Course: Asset Management Practicum

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Course: Asset Management Practicum

  1. 1. The Peter F. Drucker and Masatoshi Ito Graduate School of Management Claremont Graduate University MGT 402 Asset Management Practicum 12-11-05 (Subject to Revision) Instructor: Donald Gould (Adjunct Professor and President, Gould Asset Management) Contact: donald.gould@cgu.edu Office: Burkle 224 Office Hours: By appointment with Prof. Gould. Time: Spring Semester, 2005; Wednesdays, 7:00-10:00 p.m. (plus special session Saturday, January 21, 2006 from 2-5 pm) Classroom: Burkle 24 Faculty support: Edie Young, Burkle Building upper level west end workstation, 909 607- 9042, edie.young@cgu.edu Prerequisites: Corporate Finance (MGT 335). Students who have not completed the prerequisite must obtain specific approval from the instructor to enroll in the class. Overview The course centers on the practice of investment management and follows two parallel tracks, one broad and the other more focused. The broad track involves assigned textbook and other readings, classroom discussions, lectures by the instructor, and guest speaker presentations. The goal of this track is for students to gain a broad understanding of the major theoretical and practical issues facing managers of portfolios of financial assets. The focused track provides hands-on experience in the management of a dedicated portion of the CGU endowment portfolio that has been segregated for the educational benefit of the class. The class portfolio’s initial investments were made in May 2002. In effect, students in the course will form an asset management “firm” with responsibility for managing specific assets. Each year’s students represent the “employees” of that firm and, as such, are responsible for organizing themselves and executing the critical functions of an asset management company. The goal of the applied track is for students to gain appreciation for, and experience in, the complexities of real-world portfolio management. The ongoing functions of the asset management firm include: • Conducting investment research • Determining the investment strategies to be implemented • Investment decision making (securities selection) and implementation (including buy/sell order entry, trade settlement, and reconciliation) • Performance measurement/analysis/reporting
  2. 2. • Reviewing/revising investment policy • Communications to the client and to the larger community • Facilitating continuity of management of the client portfolio from one academic year to the next • Identifying, scheduling and promoting investment professionals who will give on-campus presentations Management of the Client Portfolio Students will manage a portfolio of equity securities. The portfolio is presently benchmarked to S&P 500 U.S. equity index. Students will develop and implement passive strategies to achieve effective benchmark performance tracking. In addition, students will undertake research seeking to identify investment strategies that may enable the portfolio to earn returns superior to the benchmark over time, i.e., value-added strategies. The research will involve ex post testing using long-time-series historical return data. Finally, students will implement selected value-added strategies. The portfolio holdings will be adjusted once annually, near the end of the course semester. Representatives of the class will report annually to the CGU Board of Trustees Investment Committee and to Henry R. Kravis, who is the initial donor of endowment funds to the project. Text: Portfolio Construction, Management, and Protection, Fourth Edition, 2006, Robert A. Strong, (South-Western College Publishing). Selected readings to be included in course packs available at Huntley Bookstore; other materials to be posted on WFS during the semester. NOTE: Course Lectures Outline: subject to revision; reading assignments for a given date are to be completed prior to the class on that date; quizzes will be based on the assigned reading and classroom lectures.) A separate outline for the management of the CGU (client) account will be established at the 1/21/06 session. 1. 1/18/06 – Part I - Investments, Investors, and Intermediaries: consumption and savings; savings and investments; capital markets; securities; financial intermediaries; the interplay of corporate finance and asset management; different types of asset management clients and their investment objectives. Part II – class discussion with CGU endowment representative; overview of class objectives for management of CGU portfolio account; review of class ground rules. No assigned reading or quiz. 2. 1/21/06 (Saturday, 2-5 pm, Mandatory Attendance) – Organizational meeting to select CEO(s), assign students to research and functional teams, review timetable for meeting class objectives, and establish procedures for monitoring progress. No assigned reading or quiz.
  3. 3. 3. 1/25/06 - Key Investment Concepts: return; risk and uncertainty; absolute vs. relative risk; present value vs. future value; liquidity; long, short, and leveraged positions. Reading: Strong – Ch. 1, 2, pp 618-624 (Stock Lending). 4. 2/1/06 - Investment Objectives and Policy. Mutual Funds. Reading: Strong – Ch. 3 (skip appendix), 4; Two Wall St. Journal articles re Merrill- Unilever. 5. 2/8/06 - Diversification: efficient frontier analysis and optimization; naïve and rigorous diversification; diversification within asset class; diversification among asset classes. Reading: Strong – Ch 5, 6; WSJ article re HP Foundations and diversification. 6. 2/15/06 - Efficient Market Hypothesis: implications for portfolio management; active and passive management strategies; issues in behavioral finance - booms, busts, etc.; Japan, Inc.; Cisco; gaga for Google? Reading: Strong – Ch. 8. 7. 2/22/06 - Bonds: types of bonds, types of bond issuers, risk factors, yield calculations, valuation, duration, convexity, embedded options. Reading: Strong – Ch. 11. 8. 3/1/06 - The Asset Universe and Asset Allocation: defining the asset class; dimensions of diversification; international investing; alternative investments; absolute and relative return strategies. Reading: Strong – Ch.7 (pp. 192-197, 210-226, Ch. 12, Smith/Gould paper from Journal of Investing (forthcoming) on asset allocation. 9. 3/8/06 – Options: calls and puts, principal determinants of option valuation, Black-Scholes option pricing model, delta, call writing strategies, VIX, BXM index. Reading: Strong Ch. 15, 16; http://www.cboe.com/micro/bxm/introduction.aspx (read this summary page and read link on page – “a 4-page paper [by Ibbotson Associates] with a summary of highlights”). 10. 3/15/06 – Spring recess. No class. 11. 3/22/06 – Realities of Running an Asset Management Company: competitive positioning and forms of value-added; types of asset management clients; types of asset managers; methods for asset management marketing; the asset management account cycle; regulatory compliance. Reading: Strong – Ch. 17, 18; other readings to be announced. 12. 3/29/06 – Mutual Funds and Other Funds: open-end, closed-end, ETFs, UITs, funds of funds, hedge funds, commodity funds; legal and regulatory structure; tax issues; fund categories; benefits and drawbacks; Eliot Spitzer and the recent mutual fund scandal; Reading: Strong pp. 74-77, 627-629; other readings to be announced. 13. 4/5/06 – Tax Factors in Portfolio Management: US taxation of interest, dividends, capital gains, index options; tax status of personal and
  4. 4. institutional accounts; implications for portfolio management; the personal asset management matrix. Reading: to be announced. 14. 4/12/06 – Final exam. Final preparation for student presentation on 4/19/06. No assigned reading or quiz. 15. 4/19/06 – Student presentation to CGU Investment Committee on results of research and recommendations for portfolio implementation. No assigned reading or quiz. 16. 4/26/06 – Portfolio implementation begins. No assigned reading or quiz. 17. 5/3/06 – Portfolio implementation completed. No assigned reading or quiz. Grading Grading practice will adhere to school policy. Grades will be determined based on student performance throughout the semester and are not subject to negotiation during or at the end of the semester. The grade will be determined based approximately on the weightings below. 20% Weekly quizzes on assigned reading 15% Final exam 15% Participation in class discussion 50% Management of CGU portfolio – team product and individual contribution on research project, firm functional duties, intangibles. Grading on the last item above will be determined in part by student peer evaluations. Important Points • Attendance is very important, and the school’s attendance policy must be adhered to. Arriving on time is also very important. Quizzes will be given at the start of each class (except where indicated above); no exceptions, no make-ups. A student’s lowest quiz score during the semester will not be counted. Excessive absence or tardiness will result in administrative withdrawal from the course. • Class participation is strongly encouraged. It’s ok to be wrong; take a chance. • Incompletes will not be granted except in the case of medical emergency.

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