Investments Chapter4

CHAPTER 4
PORTFOLIO MANAGEMENT:
AN OVERVIEW
Presenter
Venue
Date
THE PORTFOLIO PERSPECTIVE
Stock
X
Evaluate Stock X
in
isolation? and
Stock Y
Stock
Y
Evaluate as a
portfolio?
EXHIBIT 4-3 CUMULATIVE WEALTH INDEX OF
SAMPLE OF SHARES LISTED ON HKSE
Source: Datastream
EXHIBIT 4-4 THE IMPORTANCE OF THE
PORTFOLIO PERSPECTIVE
Yue Yuen Cathay Hutchinson Li & Fung COSCO Equally
Industrial Pacific Whampoa Pacific Weighted
Airways Portfolio
Mean
annual 7.3% 8.7% 12.3% 32.8% 14.2% 15.1%
return
Annual
standard 20.2% 25.4% 18.1% 29.5% 31.3% 17.9%
deviation
Mean annual return, randomly selected security = 15.1%

Annual standard deviation, randomly selected security = 24.9%
Diversification ratio = 17.9% 24.9% 71%
Source: Datastream
EXHIBIT 4-5 OPTIMAL PORTFOLIOS FOR
A SAMPLE OF HKSE SHARES
Optimal
Portfolio
s
Source: Datastream
KEY TENETS OF MODERN PORTFOLIO THEORY
Investors should hold portfolios and
focus on how individual securities in
the portfolio are related to one
another.
The priced risk of an individual

security is affected by holding it in a
well-diversified portfolio.
Systematic or nondiversifiable risk

should be the only risk that affects the
assets price.
REPRESENTATIVE INVESTMENT
MOTIVES FOR INDIVIDUAL INVESTORS
Short-Term Goals
Childrens education
Saving for a major purchase
Starting a business
Long-Term Goals
Retirement (defined contribution plan)
EXAMPLES OF INSTITUTIONAL
INVESTORS
Defined Benefit Pension Plans
University Endowments
Charitable Foundations
Banks
Insurance Companies
Investment Companies
Sovereign Wealth Funds (SWFs)

EXHIBIT 4-10 INSTITUTIONAL ASSETS (IN US$
BILLIONS)
US$
bn
16,000 16%
14,000 14%
12,000 12%
10,000 10%
8,000 8%
6,000 6%
4,000 4%
2,000 2%
0 0%
Investment Insurance Pension Funds Other Forms of
Funds Companies Institutional
Savings
1995 2005 Average annual growth (right axis)
Source: OECD, Recent Trends in Institutional Investors Statistics (2008).

DEFINED BENEFIT PENSION PLANS
Earnings Tenure of Defined

Age
History Service Benefit
Investment Returns?
EXHIBIT 4-11 TOP TEN U.S. UNIVERSITY
ENDOWMENTS BY ASSET VALUE
Source: NACUBO, 2008 NACUBO Endowment Study (January 2009).

EXHIBIT 4-12 TOP TEN U.S. FOUNDATION
ENDOWMENTS BY ASSET VALUE
Source: Foundation Center (2009).

BANKS, INSURANCE COMPANIES, AND
INVESTMENT COMPANIES
Banks Insurance Investment

Legal restrictions? Companies Companies
Risk and liquidity Risk and liquidity Investment
concerns? concerns? category?
Time horizons? Limits and legal
restrictions?
EXHIBIT 4-13 SOVEREIGN WEALTH FUNDS
BY ASSET VALUE
Source: SWF Institute (www.swfinstitute.org).

EXHIBIT 4-14 SUMMARY OF INVESTMENT
NEEDS BY CLIENT TYPE
STEPS IN THE PORTFOLIO MANAGEMENT
PROCESS
Planning Step
Understanding client
needs
Preparing an investment
policy statement (IPS)
Feedback Step Execution Step

Portfolio monitoring and Asset allocation
rebalancing Security analysis
Portfolio measurement Portfolio construction
and reporting
SELL-SIDE FIRM VS. BUY-SIDE FIRM
Broker or dealer who sells
Sell-Side securities
Provides independent
Firm investment research and

recommendations
Investment management
Buy-Side company (mutual fund, pension

fund, etc.)
Firm
Clients of sell-side firms
May perform in-house research
POOLED INVESTMENTS
Separately
Managed
Accounts
Exchange- (SMAs)
Hedge
Traded
Funds
Funds
Pooled Private
Mutual
Funds
Investment Equity
s Funds
EXHIBIT 4-17 INVESTMENT PRODUCTS
BY MINIMUM INVESTMENT
MUTUAL FUNDS:
OPEN-END FUNDS VS. CLOSED-END FUNDS
Open-End Closed-
Funds End Funds
Accept new Do not accept
money and new money or
issue additional issue additional
shares shares
Funds can be Can sell for a

withdrawn at premium or
NAV discount
Portfolio
manager must Limited ability
manage cash to grow
flows
MUTUAL FUNDS: NO-LOAD FUNDS VS. LOAD
FUNDS
Annual fee
based on
Total fees
assets under
management
Load
Fee charged
for
Brokerage
investment
fee
and/or
redemptions
MONEY MARKET FUNDS
Tax-Free Taxable
Money Money
Market Funds
Market Funds
Money
Market
Funds
EXHIBIT 4-21 BOND MUTUAL FUNDS
STOCK MUTUAL FUNDS:
ACTIVE VS. PASSIVE MANAGEMENT
Manager seeks outstanding performance

Actively Higher fees
Frequent trading
Managed More likely to realize capital gain
distributions
Passively Manager seeks to match the performance

of an index
Managed
EXCHANGE-TRADED FUNDS (ETFS)
ETFs:
Trade
Are Have Pay
like
typically prices dividends
closed-
index that track out to
end
funds NAV investors
funds
EXHIBIT 4-23 TYPES OF EXCHANGE-TRADED
FUNDS (ETFS) JANUARY 2009
Source: Investment Company Institute, Exchange-Traded Fund Assets, January 2009 (25 February
2009).
SEPARATELY MANAGED ACCOUNT (SMA)
rs
Conside s
d
Tax Nee
Assets
Owned by the
Individual
HEDGE FUNDS
Restricted
Liquidity
Large High
Minimum Management
Investment Fees
Hedge
Funds
HEDGE FUND STRATEGIES
Convertible Arbitrage
Dedicated Short Bias
Emerging Markets
Equity Market Neutral
Event Driven
Fixed-Income Arbitrage
Global Macro
Long/Short
BUYOUT AND VENTURE CAPITAL FUNDS
Invest in private rather than
public equity
Short-term investors
Minimum investment
requirement
Fees for funds under
management and performance
SUMMARY
Portfolio approach to investing

Investment management clients: types,
characteristics, and needs
Steps in the portfolio management process
Pooled investments

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CHAPTER 4

Mean annual return, randomly selected security = 15.1%

The priced risk of an individual

Systematic or nondiversifiable risk

Defined Benefit Pension Plans

Sovereign Wealth Funds (SWFs)

Source: OECD, Recent Trends in Institutional Investors Statistics (2008).

Earnings Tenure of Defined

Source: NACUBO, 2008 NACUBO Endowment Study (January 2009).

Source: Foundation Center (2009).

Banks Insurance Investment

Source: SWF Institute (www.swfinstitute.org).

Feedback Step Execution Step

Broker or dealer who sells

Firm investment research and

Buy-Side company (mutual fund, pension

Funds can be Can sell for a

Manager seeks outstanding performance

Passively Manager seeks to match the performance

Dedicated Short Bias

Equity Market Neutral

Portfolio approach to investing

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