The Portfolio Management Process Alexander Gilles, CFA

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Development of e-Learning modules for corporate training.

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The corporate investors Institutional funds: Fidelity magellan, $70bn assets TIAA-CREF $108bn in assets Philippine SSS, $6bn Taiwan SSS, $600bn Korean SSS, $800bn Japanese postal bank, has $1trn earning 1% a year A.Gilles

Institutional funds:

Fidelity magellan, $70bn assets

TIAA-CREF $108bn in assets

Philippine SSS, $6bn

Taiwan SSS, $600bn

Korean SSS, $800bn

Japanese postal bank, has $1trn earning 1% a year

Industry trends We are headed for larger markets, larger portfolios, more efficient investing. Portfolios are increasingly Global Long-term Multi-asset Diversified A.Gilles FOR MORE INFO...

We are headed for larger markets, larger portfolios, more efficient investing.

Portfolios are increasingly

Global

Long-term

Multi-asset

Diversified

Industry trends Larger markets: more efficient Investing ... needs foresight The ability to sense the future, to read people’s minds. A.Gilles FOR MORE INFO...

Larger markets: more efficient

Investing ... needs foresight

The ability to sense the future, to read people’s minds.

Competence and ethics The investing public needs competence and ethics in investment advisers So investment professionals have to give them high returns fair claims of investing skill, truth in advertising. standardized performance presentation A.Gilles

The investing public needs competence and ethics in investment advisers

So investment professionals have to give them

high returns

fair claims of investing skill, truth in advertising.

standardized performance presentation

Matching the client with the markets Building a portfolio from specifications

A dynamic flow Investor objectives and constraints Economic & social conditions Portfolio policies, strategy Capital market ex-pectations Build the optimal portfolio Investment results. Portfolio Performance Is the world changing? Good enough?

Investor objectives and constraints

Top - down Three step process A.Gilles Economic & social conditions Capital market ex-pectations Macroeconomy, big picture Three step process Three step process Industries, sectors Company & Stock

Three step process

The Investor If she wants high growth, high returns … portfolio policy will be aggressive. Buy stocks and venture capital, risky assets. If she wants safety and security,… portfolio policy will stress low-risk assets, invest in bonds and cash. A.Gilles Investor objectives and constraints Portfolio policies, strategy Style: ACTIVE, trade often Style: PASSIVE. Just buy and hold, for years

If she wants high growth, high returns … portfolio policy will be aggressive. Buy stocks and venture capital, risky assets.

If she wants safety and security,… portfolio policy will stress low-risk assets, invest in bonds and cash.

The Investor Who should be an aggressive investor, by necessity? (who wants money to grow fast) Who should stick to low-risk assets, invest in bonds and cash. (who doesn’t want any losses?) A.Gilles Investor objectives and constraints Portfolio policies, strategy Style: ACTIVE, trade often Style: PASSIVE. Just buy and hold, for years

Who should be an aggressive investor, by necessity?

(who wants money to grow fast)

Who should stick to low-risk assets, invest in bonds and cash.

(who doesn’t want any losses?)

Optimize or maximize? The investor’s objectives could be aggressive: thus maximize the RETURNS. If the investor wants to be safe, you minimize the RISK. Most investors are in between, they want maximum return for no risk. Unrealistic. Dreamers. A.Gilles Build the optimal portfolio

The investor’s objectives could be aggressive: thus maximize the RETURNS.

If the investor wants to be safe, you minimize the RISK.

Most investors are in between, they want maximum return for no risk.

Unrealistic. Dreamers.

Study the results Good enough? Maintain policy Not good? Rethink policy. Not necessarily “change” … just evaluate if still relevant. Measure performance: as good as expected? Better than expected? Better than the market as a whole? Better than other investors? A.Gilles Investment results. Portfolio performance. Investment results. Portfolio performance.

Good enough? Maintain policy

Not good? Rethink policy. Not necessarily “change” … just evaluate if still relevant.

Measure performance: as good as expected? Better than expected? Better than the market as a whole? Better than other investors?

Investable instruments What the client can buy vs. what she should buy

Risk-return tradeoff A.Gilles Risk-return tradeoff Risk-return tradeoff Low risk . . . . . . . . . . . . . . . . . High risk High .. .. .. .. Low Returns in Percent % T-Bills Bonds Stocks Futures Venture capital New ideas ! ? ? ? ?

IF Client is conservative Pension fund University endowment Hospital retirement fund Teachers’ benefit fund Cooperative’s savings Community chest Savings & Loan association A.Gilles

Pension fund

University endowment

Hospital retirement fund

Teachers’ benefit fund

Cooperative’s savings

Community chest

Savings & Loan association

Pension fund segments A.Gilles Looks conversative to me ...

Client is Daring? Dashing, debonaire Foolish, spendthrift Totally aggressive Young and restless Dabbles in futures for thrill A.Gilles

Dashing, debonaire

Foolish, spendthrift

Totally aggressive

Young and restless

Dabbles in futures for thrill

Aggressive High-flying stocks target 100% returns, junk bonds yield over 20%, futures zoom ... A.Gilles

High-flying stocks target 100% returns, junk bonds yield over 20%, futures zoom ...

A.Gilles All kinds of things T-Bills Bonds Stocks Real estate Venture cap Collectibles Futures Biotech Dot.Coms Low risk . . . . . . . . . . . . . . . . . . . . High risk High .. .. .. .. Low Returns in Percent % ? ? ? ?

Long-term expectations May not hold true, in short-term Highest to lowest returns... Venture Capital Stocks Real Estate Bonds Money-market / cash A.Gilles

May not hold true, in short-term

Highest to lowest returns...

Venture Capital

Stocks

Real Estate

Bonds

Money-market / cash

Major Markets, 1986-’94 Pacific Basin Exam question: why is it wise to confine your search to the efficient frontier? 10 15 20 25 30 35 40 45 % St.Dev. Rate of return % 18 16 14 12 10 8 6 Canada USA Europe Italy Spain Japan Australia U.K. France World Europe & Pacific “ Ideal” assets in this sector are elusive, hard to find. There’s plenty down here that you don’t want to buy...

www.fundmetrics.com Review course for Chartered Financial Analysis exams, levels 1, 2, 3. Manila, Jakarta, Sydney Review courses in Manila for US CPA review Customized training courses for banks, brokers, insurance companies, etc. Development of e-Learning modules for corporate training. See www.fundmetrics.com Advertisement

Review course for Chartered Financial Analysis exams, levels 1, 2, 3. Manila, Jakarta, Sydney

Review courses in Manila for US CPA review

Customized training courses for banks, brokers, insurance companies, etc.

Development of e-Learning modules for corporate training.

See www.fundmetrics.com