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Portfolio Management

Portfolio Management. Grenoble Ecole de Management. Dr PHILIPPE DUPUY Associate Professor in Finance philippe.dupuy@grenoble-em.com. Main Topics of Study. The market of asset management The portfolio management process and the investment policy statement Mean-variance analysis

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Portfolio Management

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  1. Portfolio Management Grenoble Ecole de Management

  2. Dr PHILIPPE DUPUY Associate Professor in Finance philippe.dupuy@grenoble-em.com

  3. Main Topics of Study • The market of asset management • The portfolio management process and the investment policy statement • Mean-variance analysis • Diversification • The Capital Asset Pricing Model (CAPM) • Multifactor models • Asset allocation • The universe of investment (bonds, equities…) • Execution and market efficiency

  4. Main Topics of Study • Evaluation of portfolio performances • Revision, rebalancing and active management • Reporting • Alternative investments

  5. E-List • Institutionalinvestor.com • watsonwyatt.com • investmentcompanyinstitute.com • investmentuk.org • efama.org • cob.fr • cfainstitute.org • edhecrisk.com

  6. Learning Objectives Mastering the principles of the portfolio management process: • Risk and returns analysis • Investments objectives and policies • Diversification • Dynamic Asset allocation • Performance measurement

  7. Learning Objectives At the end of the course, students should be able to undertake positions in the asset management industry such as: • Sales, • Marketing, • Analyst, • Middle office, • Manager assistant • etc…

  8. Assessment • 60% 3-hour exam • 40% individual report

  9. Portfolio Management The Market of Asset Management

  10. Economics of Investment Management • Relatively simple, fee driven • Based on a percentage of the average amount of assets under management + Performance fees • The value of the firm is thus a multiple of its annual fee income.

  11. Economics of investment management • portfolio managers • analysts • traders • sales • marketing • Middle office.

  12. Economics of Investment Management • In recent years AM firms have reduced the number of mutual funds • Many funds have been merged or liquidated • Primarily due to the downward pressure on fees, distribution costs and compliance costs. • Another trend in recent years has been the growth of alternative investments such as hedge funds, exchange traded fund (ETF), private equity…

  13. Portfolio Management THE PORTFOLIO MANAGEMENT PROCESS AND THE INVESTMENT POLICY STATEMENT

  14. The Portfolio Management Process • Portfolio management is a process • Logical and orderly combination of activities • Dynamic and flexible concept • Portfolio management is a continuous and systematic process complete with feedback loops for monitoring and rebalancing. • An integrated set of steps undertaken in a consistent manner to create and maintain appropriate portfolio to meet clients’ stated goals.

  15. The Portfolio Management Process

  16. The Planning Step • Formulate investments objectives and policies • Form Capital market expectations • Establish strategic asset allocation

  17. The Planning Step: Investor’s Objectives and Constraints • objectives are desired investment outcomes in terms of return and risk. • Constraints are limitations on the investor’s ability to take advantage of particular investments. Liquidity and time horizon.

  18. Investment Policy Statement (IPS) • Foundation for the process • Client’s objective and constraints • Discipline the portfolio manager • Helps ensure against ad hoc revisions in strategy An investment policy statement (IPS) is a written document that clearly sets out a client’s return objectives and risktolerance over that client’s relevant time horizon, along with applicable constraints such as liquidity needs, tax considerations, regulatory requirements and unique circumstances.

  19. Investment Policy Statement (IPS)

  20. The Planning Step: Know your customers - Investors • Investors are institutional or individual. • Institutional investors are entities such as corporations, pension funds, foundations and endowments, insurance companies.

  21. The Planning Step: Individual Investor’s Objectives and Constraints

  22. The Planning Step: The Investment Policy Statement • IPS is the governing document for all decision-making • Also IPS details reporting requirements, manager fees. See example at: http://services.assetmanagement.hsbc.co.uk/site/media/pdf/Factsheets/OS/simplified_prospectus/GIF_Brazil_Equity.pdf

  23. The Planning Step: Investment Strategy • Passive investment approach: portfolio composition does not react to changes in capital market expectations. • Passive strategies are also called buy and hold strategies. Indexing is a common passive approach. • Barclays Global Investors, State Street Global, Vanguard…

  24. The Planning Step: Investment Strategy • Active investment approach: managers will respond to changing capital market expectations. It’s holding differ from the benchmark. • Objective is to produce positive excess return, also known as positive alpha.

  25. The Planning Step: Capital Market Expectations • Long run forecast of risk and return for choosing portfolios that maximize expected return for given level of risk. • Portfolio manager may use sell-side analysts and/or buy side analyst.

  26. The Planning Step: Strategic Asset Allocation • Determine target asset class weights using portfolio optimization. • maximum-minimum bounds around target weights.

  27. Execution step: plans turn to reality • Multiple investment vehicles. Many support ETF, Securities, performance Swap, future • Orders. Portfolio managers initiate portfolio decisions and trading desks then implement these decisions. Poorly managed executions result in transaction costs that reduce performance.

  28. Feedback Step • Manager monitors and rebalances the portfolio • Manager conducts performance evaluation • Manager communicates to customers

  29. Feedback Step: Performance Evaluation • Performance evaluation involves the calculation of the portfolio’s rate of return • Performance attribution examines why the portfolio performed as it did and tracks sources of underperformance • Performance appraisal enables to judge if the manager is doing a good job compared to its pairs. • http://screen.morningstar.com/fundsearch/FundRank.html

  30. The Portfolio Management Process

  31. Portfolio Management • Investment objectives and constraints are identified and specified • Investment strategies are developed • Portfolio composition is decided in detail • Portfolio decisions are initiated by portfolio managers and implemented by traders • Portfolio performance is measured and evaluated • Investor and market conditions are monitored • And any necessary rebalancing is implemented.

  32. Portfolio Management • Process • Planning • Feedback • Execution • Objectives and constraints • Return and risk • Asset allocation • IPS

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