6 - Portfolio Construction and Planning (5/80) Flashcards
Investment Policy Statement
Client risk appetite and capacity for loss
Time horizon
Goals
Tax position
Deterministic vs Stochastic Modelling
Deterministic = single variable
Stochastic = multiple variables, thousands of simulations
SAA vs TAA
SAA = set once and stick to it; may adjust to rebalance
TAA = set once, but change in the short-term to take advantage of opportunities
Index Tracking Methods
Full replication = buying each security
Stratified sampling = representative sample of an index
Optimisation = use models to buy index ‘characteristics’
Active Investment Methods
Top-Down = asset allocation -> sector choice -> security choices
Bottom-Up = start with attractive stocks and work upwards
Active Share
Proportion of an active fund that differs from the underlying benchmark
Higher active share typically = higher alpha
Bond Fund Strategies
Passive
Active
Indexing
Immunisation = ignores changing rates; matches cash flows to liabilities
-> Opportunity cost of assets not growing (stay same as liabilities)
Liability-Driven Investment
Start with a liability to pay and invest towards it
Typically used by DB pensions and insurers
Reduction in Yield
The effect of costs on a fund’s return
Have to be published in KIDs/PRIIPs for a 10-year period
Synthetic Risk and Reward Indicators
Give a 1-7 ‘score’ for the riskiness of a fund, based on historic NAV volatility
Fundamental vs Technical Analysis
Fundamental = company statistics, ratios etc.
Technical = market price movements
- > Market discounts everything
- > Prices move in trends
- > History repeats itself
Indexing Advantages and Disadvantages
A: Few active outperform benchmark, diversified, cheaper
D: Follow benchmark down, rebalancing issues, not suitable for everyone
Top-Down vs Bottom-Up Investing
Top-Down: start with AA -> sector -> stocks
Bottom-Up: start with stocks
Trend Investing
Gains through analysis of stock momentum
