Reading 22: Overview of Equity Portfolio MGMT

Question 1

Stock Loans

Answer 1

Usually open ended in duration. If the loaned stock is special (in high demand), the lender is likely to earn a higher than average fee. The lender must pay any dividends to the borrower (also known as manufactured), but the borrower cannot vote anymore. The lender usually posts collateral that the lender can earn a return on (at cost of administration).

Question 2

Why Equities?

Answer 2

Dividend income, diversification, and inflation hedge. Generally there is a positive relationship between inflation and equity returns (as costs are passed on), however during hyperinflation it can be negative. Equity prices are leading, inflation is lagging.

Question 3

Screening

Answer 3

Includes negative, positive and thematic. Thematic screens to meet investors objectives based on a specific theme (like climate change).

Question 4

Style & Size

Answer 4

Screening for style and size allows managers to better address clients risk and return considerations, provides good diversification, constructs a relevant benchmark, and analyses how companies change over time (this can also be a disadvantage).

Question 5

Geography

Answer 5

It is important to note that even if you diversify through geography, the sources of income may not come from that country and could actually come from the domestic country the investor is in. It may overestimate the diversification benefit.

Question 6

Economic Activity

Answer 6

Market oriented approach: segments companies by markets served, how products are used by consumers, and how cash flows are generated. I.e. coal company could be energy sector. Product orientated approach classifies by products manufactured and inputs required. I.e. coal company could be basic materials sector.

Question 7

Income Strategies

Answer 7

Covered call (selling the upside) provides a premium income but lose of upside. Cash covered put (sell put and setting aside sufficient cash to cover it if exercised) provides income through premium but may end up having to buy at premium to market price.

Question 8

Dividend Capture

Answer 8

Buying stock just for the dividend hoping the stock price doesn’t decrease by the same amount as the dividend (which is possible with market movements etc).

Question 9

Equity Portfolio Fees & Costs

Answer 9

Management and performance fee, admin fee, marketing and distribution fee, trading costs, investment strategy.

Question 10

Shareholder Engagement

Answer 10

Can cause increased focus on short term not long term, lead to acquiring non public material info, create potential conflicts of interest.

Question 11

Active Management

Answer 11

Good to add value and can adopt ESG focus, needs to have a broad range underlying equities in the index (narrow is better for passive). Can cause reputation risk, key person risk, and higher portfolio turnover.