Presenting

Equity Portfolio
Management
Strategies
 Group “Adroit”

Name ID
Md. Omar Faruq 1484
Md Tariqul Islam 1504
Md enamul hasan. 2315
Anik Banik. 2317
khondakar masun amin sajib 2318
Equity Portfolio
Management
 Why equities in a portfolio?

• Equities have historically served as a good

inflation hedge. When-
Inflation can be priced into the stock.
Inflation can be passed through the
consumer.
• Provides a growth dimension to the
portfolio.
Passive versus Active Management

• Passive equity portfolio management

– Long-term buy-and-hold strategy,
– Usually tracks an index over time,
– Designed to match market performance,
– Manager is judged on how well they track the
target index.
 Passive versus Active Management

• Active equity portfolio management

– Attempts to outperform a passive benchmark
portfolio on a risk-adjusted basis.
Passive equity
strategies
An Overview of Passive Equity Portfolio
Management Strategies

Replicate the performance of an index.

May slightly underperform the target index
due to fees and commissions.
Costs of active management (1 to 2 percent)
are hard to overcome in risk-adjusted
performance.
Many different market indexes are used for
tracking portfolios.
 Index Portfolio Construction
Techniques

• Full replication.
• Sampling.
• Quadratic optimization or
programming.
 Full Replication

• All securities in the index are purchased

in proportion to weights in the index.
• This helps ensure close tracking.
• Increases transaction costs, particularly
with dividend reinvestment.
 Sampling

• Buys a representative sample of stocks in the

benchmark index according to their weights
in the index.
• Fewer stocks means lower commissions.
• Reinvestment of dividends is less difficult.
• Will not track the index as closely, so there
will be some tracking error.
 Expected Tracking Error Between the S&P 500
Index and Portfolio Comprised of Samples of Less
Than 500 Stocks
Expected Tracking Error Exhibit 16.2
(Percent)

4.0

3.0

2.0

1.0

500 400 300 200 100 0

Number of Stocks
 Quadratic Optimization
(or programming techniques)
• Historical information on price changes and
correlations between securities are input
into a computer program that determines
the composition of a portfolio that will
minimize tracking error with the benchmark.
• This relies on historical correlations, which
may change over time, leading to failure to
track the index.
Methods of Index Portfolio Investing

• Index Funds
– Attempt to replicate a benchmark index.
• Exchange-Traded Funds
– EFTs are depository receipts that give
investors a pro rata claim on the capital gains
and cash flows of the securities that are held
in deposit by a financial institution that issued
the certificates.
“Value”
versus

“Growth”
Investing
 Value Stock

• Trading at a discount to “Intrinsic Value.”

• Features-
Lower P/E ratio.
Dividends.
 Growth Stock

• Potential for future earnings growth.

• Features-
Higher P/E ratio.
No dividends.
“Growth and Value investing
are joined at the hip.”
-Warren Buffet.
 Value versus Growth

Growth stocks will outperform

value stocks for a time and then
the opposite occurs.
Over time value stocks have
offered somewhat higher returns
than growth stocks.
 Value versus Growth

• Growth-oriented investor will:

focus on EPS and its economic
determinants.
look for companies expected to have
rapid EPS growth.
assumes constant P/E ratio.
 Value versus Growth

• Value-oriented investor will:

–focus on the price component.
–not care much about current earnings.
–assume the P/E ratio is below its
natural level.
Style
 Style

• Construct a portfolio to capture one or more

of the characteristics of equity securities
• Small-capitalization stocks, low-P/E stocks,
etc…
• Value stocks appear to be underpriced
– price/book or price/earnings.
• Growth stocks enjoy above-average earnings
per share increases.
 Determining Style

• Style grid:
– firm size (large cap, mid cap, small cap).
– Relative value (value, blend, growth)
characteristics.
• Style analysis
– constrained least squares.
 Benchmark Portfolios
• Sharpe
– T-bills,
– intermediate-term government bonds,
– long-term government bonds,
– corporate bonds,
– mortgage related securities,
– large-capitalization value stocks,
– large-capitalization growth stocks, medium-capitalization
stocks,
– small-capitalization stocks,
– non-U.S. bonds,
– European stocks,
– and Japanese stocks
 Benchmark Portfolios

• Sharpe
• BARRA
– Uses portfolios formed around 13 different
security characteristics,
– including variability in markets, past firm
success, firm size, trading activity, growth
orientation, earnings-to-price ratio, book-to-
price ratio, earnings variability, financial
leverage, foreign income, labor intensity, yield,
and low capitalization
 Benchmark Portfolios

• Sharpe
• BARRA
• Ibbotson Associates
– simplest style model uses portfolios formed
around five different characteristics:
– cash (T-bills), large-capitalization growth, small-
capitalization growth, large-capitalization value,
and small-capitalization value
 Timing Between Styles

• Variations in returns among mutual

funds are largely attributable to
differences in styles
• Different styles tend to move at
different times in the business cycle
Active equity Strategies
 An Overview of Active Equity
Portfolio Management Strategies

Total actual return= expected return + alpha

Management strategies
 Fundamental strategies.
 Technical strategies .
 Market anomalies and attributes.
 Tax efficiency and active equity portfolio .
 Fundamental strategies

Active fundamental managers use three

generic themes.
Asset class rotation strategy
 Shifting fund in and out of the stock market
depending managers perception how stock is
value compared to the various asset class
alternative.
Sector rotation strategy.
130/30 strategy.
 Technical analysis

 Contrarian investment strategy.

 Base other belief that the best time to a stock is
when the majority other investors are the most
bearish or bullish.

 Price momentum strategy.

 Earnings momentum strategy.
Disadvantages: technical analysis

 Past price pattern may not be repeated in the

future.
 The intense competition of those using the trading
rules will render the technique useless.
 The values that signal action constantly changing.
 Anomalies and attributes

• The Weekend Effect.

• The January Effect.
• Firm Size.
 Tax efficiency and active equity
management
• Passive equity portfolio.
• Active equity portfolio.
• Pension fund and university endowment funds.
• Tax cost ratio.
 Asset
allocation
strategies
 Asset Allocation Strategies

1.Integrated asset allocation

2.Strategic asset allocation
3.Tactical asset allocation
4.Insured asset allocation
 Integrated Asset Allocation

The integrated asset allocation strategy examines,

capital market conditions and investor’s objectives
and constraints .These factors are combined to
establish the portfolio asset mix .
 Strategic Asset Allocation

Strategic asset allocation is a constant mix asset

allocation with periodic rebalancing to adjust the
portfolio to the specified asset weights.
 Tactical asset allocation

-Mean reversion
-Inherently contrarian
 Insured Asset Allocation

Insured asset allocation results in continual

adjustment in the portfolio allocation assuming that
expected market returns and risk are constant over
time.
 Selecting an Active Allocation
Method

-Depend on the perceptions of the variability

-Perceived relationship between past and future
capital market condition.
Thank you all.