R26 Intro to Equity Portfolio Management

Question 1

Equity Universe Segmentation

Answer 1

1. Size (large, mid, small cap)
2. Style (growth, value, core)
3. Geography (developed, emerging and frontier markets)
4. Economic activity (Production orientated e.g. coal company = mining sector. Market orientated e.g. coal company = energy sector)
5. Equity Indexes and benchmarks (can reflect some or all of approaches in 1-4)

Question 2

Equity Income

Answer 2

1. Dividend Income (including Special dividends and stock dividends)
2. Securities lending income (0.2-0.5% fee in developed markets; 1-2% emerging markets, ‘specials’ 5-15%)
3. Dividend Capture (Buy just before ex-div, capture dividend, sell after)
4. Writing options (e.g. Covered call, cash-covered put)

Question 3

Equity Fees

Answer 3

1. Management Fees (usually % funds under management)
2. Performance fees (often associated with Hedge Funds. High water Mark provisions)
3. Administration fees (for corporate actions but also including Custody, Depository and Registration fees)
4. Marketing and Distribution costs
5. Trading Costs

Question 4

Advantages of Shareholder engagement

Answer 4

1. Can assist in developing a more effective corporate governance culture
2. “Free rider problem” - some investors could benefit from the shareholder engagement of others
3. Stakeholders can gain or lose influence with companies depending on the outcomes of shareholder engagement
4. ESG can benefit from shareholder engagement

Question 5

Disadvantages of shareholder engagement

Answer 5

1. Time consuming and can be costly for both shareholders and companies
2. Pressure on company management to meet near-term share price or earnings targets
3. Engagement can result in selective disclosure of important information to a certain subset of shareholders, which could lead to a breach of insider trading
4. Conflicts of interest can result for a company

Question 6

R26

Role of Equity in Portfolio

Answer 6

1. Capital Appreciation
2. Dividend Income. More stable than capital appreciation.
3. Diversification benefits (not constant over time)
4. Infaltion Hedges (Varies. Companies must be able to pass on costs to customers.Broad based (oil, industrial metals) commodity companies do well)
5. Consider facets of IPS: RRLTTLU
6. ESG (Postive / negative screening, thematic investing, impact investing)