Managing Equity Portfolios

Course overview

Course outline

1. 1Day 1: Overview of Equities as an Asset Class and more

   • Overview of Equities as an Asset Class
   • How does equity ownership compare to other financial claims?
   • Position of equity vis à vis other elements in corporate capital structure
   • Review of equity capital from an accounting perspective
   • Characteristics of ordinary, bearer and registered shares
   • Cumulative, participating, and convertible preference shares
   • Ranking for dividends and liquidation
   • Overview of the primary issuance of Equity Securities
   • Equity Markets and Trade Execution
   • Order driven/quote driven platforms
   • Warrants and Covered warrants
   • Contracts for Difference (CFD’s)
   • Overview of equity based collective investment vehicles
   • Primary Issuance, Clearing, Custody and Trading Of Equity Securities
   • Listing securities – the regulatory framework, investor disclosures
   • Structure and stages of an initial public offering (IPO)
   • Alternative routes for going public - direct listings, SPAC's
   • Role of intermediaries, book building, pricing
   • Benefits for the issuer and investors
   • Underwritten versus best efforts
   • Oversubscribed issues and greenshoe options
   • Role of exchanges in providing secondary market facilities, platforms
   • Alternative Trading Venues
   • Multilateral Trading Facilities and dark pools
   • The meaning of ‘books closed’, ‘ex-div’ and ‘cum div’, cum, special ex, special cum, and ex rights
   • Explanation of the nature and objectives of High Frequency Trading (HFT)
   • Principles of Delivery versus Payment (DVP) and Free Delivery
   • International Central Securities Depositories (ICSD)
   • Examination of the role of Custodians/Nominees
   • Purpose, requirements and implications of securities lending SBLI’s
   • Short selling, collateral management, re-hypothecation etc.
   • Global Equities Markets/Indices
   • Principal indices/exchanges
   • Emerging and frontier markets
   • Classification systems of global equity markets – MSCI, FTSE
2. 2Day 2: Historical survey of performance of main global equity indices and more

   • Historical survey of performance of main global equity indices
   • Historical P/E ratios
   • Regulatory and supervisory environment
   • Shareholder protections etc.
   • Structure and size of markets, volumes
   • Liquidity and transparency
   • Trading characteristics e.g. prevalence of off exchange activities
   • Financial Statement Analysis
   • Purpose, structure and use of balance sheets, income statements and cash flow statements
   • Key classes of financial ratios:
   • Profitability, Liquidity, Asset turnover, Gearing
   • Key Investor ratios
   • Earnings Per Share (EPS), P/E Ratios (historic and prospective), Price/Earnings-to-Growth (PEG) ratio
   • Dividend yield, Dividend/interest cover
   • Advantages and challenges of performing financial analysis
   • Comparing companies across and within sectors
   • Accounting for Corporate Actions
   • Stock and cash dividends
   • Rights issues, open offers, offers for subscription and for sale
   • Calculation of theoretical effect on the issuer’s share price of bonus/scrip, consolidation, rights issues
   • Corporate Valuation Methods
   • Fundamental equity valuation – Discounted Cash Flow (DCF) techniques
   • Models based on calculating the Present Value of future dividend flows
   • Simple Model
   • Multi-stage model
   • Comparing valuations across different sectors
   • What discount rate should be used in DCF models?
   • Determining the Weighted Average Cost of Capital (WACC)
   • What multiples should be used for individual companies, for overall market?
   • How to value high growth enterprises with no dividends
   • Sustainability of profits and commercial disruptions
   • Relationship of corporate valuations to underlying interest rate environment
   • Return on Equity (ROE) measurements – including risk-adjusted return on capital (RAROC)
   • Risk Adjusted valuations – incorporating beta into valuation methods
   • Importance of changes in the regulatory environment on valuation forecasting
3. 3Day 3: Equity Allocation and Performance Attribution and more

   • Equity Allocation and Performance Attribution
   • Criteria for determining the relative allocations for equities, fixed income, alternative assets etc.
   • Contribution of each to overall portfolio return
   • Strategic versus tactical
   • Core versus satellite holdings
   • Active equity allocation – stock selection vs. passive investment
   • Relative performance of active managers to benchmarks
   • Performance attribution – allocation to specific securities vs. overall exposure to benchmarks
   • Examination of contrasting styles of Growth vs. Value investing
   • Warren Buffet’s investment philosophy
   • Portfolio Theory and the Risk/Return Trade Off
   • Cornerstones of Capital Asset Pricing Model (CAPM)
   • Securities market line (SML), beta, alpha, risk free rate etc.
   • The concept of the efficient frontier
   • Systematic Risk and idiosyncratic or specific Risk
   • Modern Portfolio Theory (MPT) and diversification
   • Markowitz model and covariance matrix analysis
   • Risk Adjusted Return
   • Sharpe Ratio, Sortino Ratio, Treynor Ratio, Calmar Ratio, Total Expense Ratio (TER)
   • Risk-adjusted return on capital (RAROC)
   • Difference between CAPM and Arbitrage Pricing Theory (APT)
   • Active and passive strategies – index tracking, stock picking, transaction costs
   • Hedging and use of derivatives in risk management
   • Survivorship bias phenomenon
   • Risk Budgeting
   • Explanation of risk premia – excess return or compensation for not holding riskless assets
   • Risk as a scarce resource and how to allocate exposures according to risk premia and expected returns
   • Statistical distributions for modelling probability structures
   • Benchmarks and tracking errors – active versus passive risk
   • Recognizing importance of drawdowns - holding periods, needs for liquidity
   • Expected returns from a risk-budgeting perspective
   • Obligations to market – trading book, Basel III approaches
   • Calculations and mechanics of standard deviation / tracking error/ M 2 / beta
   • Value at Risk – methodologies, Expected Shortfall, Extreme Value Theory
4. 4Day 4: Exchange Traded Funds (ETF’s) & Special Risk Factors for Emerging Market Equities and more

   • Exchange Traded Funds (ETF’s)
   • Compare availability and range of ETF’s traded on US, European platforms
   • Number of funds, assets under management, growth trajectories
   • Contrast features of ETF’s to other collective investment vehicles (CIV’s)
   • Fiduciary/trust architectures, role of sponsors, creation units
   • Contrast passive index tracker ETF’s (the majority) with actively managed funds
   • Examination of MSCI geographical indices which many ETF’s track
   • Features of inverse ETF’s, leveraged funds
   • Contrast between funds which hold “physicals” versus those which are synthetic – hold futures, swaps, structured products.
   • Replication strategies – stratified sampling vs. full replication, use of synthetics
   • Examination of tracking error for exchange traded products
   • Risks associated with ETF’s, liquidity risk, risks with synthetic ETF’s
   • Special Risk Factors for Emerging Market Equities
   • Examination of how capital flows into emerging markets are influenced by the intention of central banks especially Federal Reserve to push asset managers into risk assets
   • Globalization of resourcing and capital flows has invalidated much traditional macro-economic theory regarding economic cycles
   • Differentiation between EM economies which have trade surpluses/deficits
   • Examination of negative feedback loops for EM markets when advanced economies reduce their accommodative monetary policy
   • Examination of ETF’s which provide exposure to emerging market equity and debt
   • Analysis of correlation between emerging market equities and commodities
   • Challenges and strategies for hedging and managing risk of emerging market equities because of lack of depth in markets for hedging exotic currencies
   • Techniques For Forecasting Expected Returns
   • Risk Factor Asset allocation strategies – reversing the trend of MPT and focusing on specific factors which “account” for asset class behaviour
   • Identifying key risk factors as drivers of asset prices
   • Insights from behavioural finance – risk seeking versus risk aversion
   • Long term correlations amongst asset classes – mean reversion
   • Contrarian indicators – sentiment, positioning of traders, hedge funds
   • Is there any evidence of asset returns having cyclical behavior?
   • Overview of Equity Based Derivatives
   • Terminology – underlying, spot markets, options, futures, swaps
   • Initial margin, variation margin, cost of carry, basis risk
   • Equity index futures contracts
   • Options on individual equities and equity indices
   • American, European, Asian style
   • Puts and calls – perspective of buyer and writer
5. 5Day 5: Risk elements of derivatives & Main types of portfolio risk and more

   • Risk elements of derivatives
   • Counterparty risk, Market risk, Liquidity risk
   • Risks to the buyer of futures/options
   • Risks to the writer/seller of futures/options
   • Explain the key contrasts between Exchange traded versus Over-the-counter (OTC) derivatives
   • Central clearing versus counterparty risk
   • Role of options/futures in hedging equity portfolios
   • Role of Total Return Swaps - collateral issues, lessons from Archegos debacle
   • Managing Risk for Equity Portfolios
   • Main types of portfolio risk
   • Market risk – asset price volatility, currency, interest rates etc.
   • Investment horizon and holding period
   • Systemic and tail risk
   • Principles used to mitigate portfolio risk:
   • Seeking relatively uncorrelated assets
   • Benefits/limitations of diversification
   • Use of derivatives in hedging and risk management
   • Modeling risk scenarios – stress testing, stress regression based on outlier values, tools of statistical analysis, Monte Carlo simulations, back testing
   • Tail risk protection strategies
   • Smart Beta Strategies
   • Review of the logic behind smart beta – risk factor asset allocation models
   • Examination of the performance of various widely used smart beta ETF’s
   • Crowding and herding issues with smart beta strategies
   • Are the promises provided by smart beta ETF sponsors warranted?
   • ESG Strategies
   • Examine arguments for and against ESG in relation to investment performance and effectiveness
   • Analyze how ESG can create both risks and opportunities for investors
   • Review case studies and actual examples of decision making regarding ESG
   • Concluding Themes
   • The benefits of strategic investment vs. short term trading and market timing
   • Recognition that investor behavior can be emotion driven in the short term but more calculated over longer term horizons
   • Sources of bias in decision making and judgment in asset allocation
   • Establishing investment objectives that can be defined, quantified, and achieved successfully
   • Importance of periodic re-balancing and refreshment of portfolios
   • Synthesis of different asset allocation approaches
   • Macro-economic top-down allocation
   • Micro-economic bottom-up allocation