MANAGING INVESTMENT PORTFOLIOS

Transcription

1 MANAGING INVESTMENT PORTFOLIOS A DYNAMIC PROCESS Third Edition John L. Maginn, CFA Donald L. Tuttle, CFA Dennis W. McLeavey, CFA Jerald E. Pinto, CFA John Wiley & Sons, Inc.

2 CONTENTS Foreword Preface Acknowledgments Introduction CHAPTER 1 The Portfolio Management Process and the Investment Policy Statement 2 Investment Management 3 The Portfolio Perspective 4 Portfolio Management as a Process 5 The Portfolio Management Process Logic 5.1 The Planning Step 5.2 The Execution Step 5.3 The Feedback Step 5.4 A Definition of Portfolio Management 6 Investment Objectives and Constraints 6.1 Objectives 6.2 Constraints 7 The Dynamics of the Process 8 The Future of Portfolio Management 9 The Ethical Responsibilities of Portfolio Managers CHAPTER 2 Managing Individual Investor Portfolios 2 Case Study 2.1 The Inger Family 2.2 Inger Family Data 2.3 Jourdan's Findings and Personal Observations xvii xix xxi v

3 VI Contents Investor Characteristics 3.1 Situational Profiling 3.2 Psychological Profiling Investment Policy Statement 4.1 Setting Return and Risk Objectives 4.2 Constraints An Introduction to Asset Allocation 5.1 Asset Allocation Concepts 5.2 Monte Carlo Simulation in Personal Retirement Planning CHAPTER 3 ^ Managing Institutional Investor Portfolios 63 1 Overview 63 2 Pension Funds Defined-Benefit Plans: Background and Investment Setting Deflned-Contribution Plans: Background and Investment Setting Hybrid and Other Plans 84 3 Foundations and Endowments Foundations: Background and Investment Setting Endowments: Background and Investment Setting 91 4 The Insurance Industry Life Insurance Companies: Background and Investment Setting Non Life Insurance Companies: Background and Investment Setting Banks and Other Institutional Investors Banks: Background and Investment Setting Other Institutional Investors: Investment Intermediaries 127 CHAPTER 4 Capital Market Expectations 2 Organizing the Task: Framework and Challenges 2.1 A Framework for Developing Capital Market Expectations 2.2 Challenges in Forecasting,. 3 Tools for Formulating Capital Market Expectations 3.1 Formal Tools 3.2 Survey and Panel Methods 3.3 Judgment ~ 4 Economic Analysis 4.1 Business Cycle Analysis 4.2 Economic Growth Trends 4.3 Exogenous Shocks 4.4 International Interactions 4.5 Economic Forecasting 4.6 Using Economic Information in Forecasting Asset Class Returns 4.7 Information Sources for Economic Data and Forecasts

4 Contents Vll CHAPTER 5 Asset Allocation What is Asset Allocation? The Role of Strategic Asset Allocation in Relation to Systematic Risk Strategic versus Tactical Asset Allocation The Empirical Debate on the Importance of Asset Allocation Asset Allocation and the Investor's Risk and Return Objectives Asset-Only and Asset/Liability Management Approaches to Strategic Asset Allocation Return Objectives and Strategic Asset Allocation Risk Objectives and Strategic Asset Allocation 24^' 3.4 Behavioral Influences on Asset Allocation The Selection of Asset Classes Criteria for Specifying Asset Classes The Inclusion of International Assets (Developed and Emerging Markets) Alternative Investments The Steps in Asset Allocation Optimization The Mean-Variance Approach The Resampled Efficient Frontier The Black-Litterman Approach Monte Carlo Simulation Asset/Liability Management Experience-Based Approaches Implementing the Strategic Asset Allocation Implementation Choices Currency Risk Management Decisions Rebalancing to the Strategic Asset Allocation Strategic Asset Allocation for Individual Investors Human Capital Other Considerations in Asset Allocation for Individual Investors Strategic Asset Allocation for Institutional Investors Defined-Benefit Plans Foundations and Endowments Insurance Companies Banks * Tactical Asset Allocation 320 CHAPTER 6 Fixed-Income Portfolio Management 2 A Framework for Fixed-Income Portfolio Management 3 Managing Funds Against a Bond Market Index 3.1 Classification of Strategies 3.2 Indexing (Pure and Enhanced) 3.3 Active Strategies

5 Vlll Contents 3.4 Monitoring/Adjusting the Portfolio and Performance Evaluation Managing Funds Against Liabilities Dedication Strategies Cash-Flow Matching Strategies Other Fixed-Income Strategies Combination Strategies Leverage Derivatives-Enabled Strategies International Bond Investing Active versus Passive Management Currency Risk,^»_ Breakeven Spread Analysis Emerging Market Debt Selecting a Fixed-Income Manager Historical Performance as a Predictor of Future Performance Developing Criteria for the Selection Comparison with Selection of Equity Managers 403 CHAPTER 7 Equity Portfolio Management The Role of the Equity Portfolio Approaches to Equity Investment Passive Equity Investing Equity Indices Passive Investment Vehicles Active Equity Investing Equity Styles Socially Responsible Investing Long-Short Investing Sell Disciplines/Trading Semiactive Equity Investing Managing a Portfolio of Managers Core Satellite * Completeness Fund Other Approaches: Alpha and Beta Separation 465 ' 8 Identifying, Selecting, and Contracting with Equity Portfolio Managers Developing a Universe of Suitable Manager Candidates The Predictive Power of Past Performance Fee Structures The Equity Manager Questionnaire Structuring.Equity Research and Security Selection Top-Down versus Bottom-Up Approaches Buy-Side versus Sell-Side Research Industry Classification 475

6 Contents IX CHAPTER 8 Alternative Investments Portfolio Management 2 Alternative Investments: Definitions, Similarities, and Contrasts 3 Real Estate 3.1 The Real Estate Market 3.2 Benchmarks and Historical Performance 3.3 Real Estate: Investment Characteristics and Roles 4 Private Equity/Venture Capital 4.1 The Private Equity Market 4.2 Benchmarks and Historical Performance 4.3 Private Equity: Investment Characteristics and Roles 5 Commodity Investments 5.1 The Commodity Market 5.2 Benchmarks and Historical Performance 5.3 Commodities: Investment Characteristics and Roles 6 Hedge Funds 6.1 The Hedge Fund Market 6.2 Benchmarks and Historical Performance 6.3 Hedge Funds: Investment Characteristics and Roles 6.4 Performance Evaluation Concerns 7 Managed Futures 7.1 The Managed Futures Market 7.2 Benchmarks and Historical Performance 7.3 Managed Futures: Investment Characteristics and Roles 8 Distressed Securities 8.1 The Distressed Securities Market 8.2 Benchmarks and HistoricabPerformance 8.3 Distressed Securities: Investment Characteristics and Roles CHAPTER 9 Risk Management ; 2 Risk Management as a Process 3 Risk Governance 4 Identifying Risks 4.1 Market Risk 4.2 Credit Risk 4.3 Liquidity Risk 4.4 Operational Risk 4.5 Model Risk 4.6 Settlement (Herstatt) Risk 4.7 Regulatory Risk 4.8 Legal/Contract Risk 4.9 Tax Risk 4.10 Accounting Risk 4.11 Sovereign and Political Risks ^

7 Contents 4.12 Other Risks Measuring Risk 5.1 Measuring Market Risk 5.2 Value at Risk 5.3 The Advantages and Limitations of VaR 5.4 Extensions and Supplements to VaR 5.5 Stress Testing 5.6 Measuring Credit Risk 5.7 Liquidity Risk 5.8 Measuring Nonfinancial Risks Managing Risk Managing Market Risk Managing Credit Risk Performance Evaluation Capital Allocation Psychological and Behavioral Considerations CHAPTER 10 Execution of Portfolio Decisions 2 The Context of Trading: Market Microstructure 2.1 Order Types 2.2 Types of Markets 2.3 The Roles of Brokers and Dealers 2.4 Evaluating Market Quality 3 The Costs of Trading 3.1 Transaction Cost Components 3.2 Pretrade Analysis: Econometric Models for Costs 4 Types of Traders and Their Preferred Order Types 4.1 The Types of Traders 4.2 Traders' Selection of Order Types 5 Trade Execution Decisions and Tactics 5.1 Decisions Related to the Handling of a Trade 5.2 Objectives in Trading and Trading Tactics 5.3 Automated Trading 6 Serving the Client's Interests 6.1 CFA Institute Trade Management Guidelines 6.2 The Importance of an Ethical Focus 7 Concluding Remarks CHAPTER 11 Monitoring And Rebalancing 2 Monitoring 2.1 Monitoring Changes in Investor Circumstances and Constraints 2.2 Monitoring Market and Economic Changes

8 Contents XI 2.3 Monitoring the Portfolio Rebalancing the Portfolio 3.1 The Benefits and Costs of Rebalancing 3.2 Rebalancing Disciplines 3.3 The Perold-Sharpe Analysis of Rebalancing Strategies 3.4 Execution Choices in Rebalancing Concluding Remarks CHAPTER 12 Evaluating Portfolio Performance 717 7]^ 2 The Importance of Performance Evaluation The Fund Sponsor's Perspective The Investment Manager's Perspective The Three Components of Performance Evaluation Performance Measurement Performance Measurement without Intraperiod External Cash Flows Total Rate of Return The Time-Weighted Rate of Return The Money-Weighted^Rate of Return TWR versus MWR The Linked Internal Rate of Return Annualized Return J " Data Quality Issues Benchmarks Concept of a Benchmark Properties of a Valid Benchmark * Types of Benchmarks Building Custom Security-Based Benchmarks Critique of Manager Universes as Benchmarks Tests of Benchmark Quality Hedge Funds and Hedge Fund Benchmarks Performance Attribution Impact Equals Weight Times Return Macro Attribution Overview Macro Attribution Inputs Conducting a Macro Attribution Analysis Micro Attribution Overview Sector Weighting/Stock Selection Micro Attribution Fundamental Factor Model Micro Attribution Fixed-Income Attribution Performance Appraisal Risk-Adjusted Performance Appraisal Measures Quality Control Charts Interpreting the Quality Control Chart The Practice of Performance Evaluation Noisiness of Performance Data 776

9 Xll Contents 8.2 Manager Continuation Policy, Manager Continuation Policy as a Filter 780 CHAPTER 13 Global Investment Performance Standards Background of the GIPS Standards The Need for Global Investment Performance Standards The Development of Performance Presentation Standards Governance of the GIPS Standards Overview of the GIPS Standards <? Provisions of the GIPS Standards Fundamentals of Compliance Input Data Calculation Methodology: Time-Weighted Total Return Return Calculations: External Cash Flows Additional Portfolio Return Calculation Standards Composite Return Calculation Standards Constructing Composites I Defining Discretion Constructing Composites II Defining.Investment Strategies Constructing Composites III Including and Excluding Portfolios Constructing Composites IV Carve-Out Segments Disclosure Standards Presentation and Reporting Requirements Presentation and Reporting Recommendations Introduction to the Real Estate and Private Equity Provisions Real Estate Standards Private Equity Standards Verification GIPS Advertising Guidelines Other Issues After-Tax Return Calculation Methodology Keeping Current with the GIPS Standards 855 Appendix: GIPS Glossary 856 Glossary 864 References ~ 888 About the CFA Program 903 About the Authors 904 Index 913