Running Money. McGraw-Hill Irwin. Professional Portfolio Management. Scott D. Stewart, PhD, CFA. Christopher D. Piros, PhD, CFA

Transcription

1 Running Money Professional Portfolio Management Scott D. Stewart, PhD, CFA Boston University Christopher D. Piros, PhD, CFA Boston University and Reykjavik University Jeffrey C. Heisler, PhD, CFA Venus Capital Management, Inc. Me Graw Hill McGraw-Hill Irwin

2 Chapter 1 Introduction Introduction What Is a Portfolio Manager? What Investment Problems Do Portfolio Managers Solve? 5 Asset Allocation and Asset Class Portfolio Responsibilities 5 Representative Investment Problems Spectrum of Portfolio Managers Layout of This Book 9 Chapter 2 Client Objectives for Diversified Portfolios Introduction Definitions of Risk The Portfolio Management Process and the Investment Policy Statement 15 The Investment Policy Statement Institutional Clients 20 Foundations and Endowments 20 Pension Plans Individual Investors 35 Understanding the Client: Situational Profiling 35 The Individual s IPS: Objectives and Constraints 38 Trends in the Wealth Management Business Asset Class Portfolios 41 Chapter 3 Asset Allocation: The Mean-Variance Framework Introduction: Motivation of the Mean-Variance Approach to Asset Allocation 51 Types of Asset Allocation 52 Asset Classes 52 The Mean-Variance Framework Theory: Outline of the Mean-Variance Framework 57 Utility Theory 57 Return Behavior 61 Return Variance 63 Portfolio Return and Variance 65 Objective Function 66 Constraints 66 Investment Horizon Practice: Solution of Stylized Problems Using the Mean-Variance Framework 69 The Efficient Frontier 70 The Optimal Portfolio 76 Investment Horizons 79 The Shortfall Constraint 82 Asset-Liability Management 83 Practice Summary 86 1 Returns, Compounding, and Sample Statistics A. Returns 91 B. Continuous Compounding 92 C. Sample Statistics 92 D. Application in Excel 93 2 Optimization Parameters and Assumptions 94 Decision Variables 94 Objective 95 Constraints 95 Solution 95 Optimization Failure 96 Linear Programming 96 Quadratic Programming 97 Excel Solver 97 3 Notation Investment 100 Statistical 100 Chapter 4 Asset Allocation Inputs Sensitivity of the Mean-Variance Model to Inputs Constant Investment Opportunities 102 Using Sample Moments 102 James-Stein Estimation 105 Linking Returns to the Economy 110 Implied Views 114 Cross-Sectional Risk Models 118 Combining Estimates: Mixed Estimation Time-Varying Investment Opportunities 124 xii

3 xiii Mixed Estimation with Multiple Assets Chapter 5 Advanced Topics in Asset Allocation Introduction Horizon Effects in the M-V Framework 141 Horizon-Dependent Risk Aversion 141 Horizon-Dependent Risk and Return Dynamic Programming 153 The General Framework 153 Mean-Variance with Recursive Shortfall Constraints 154 The Impact of Mean Reversion 160 Some Intuition about Changing Investment Opportunities 160 Portfolio Choice with Mean Reversion Simulation 165 The Impact of Required Expenditures and Alternative Probability Distributions 166 Specialized Objectives 168 Resampled Mean--Variance Asset Allocation with Active Managers Portfolio Insurance 174 Option-Based Portfolio Insurance 175 Constant Proportional Portfolio Insurance 176 Who Should Buy Portfolio Insurance? : The Estimated VAR1 Model 2 DP Solution of the Mean Reversion Model Chapter 6 The Investment Management Process Introduction The Efficient Market Hypothesis (EMH) 188 Definition of the EMH 188 Implications of the EMH General Discussion of Investment Strategies The Five Key Elements of the Investment Process 192 Introduction 192 Philosophy of the Strategy 192 Signal Creation 193 Capturing the Signal 195 Implementation Issues 195 Feedback/Review Process The Importance of Quality Control A Sample Investment Strategy: The SRY Model 202 Philosophy of the Strategy 202 Signal Creation 204 Capturing the Signal 205 Implementation Issues 207 Feedback/Review Process 210 Chapter 7 Introduction to Equity Portfolio Investing: The Investor's View Introduction Equity Strategies 218 Passive Strategies 218 Structured Active Strategies 218 Active Strategies Selecting the Equity Mix 221 Equity Return Behavior Alternative Equity Mixes 223 Optimal Mean-Variance Allocations 224 Stress Testing Allocations The Equity Management Business 229 Equity Fund Structures Implementing the Equity Mix 231 Sample Equity Mixes 231 Equity Portfolio Performance Equity Portfolio Investment Objectives 235 Overview of Manager Guidelines 235 Sample Manager Guidelines 236 Chapter 8 Equity Portfolio Construction Introduction Passive versus Active Management 242 The Record of Active Management 242 Growth in Equity Fund Management Passive Portfolio Construction 245 Full Replication 246 Sampling Goals for Active Management 256 Investment Processes Sector Management Style and Sector Management Identifying Style 264

4 xiv 8.8 Sample Active Portfolio 269 Investment Philosophy 269 Portfolio Construction 269 Chapter 9 Fixed-Income Management Introduction Fixed-Income Markets, Instruments, and Concepts 274 The U.S. Bond Market 274 A Review of Key Fixed-Income Concepts 279 Empirical Properties of Stock and Bond Returns Fixed-Income Mandates Passive Management Active Management 299 A Sample Active Mandate 300 Universes and Benchmarks 302 Active Strategies and Tactics Structured Portfolios 313 Cash Matching 313 Immunization 314 Contingent Immunization 319 Matching Additional Risk Measures 320 Chapter 10 Global Investing Introduction Investing with a Global Perspective 326 The Investment Policy Statement Revisited 327 Operational Considerations for International Investing Global Investment Opportunities 329 Global Equity Opportunities 329 Global Bond Opportunities The Impact of Currency 336 Unhedged Returns 337 Hedged Returns 338 Cross-Hedging 338 Proxy Hedging 338 Asset versus Currency Decisions 340 Hedging Uncertain Returns International Diversification: Failure to Deliver? 346 The Correlation Conundrum 346 International Diversification with Active Managers Implications of Globalization 348 Interest Rate Convergence: When They Do and Why They Don't 350 Are Hedged Bonds Redundant? 351 Global Equities: Country versus Industry Effects Currency Overlays: Incentive-Compatible Performance Evaluation 354 Chapter 11 Alternative Investment Classes Introduction Hedge Funds 363 Definition of a Hedge Fund 363 How a Hedge Fund Works 364 Hedge Fund Styles and Returns 366 Data Issues Manager Selection 369 Sources of Alpha 369 The Due Diligence Process 371 Fund of Funds Venture Capital and Private Equity 374 Performance Record of Venture Capital and Private Equity Real Estate 378 Introduction to Real Estate 3 78 Performance Record of Real Estate Commodities 381 Commodity Prices and Returns 381 Performance Record of Commodities Allocating Assets Including Alternatives 383 Issues for Implementing Investments in Alternatives 383 Risk Analysis of Investment Allocation 385 Computing Optimal Allocations 387 Sources for Return Series Chapter 12 Portfolio Management through Time: Taxes and Transaction Costs Introduction Performance Shortfall 394 Look-Back Bias 395 Implementation Costs 396 Signal Capture and Implementation Lags 398 Poor Execution, Trade Errors, and Fraud 398

5 xv 12.3 Portfolio Adjustments without Taxes or Costs Transaction Costs 401 Cost Components 401 Rebalancing with Transaction Costs 406 Transaction Costs and Target Portfolios 410 Turnover versus Value Added Taxation of Investment Returns in the United States Strategies to Reduce Individual Investor Taxes 414 Enhancing After-Tax Returns 414 Wealth Preservation and Transfer 416 General Recommendations Tax Managing a Portfolio of Securities 418 Chapter 13 Performance Measurement and Attribution Introduction Performance Measurement 425 Security Valuation 425 Return Measures 427 The Impact of Flows and Errors 428 Risk Measures Performance Attribution 434 Benchmarks 434 Returns-Based Analysis 435 Holdings-Based Attribution Performance Appraisal / 451 Calculation of Risk Measures Chapter 14 Incentives, Ethics, and Policy Introduction 457 Interests of the Portfolio Manager and the Client 458 Outline of Chapter The Investment Company Business Model 459 Variables Influencing Firm Profits 459 Relative Importance ofvariables 460 Employee Compensation Incentives for Businesspeople and Portfolio Managers 462 Short-Term Incentives for the Individual or Small Firm 462 Long-Term and Firm Incentives Ethical Situations 464 Artificially Boosting Performance 465 Paying Bribes and Other Questionable Sales Techniques 465 Hiding Mistakes 466 Use of Commissions for Manager and Sponsor Benefit Industry Guidelines for Good Business Practices 467 Artificially Boosting Performance 468 Paying Bribes and Other Questionable Sales Techniques 468 Hiding Mistakes 469 Use of Commissions for Manager and Sponsor Benefit Internal Company Policies to Protect the Franchise 470 General Policy Discussion 4 70 Specific Policy Discussion Effective Manager and Analyst Compensation Policies 473 Portfolio Manager Compensation 473 Analyst Compensation 474 Other Investment Professional Compensation 476 Sample List of Investment Policies Chapter 15 Investor and Client Behavior Introduction Theory and Observations of Human Behavior 480 Normative Behavior 481 Normal Behavior 482 Behavioral Finance 484 Observations of Individual Investor Behavior 487 Observations of Institutional Investor Behavior Implications for Active Management 490 General Observations 490 Limits to Market Efficiency and Opportunities for Active Management Implications for Setting Investment Policy Implications for Manager Selection 492 The Record 494

6 xvi Chapter 16 Managing Client Relations Introduction General Recommendations for Client Management 499 General Implications Meeting Client Needs 501 Meeting Individual Investor Needs 502 Meeting Institutional Investor Needs Manager Selection Process Securing New Clients 507 Individual Investors 508 Institutional Investors Retaining Clients 511 Ongoing Client Communication 512 Communication in Periods of Poor Performance Case Study 515 Sample Cases 519 Glossary 540 References 548 Index 554