Week 7_09 - Common Investment Strategies

Week 7_09 - Common Investment Strategies - Common...

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Common Investment Strategies Practical Topics in Investment Management
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Practical Topics in Investment Manageme 2 Follow-up to MPT lecture Current financial events discussion Investment Strategies lecture Agenda for Today
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Practical Topics in Investment Manageme 3 Investment Mandates and Strategies What is an investment mandate? An investment mandate is a defined task that a client sets out for an investment manager Two general types of mandates: Broad Broad mandates allow the manager wide discretion to make significant bets Narrow Narrow mandates place significant restrictions on what the manager can and can’t invest in What is an investment strategy? An investment strategy is the approach an investment manager takes in order to beat the benchmark for a given mandate
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Practical Topics in Investment Manageme 4 Some Common Ways to Define Investment Strategies Active / Passive / Enhanced Top-Down / Bottom-Up Fundamental / Technical / Quantitative Style-Based ***Note: These dimensions are not mutually exclusive! You could have, for instance, an actively managed, top-down, fundamental, large cap value strategy
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Practical Topics in Investment Manageme 5 Active v. Passive Investing Efficient Market Hypothesis : Postulates that equilibrium market prices fully reflect all available information. Active : Seeks to produce excess returns over a benchmark by exploiting market inefficiencies Purchasing undervalued securities and / or short-selling securities that are over-valued Contradicts the E.M.H. Passive : Management style which makes as few portfolio decisions as possible in order to minimize transaction costs and closely approximate benchmark returns Rests on the theory that the average investor will have (before-costs) performance equal to the market average Therefore the average investor will benefit more from reducing investment costs than from trying to beat the average.
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Practical Topics in Investment Manageme 6 Active v. Passive Investing Enhanced Indexing : Catch-all term that describes strategies employed to outperform traditional indexing Attempts to generate modest excess returns compared to index funds and other passive management techniques Enhanced cash Index construction enhancements Exclusion rules Trading enhancements Portfolio construction enhancements Tax-managed strategies
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Practical Topics in Investment Manageme 7 Active v. Passive Investing A Practical Approach: Securities markets are discounters of all widely-known information, therefore to beat the market, one must: either have access to information others commonly don’t or interpret widely-known data differently and correctly from common interpretation The only rational basis for making an active bet in portfolio management is if you believe you know something others commonly don’t In the absence of knowing something special, you shouldn’t make a bet In the absence of ever knowing something special, you should probably be passive
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Week 7_09 - Common Investment Strategies - Common...

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