverage to enhance return Their ability to produce superior returns than traditional investment structures, has been challenged in the recent years International Portfolio Management Asset Management Industry 20 10

11 Exhibit International Portfolio Management Asset Management Industry 21 Hedge Funds The Characteristics As a private partnership, hedge funds are generally less restricted in how and where they can make investments Less correlated with traditional asset class investments, providing diversification benefits Hedge fund investments are far less liquid than mutual fund (or even closed-end fund) shares There are severe limitations on when and how often investment capital can be contributed to or removed from a partnership Performance allocation and high-watermark See Exhibit International Portfolio Management Asset Management Industry 22 11

12 Exhibit International Portfolio Management Asset Management Industry 23 Hedge Fund Strategies Equity-Based Strategies Long-short equity: Managers attempt to identify misvalued stocks and take long positions in the undervalued ones and short positions in the overvalued ones Equity market neutral: attempt to limit the overall volatility exposure of the fund by taking offsetting risk positions on the long and short side, an effort that might also involve adopting derivative positions. International Portfolio Management Asset Management Industry 24 12

13 Hedge Fund Strategies Arbitrage-Based Strategies Fixed-income arbitrage: Returns are generated by taking advantage of bond pricing disparities caused by changing market events, investor preferences, or fluctuations in the fixed-income market Convertible arbitrage: Seeks to profit from disparities in the relationship between prices for convertible bonds and the underlying common stock Merger (risk) arbitrage: Returns are dependent upon the magnitude of the spread on merger transactions, which are directly related to the likelihood of the deal International Portfolio Management Asset Management Industry 25 Hedge Fund Strategies Opportunistic Strategies High yield and distressed: Invest in risky bonds Global macro: This broad class of strategies seeks to profit from changes in global economies Managed futures: This strategy entails using long and short positions in a variety of futures contracts Special situations: Events like bankruptcies, spinoffs Multiple strategies Fund of funds: Invest in a number of funds so as to achieve a well-diversified allocation to the hedge fund investment space International Portfolio Management Asset Management Industry 26 13

14 Hedge Fund Performance Not all hedge funds are the same when it comes to their risk and return profiles The returns to these strategies show a high degree of variability on a year-to year basis, in both an absolute and a relative sense There are only two (of 14) years in which every strategy class earned positive returns Emerging markets was the worst performing strategy in 1995 (-16.9%). However, it was the best performing strategy in 1996 ( +34.5%) The long/short equity strategy performed well in 2003 and 2004, but lost money in 2002 International Portfolio Management Asset Management Industry 27 Hedge Fund Performance Good between 1998 and 2003 International Portfolio Management Asset Management Industry 28 14

15 Private Equity Basic Concepts Refers to any ownership interest in an asset (or assets) that is not tradable in a public market Typically fund either new companies or established firms that are seeking to change their organizational structure or are experiencing financial distress Generally far less liquid than public stock holdings and are therefore considered to be long-term positions within an investor s overall portfolio Characteristics Higher return and low liquidity Good sources of diversification See Exhibit International Portfolio Management Asset Management Industry 29 Exhibit International Portfolio Management Asset Management Industry 30 15

16 Private Equity Development and Organization Organized private equity investing began in the United States back in 1946 Three Subcategories Venture Capital Seed Early stage Later stage Buyouts Special Situations Distressed Debt Mezzanine Financing Exhibit 24.22: Private equity investing in the U.S. International Portfolio Management Asset Management Industry 31 Exhibit International Portfolio Management Asset Management Industry 32 16

17 Private Equity Returns to Private Equity Funds Private equity commitments should be viewed as longterm, highly illiquid investments The return pattern known as the J-curve effect Average annual returns for these investments tend to be quite high over time The initial years of a new private equity commitment usually produce negative returns In addition to its higher overall risk level, there exists a huge dispersion in fund returns, that is, good performance vs. bad performance managers See Exhibit International Portfolio Management Asset Management Industry 33 Exhibit International Portfolio Management Asset Management Industry 34 17