investment strategy,Tactics, Investment policy statement ,strategic assets allocation ,Investment constrains ,Strategic Assets Allocation

1. Investment Strategies
NAIF AWAD BAGHALF
MBA(FINAINCE),CME1,CME3
*MEMEBER OF SAUDI ECONOMIC ASSOCIATION.
*MEMEBER OF THE SAUDI AUTHORITY OF ACREDIATE VALUERS .
*MEMBER OF THE REAL ESTATE COMITTIE IN JEDDAH CHEMBER .
Lecture forThe Banking and Finance program at
Dar –Alhekma university by :

2. What is an investment strategy?
• Investment strategy : is a decision by a portfolio manager regarding how he or she will
manage the portfolio to meet the goals and objectives of the client.This will include either
active or passive management and, if active, what style in terms of top-down or bottom -
up or fundamental versus technical.
• Investment strategy : an investor approach to investment analysis and security selection .
By Naf Baghlaf

3. Investment and Strategy
• most investors jump to investment strategy as soon as they start thinking about
investment !! Some may choice one based on a friend recommendations !!
• In order to choise the right investment strategy you have to start from the second
part of the sentence (investment strategy)
• Strategy : are the means by which long term objective s will be achieved .
By Naf Baghlaf

4. So how I should start ?
• The first step is to plan
• Planning involves setting your goals ,objective and the methods or ways
(strategies , tactics ,polices etc.) to achieve those objectives.
• There is a unique statement that been used by wealth mangers and portfolio
managers to convey those planning concept into an investment roadmap .
• Investment policy statement (IPS): a written document that sets out client return
objective and risk tolerance over relevant time horizon , along with applicable
constrains such as liquidity needs, tax consideration ,regulatory requirements and
unique circumstances .
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5. Investment policy statement(IPS)
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6. Investment policy statement (IPS) includes:
• A)Brief client description .
• B)Client goals.(your goals )
• C)investment objectives :
Return objective
Risk objective
D) Investment constrains :
Time horizon
Tax consideration (zakah)
Liquidity needs
Legal and regulatory concerns
Unique circumstances
By Naf Baghlaf

7. Investment policy statement (IPS) includes:
• E)strategic assets allocation :
Assets class constrains
Investment constrains
Investment strategies
F) Implementation and mentoring and review :
Responsibility of manger , client and any parties involved (it could be the bank you
dealing with )
Performance measure ,evaluation and benchmark
Review schedule
By Naf Baghlaf

8. Return objectives
• Desired investment outcomes .
• It must bee consistent with the risk objective .
• Usually they are expressed as :
Total return : cold be a percentage 10% for example or relative to a benchmark like the
S&P500 .
• It could be nominal not adjusted for inflation
• It could post- tax (after tax) or pretax (before tax)
• It can be described by using all the terms above :
10% pre-tax total return over CPI
5% higher than the benchmark (alpha)
By Naf Baghlaf

9. Risk objective
• Risk can be measured either in absolute term or relative terms.
• Example of absolute risk is a specific level of standard deviation of the total return .
(volatility )
• Relative risk can be the standard deviation of the difference between your portfolio
and the benchmark . (most the time its an Index likeTASI)
• Another important concept is theValue at risk .
• Risk tolerance and risk capacity.
• It can be described in following form:
-the volatility(SD) of the portfolio will not exceeds 10% .
-value at risk should not exceeds 15% in the time horizon of the investment .
By Naf Baghlaf

10. Investment constrains
• A)Time Horizon
It could be long term or short term .
Investors with longer time horizon have higher willingness to take risk.
Time horizon have a big effect on assets allocation.
The time horizon could anywhere from 1(or even shorter) up year to 25 years.
B)Tax consideration
There are many kind of taxes capital gain tax or income tax (dividends –coupon
payments etc.) . Other kind of taxes include marginal taxes –property taxes etc.
-Zkah .
By Naf Baghlaf

11. Investment constrains
• C) Liquidity needs :
The need of cash at specific point of time.
-For example the need of cash to build a home .
-paying for college tuition fees .
- Emergency .
• D)Legal and regulatory concerns .
The CMA regulations for example –it could be the SEC in the USA.
A very good example would be pension funds regarding there investments credit rating .
In the other hand some regulations doesn’t protect investors if they invest in particular investments
such as the hedge funds .
By Naf Baghlaf

12. Investment constrains
• E) Unique circumstances :
-such as ethical constrains (weapon - certain countries )
-Islamic regulation ( investing in Islamic instrument -avoiding alcoholic products -other
products )
-it could be certain kind of investments ,such as (derivatives –structured products etc.)
By Naf Baghlaf

13. Strategic Assets Allocation
• A)assets class constrains :
-for example some investors don’t like to invest in gold , or in bonds so they limit
there exposure to such assets class .
-constrains on investing in certain geographical region .
-constrains on investing in sectors, industries .
-certain investing channels such as ETFs,ETNs.
-constrains on large cap securities –small cap etc.
-some investors like international investments versus local .
-most of the time it expressed as percentage of the total investment (portfolio )
5% for alternative investments , 15% for bonds etc.
By Naf Baghlaf

14. Strategic Assets Allocation
• B)Investment constrains :
-using leverage (loans) .
-using margin account specially for those who use short sale or other derivatives such as
options or futures etc.
-most of the time its percentage of the equity. (debt to equity)
By Naf Baghlaf

15. Strategic Assets Allocation
• Investment strategies :
Active : it’s a strategy where the investor react to the change in the market
expectation In otter word the investor will react. what investor looking for here is the
excess return over specific benchmark ( alpha).
Passive : it’s a strategy where the investor does not react to changes in the market
expectation in other word the investor will not react.
Indexing is an example of passive investment strategy designed to replicate the
returns of that index .
Buy and hold is another form of passive strategy .
By Naf Baghlaf

16. Strategic Assets Allocation
1-Equity (Stocks)
• Growth stocks :
Are those stocks that expected to generate earnings at rate that exceeds the industry
average .
Usually they are not paying dividends (no distribution ) .
Growth stocks can be picked using historical EPS growth , or the forward earing growth
(forecasted).
ROE is another good metric to fined growth campiness .
By Naf Baghlaf

17. Strategic Assets Allocation
• Value stocks:
Value stocks are those stocks that seems to be underpriced by the market .
Its basically the idea that those stocks are ignored by the market .
Investors believe that those stocks have an intrinsic value , or there fair value is higher than
the market price .
The most favored metric to identify those value stocks are P/E , another one is P/S (specially
for start up companies).
Dividend yield is another metric to use when looking for value stocks .
By Naf Baghlaf

18. Strategic Assets Allocation
• Bonds
Indexing strategy :
It’s a strategy that seeks to match the composition and there for the
performance of selected market index .
It can be done either by replicating the whole index or just a sample of the
index.
The strategy try find the best index that fits the investor return objective and
risk objective .
Tracking error can be used to evaluate how well is this strategy implemented
.
By Naf Baghlaf

19. Strategic Assets Allocation
Yield spread analysis :
This strategy assumes normal relationships exist between the yield for bonds in
alternative sectors (yield in high sectorVerses low sector or different industrial
sectors .
When an abnormal relation occurs the investor would take advantage of those
yields by executing different sector swap.
The swap can either to pickup yield ,substitution swap or simply tax swap.
By Naf Baghlaf

20. Strategic Assets Allocation
Alternative investments :
Private equity :
The most famous strategy used by private equity firms is the leveraged buyout strategy,
Leveraged buyouts are conducted when a company borrows a significant amount of capital
(from loans and bonds) to acquire another company (most of the time they are using the
acquired company assets as a collateral for the loan )
Real estate:
Buy and hold is the most popular strategy in real estate , its involving buying a property and
benefiting from the fixed income and the anticipated capital appreciation .
By Naf Baghlaf

21. Strategic Assets Allocation
• Derivatives :
Derivatives are financial instruments designed to hedge or to minimize risk .
Stock Options :
Protective Puts strategy involves buying one put contract for every 100 shares of
underlying stock already owned .This put guarantees the owner the right, but not the
obligation, to sell the shares at the strike price at any time until the option expires, no
matter how low the stock declines in value.
By Naf Baghlaf

22. Strategic Assets Allocation
• ETF: exchange traded fund , there main advantage that they are traded as
stocks unlike mutual fund, so they tend to be highly liquid unlike mutual funds
.
There are many ETF with different assets classes, different strategies and even
different geographical exposure.
By Naf Baghlaf

23. Strategic Assets Allocation
• E) Implementation , mentoring and review :
• This step involving the portfolio construction or execution step ,its where the
assets combined effectively (optimization)to achieve the return and risk
objectives.
• Mentoring and rebalancing : involving finding new investment opportunity
to achieve the objective and constrain of the investor, mentoring any change
in the economic conditions or market expectations .
• Performance Evaluations where you find wither you archive your returns and
risk objective without overcoming your constrains .There are many
quantitative methods to evaluate the performance of your investments like
Total rate of return-Time weighted rate of return-Money weighted rate of
return and Alpha .By Naf Baghlaf

24. References
• Maginn j ,Tuttle D, Mcleavey D,Pinato (2007) Managing investment portfolio ,john
wiley &sons Inc –CFA investment series .
• Enensky.H , Horan S,RobinsonT (2011) The new wealth management , john wiley
&sons Inc –CFA investment series .
• David .F,(2009) strategic management concepts ,pearson.
• Brwon , Reilly ,(2009) analysis of investments and management of portfolio .South –
western.
By Naf Baghlaf

25. By Naf Baghlaf