Lecture I. Anthony Broccardo Chief Investment Officer (CIO) F&C Asset Management plc London

Transcription

1 Lecture I Anthony Broccardo Chief Investment Officer (CIO) F&C Asset Management plc London 12 th November 2004

2 STRATEGY Pulling it all together

3 Strategy Pulling it all together Investment Philosophy Asset Allocation Process Macro-economics Micro-economics Corporate Evaluation Implementation Strategy

4 Investment is simple!!! Need to Know the basics Need set of beliefs Philosophy evidence Process evidence requirements Discipline personality behaviour

5 Approaches Active v.s. Passive Top-Down v.s. Bottom-up v.s. Blend Value v.s. Growth Large v.s. Small Cap Key data to justify the approach Framework Process Choose from 3 mandates

6 Stock Market Efficiency Inefficient Highly Efficient Completely Efficient How Perceived Traditional view Evolving view Theoretical Model Shared Errors Normal Rare or hard to identify None Managers Role Active only Passive & Active Passive only

7 Three contrasting philosophies Traditional Active Management Highly Efficient Market Completely Efficient Market Investor Consensus Often irrational Highly Rational Completely rational Current Price Not necessarily related to true (or inherent, or equilibrium, or fair ) value Starting point for valuation Best and only estimate for value Required Estimate True market value 6- or 12- month price change None

8 Macro

9 Macro

10 Macro

11 Macro

12 Macro

13 Macro

14 Macro

15 Macro

16 Macro

17 Macro Forecast

18 Macro Forecast

19 Macro Forecast

20 Macro Forecast

21 Macro Forecast

22 Macro Forecast

23 Macro Forecast

24 Macro Forecast

25 Macro Forecast

26 Macro Forecast

27 Macro Forecast

28 Macro Forecast

29 Macro Forecast

30 Macro Forecast

31 Tracking the Cycle Leading Indicator Average weekly hours in manufacturing Initial unemployment claims Manufacturers new orders, consumer goods & materials Manufacturers new orders, non-defence capital goods Vendor performance Building permits Real M2 Interest rate spread, 10yr treasury bonds less federal funds Index of consumer expectations Stock prices, S&P500 Coincident Indicator Employees on non-agricultural payrolls Personal income less transfer payments Industrial production Manufacturing & trade sales Lagging Indicator Average duration of unemployment Ratio of manufacturing & trade inventories to sales Change in unit labour cost Average prime rate charged by banks Commercial & industrial loans outstanding Ratio of consumer instalments to credit outstanding Change in consumer price index for services National Bureau of Economic Research (NBER) for USA

32 Asset Allocation Richard C. Grinold, Ronald N. Kahn, Active Portfolio Management, McGraw-Hill, 2 nd ed.,

33 Asset Allocation Richard C. Grinold, Ronald N. Kahn, Active Portfolio Management, McGraw-Hill, 2 nd ed.,

34 Strategic Asset Allocation Long-term view Types of assets to be included in the portfolio Strategic asset weights (weights that assume the manager has NO views about likely short-term market performance) Bounds/range for short-term tactical deviations

35 Tactical Asset Allocation Investment Management Single Asset Class Multiple Asset Classes Equities / Cash Equities / Bonds Equities / Bonds / Cash Equities / Bonds / Cash /... Subjective / Qualitative Quantitative Tactical Asset Allocation Asset Class Relative Attractiveness Asset Allocation Decision Portfolio Construction Review and Control

36 Tactical Asset Allocation Asset Allocation Decision Empirical Signals / Indicators Optimised Hybrids Empirical Analysis Expected Returns Volatilities Correlations Signals / Indicators Risk Tolerance Other

37 Developing a Strategy Key Factors That Drive Stock Prices Technical term Common term Dividend / Earnings growth rate Business outlook Risk-free Rate Interest rates Equity Risk Premium Investor confidence / Market Sentiment

38 Developing a Strategy MSCI WORLD INDEX, EARNING & DIVIDENS MSCI WORLD INDEX Earnings [RHS] Dividens [RHS] MSCI WORLD INDEX & BOOK VALUE MSCI WORLD INDEX Book Value [RHS] in the Long-Run

39 Developing a Strategy 2yr rolling correlation between US equity & bond returns Equity/bond correlation turns negative during periods of deflation and/or intense uncertainty

40 Developing a Strategy Chart with Equity-Bond historical Risk premiums Oppenheimer or Doole Equity Risk Premium most often used and discussed ratio

41 Developing a Strategy

42 Developing a Strategy

43 Developing a Strategy Equity Risk Premium most often used/quoted ratio

44 Developing a Strategy Liquidity

45 Developing a Strategy Earnings Expectations & Earning Revisions 30 MSCI WORLD - 12m Earnings Expectations & Revisions : : : : : : : : : :12 MSCI WORLD - Net # of Revised Estimates as a % of Total - 3m MA [RHS] MSCI WORLD - 12m Earnings Grow th Expectation 1997: : : : : : MSCI WORLD - Long Term Earnings Expectations & Revisions : : : : : : : : : : : : : : : :12 MSCI WORLD - Net # of Revised Estimates as a % of Total - 3m MA [RHS] MSCI WORLD - LT Earnings Grow th Expectation

46 Developing a Strategy Market Sentiment

47 Developing a Strategy Risk Indicators Implied Volatility of the NASDAQ Index EMBI+ Index [Emerging Market Debt] - Yield Spread to 10Y US Treasuries Moodys Baa - Yield Spread to 10Y US Treasuries

48 Developing a Strategy Bonds/Equities Relative Value BY/EY The FED Model Useful signals at extremes 2.25 Relative Value - BY/EY - GLOBAL 40 PE & BY - WORLD equities expensive equities cheap 0.50 Dec.85 Dec.86 Dec.87 Dec.88 Dec.89 Dec.90 Dec.91 Dec.92 Dec.93 Dec.94 Dec.95 Dec.96 Dec.97 Dec.98 Dec.99 Dec.00 Dec.01 Dec.02 Dec.03 Dec.04 WORLD WORLD - MEAN WORLD - MEAN-1stdv WORLD - MEAN+1stdv Dec.79 Dec.80 Dec.81 Dec.82 Dec.83 Dec.84 Dec.85 Dec.86 Dec.87 Dec.88 Dec.89 Dec.90 Dec.91 Dec.92 Dec.93 Dec.94 Dec.95 Dec.96 Dec.97 Dec.98 Dec.99 Dec.00 Dec.01 Dec.02 Dec.03 Dec.04 PE BY (RHS - inverted) Relative Value - BY/EY - USA equities expensive 40 PE & BY - USA Dec.79 Dec.81 equities cheap Dec.83 Dec.85 Dec.87 Dec.89 Dec.91 Dec.93 Dec.95 Dec.97 Dec.99 Dec.01 USA USA - MEAN USA - MEAN-1stdv USA - MEAN+1stdv Dec PE BY (RHS - inverted) Dec.79 Dec.80 Dec.81 Dec.82 Dec.83 Dec.84 Dec.85 Dec.86 Dec.87 Dec.88 Dec.89 Dec.90 Dec.91 Dec.92 Dec.93 Dec.94 Dec.95 Dec.96 Dec.97 Dec.98 Dec.99 Dec.00 Dec.01 Dec.02 Dec.03 Dec

49 Developing a Strategy 1.75 Equities/Bonds Relative Value EY/BY Relative Value - BY/EY - UK 30 PE & BY - UK equities cheap Dec.79 Dec.81 Dec.83 Dec.85 Dec.87 Dec.89 Dec.91 Dec.93 Dec.95 Dec.97 Dec.99 Dec.01 UK UK - MEAN UK - MEAN-1stdv UK - MEAN+1stdv Dec PE BY (RHS - inverted) Dec.79 Dec.80 Dec.81 Dec.82 Dec.83 Dec.84 Dec.85 Dec.86 Dec.87 Dec.88 Dec.89 Dec.90 Dec.91 Dec.92 Dec.93 Dec.94 Dec.95 Dec.96 Dec.97 Dec.98 Dec.99 Dec.00 Dec.01 Dec.02 Dec.03 Dec Relative Value - BY/EY - EUROPE ex UK equities expensive PE & BY - EUROPE ex UK equities cheap Dec.86 Dec.87 Dec.88 Dec.89 Dec.90 Dec.91 Dec.92 Dec.93 Dec.94 Dec.95 EUROPE ex UK EUROPE ex UK - MEAN-1stdv Dec.96 Dec.97 Dec.98 Dec.99 Dec.00 Dec.01 Dec.02 EUROPE ex UK - MEAN EUROPE ex UK - MEAN+1stdv Dec.03 Dec Dec.79 Dec.80 Dec.81 Dec.82 Dec.83 Dec.84 Dec.85 Dec.86 Dec.87 Dec.88 Dec.89 Dec.90 Dec.91 Dec.92 Dec.93 Dec.94 Dec.95 Dec.96 Dec.97 Dec.98 Dec.99 Dec.00 Dec.01 Dec.02 Dec.03 Dec.04 PE BY (RHS - inverted) Relative Value - BY/EY - JAPAN equities expensive 400 PE & BY - JAPAN PE BY (RHS - inverted) equities cheap Dec.83 Dec.84 Dec.85 Dec.86 Dec.87 Dec.88 Dec.89 Dec.90 Dec.91 Dec.92 Dec.93 Dec.94 Dec.95 Dec.96 Dec.97 Dec.98 Dec.99 Dec.00 Dec.01 Dec.02 Dec.03 Dec.04 JAPAN JAPAN - MEAN JAPAN - MEAN-1stdv JAPAN - MEAN+1stdv Dec.79 Dec.80 Dec.81 Dec.82 Dec.83 Dec.84 Dec.85 Dec.86 Dec.87 Dec.88 Dec.89 Dec.90 Dec.91 Dec.92 Dec.93 Dec.94 Dec.95 Dec.96 Dec.97 Dec.98 Dec.99 Dec.00 Dec.01 Dec.02 Dec.03 Dec

50 Developing a Strategy Mean Reversion of Returns Equity Risk- Premium Subsequent Excess Returns (Equities over Bonds) Frequency of Outperformance (Equities over Bonds) 3 months 12 months 3 months 12 months >4.0% 11.9% 22.9% 90% 100% 3.5% to 4.0% 4.8% 18.1% 82% 91% 3.0% to 3.5% 2.5% 15.2% 73% 85% 2.5% to 3.0% 0.5% -0.9% 39% 43% 2.0% to 2.5% -1.8% 0.9% 27% 46% 0.0% to 2.0% -3.2% -7.4% 35% 42%

51 Developing a Strategy Simple Asset Allocation Matrix Equity Risk- Premium Equity / Bonds Weights Equities Bonds >4.5% Upper Bound / Max overweight 80% 20% 4.0% - 4.5% 75% 25% 3.5% - 4.0% 70% 30% 3.0% - 3.5% 65% 35% 2.5% - 3.0% Neutral 60% 40% 2.0% - 2.5% 55% 45% 1.5% - 2.0% 50% 50% 1.0% - 1.5% 45% 55% >1.0% Lower Bound / Max underweight 40% 60%

52 Developing a Strategy Matrix Scores

53 Developing a Strategy Matrix Scores F&C Asset Management plc Emerging Markets

54 Developing a Strategy F&C Asset Management plc Emerging Markets

55 Developing a Strategy F&C Asset Management plc Emerging Markets

56 Developing a Strategy Quantitative Model Objective Intuitive Auditable Economist s GDP forecast Actual Output (GDP) Money Supply Potential Output (GDP) IBES Consensus Forecasts Earnings Bond Yield P-Star (Equilibrium Prices) CPI (Actual Prices) Inflationary expectations Inflation risk premium Factors Influencing Real Yield leading cyclical indicator Real money mar ket rate (monetar y policy reaction functi on) Actual Bond Yield Equilibrium Bond Yield Fair Value (Equilibrium Prices) MSCI (Actual Prices) Bond Yield Dynamics Momentum, Inflation, Foreign Influence Valuation Gap Monetary policy reaction function model Implied Yield Change Two factor model Shift Twist Implied money market rate change Stock Market Dynamics Stock Market Gap Implied yield curve change & duration recommendation Implied Return

57 Stock Selection

58 Stock Selection

59 Stock Selection

60 Stock Selection

61 Stock Selection

62 Stock Selection Growth Value

63 Stock Selection Growth At a Reasonable Price (GARP)

64 Stock Selection

65 Stock Selection

66 Stock Selection

67 Stock Selection

68 Stock Selection

69 Stock Selection

70 Stock Selection