Chapt 2 - Typology of investment methods

Typology of investment methods
Janvier 2012
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Describe an Expertise: the consultant approach (mandates)
•
People
• Company description
• Investment Team in charge of the expertise : experience and background
•
Investment Universe: What are the instrument used by the manager?
• Geographical criteria, asset classes, derivatives, number of securities in the manager’s radar
•
Investment Philosophy
• What are the reasons you beleive you could add value to the portfolio?
• What type of strategy will you implement?
•
Investment Process
Implementing the strategy: the value chain
Risk control and follow up of the book
•
Performances (net of fees)
Did the strategy (out) performed?
Are the results in accordance with the philosophy?
•
Reporting and documentation
Linked to the investment philosophy and process
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Experience
Assets Under Management
AUM
Since when ?
The extent of the range
Team
Number of people dedicated to the expertise
CVs
The team in the company
The individual in the team
Too many team kills performance
Study of Jim Hunter, "not to teamwork and an obsession to return to more balanced interactions, to
subdivide the large existing teams, and focus on individual decisions and mixed decisions only at the
expense of college."
Société de Gestion de Portefeuille agréée par l’Autorité des Marchés Financiers AMF sous le n° GP 11000028 du 01/08/2011
SAS au capital de 300 000 € - SIREN 533 756 938 RCS Nanterre
3
Investment Philosophy (Credo)
The principles that drive management decisions,
structuring teams and tools
Use this
framework
to bring out
your ideas
One thing
And its
opposite
And what about you?
CAPM
Active
Passive
Active risk allocation and contribution
Behavioral
Contrarian
Trend follower
Contrarian based on fundamentals
Cultural
Top Down
Bottom up
Top down
Method
Quantitative /
Systematic
Discretionary
Quantitative when appropriate to generate
ideas and risk monitoring but mostly
discretionary
Human factor
Team /
Organization
Individual
Small team
Source of
inneficiency
«Market»
valuation model
Thorough
information set
Market model for economic
Information set mainly for unliquid sectors
Société de Gestion de Portefeuille agréée par l’Autorité des Marchés Financiers AMF sous le n° GP 11000028 du 01/08/2011
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Investment philosophy : Are security prices predictable?
/ Prices and fundamentals
Financial and economic information is widely available to any investor. Valuation methods for any asset class
are known. Forecasting is hazardous in « normal » financial conditions.
Nevertheless, like tectonic, economic imbalances are often corrected through crisis rather soft changes.
Hence fundamentals can be contradicted by market prices during a significant period of time before mean
reversion suddenly happen.
/ Rationale for a dynamic asset allocation
When markets do not exert large valuation imbalances stay benchmarked
Large imbalances due to overconfidence or extreme pessimism are source of opportunities
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31, rue des Poissonniers
92200 Neuilly-sur-Seine
01 55 62 19 80
01 55 62 19 81
@
[email protected]
: Bull Reverting
: Bull Trend
: Bear Reverting
: Bear Trend
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Investment philosophy : Cope with the deleveraging paradigm
Shorter and more volatile financial cycles with low drift
The current crisis started in 2007 is the outcome of a structural change in world economic dynamics. Deleveraging reduces the
prospect for GDP growth. Hence, trends on asset returns have been revised down.
Growing uncertainties in economic trends also speeds up financial cycles and increases volatility.
Strategic implication for wealth management
Diversified your assets between safe heaven and risky yielding assets
Favor an active management in a contrarian style
31, rue des Poissonniers
92200 Neuilly-sur-Seine
01 55 62 19 80
01 55 62 19 81
@
[email protected]
Source: BNY Mellon
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Investment philosophy : 4 proposals to build up performance
/
Proposal 1 : Define a risk budget in accordance with your objective.
Monitor the acceptable loss more than the expected return
/
Proposal 2 : Select investment theme with a contrarian bias.
Shape portfolio risks in accordance with market phases.
Look for opportunities in specific themes (dividends, baking sectors, rebuilding of international monetary
system)
/
Proposal 3 : Implement multi asset manager portfolios.
More complex market organisation requires investment specialists by sector/asset class
Multi asset management gives a simple access to these specialists
Wiséam has developed capabilities to implement optimal portfolios :
▫
▫
/
Thorough research with selected specialist team to catch the many dimension of an asset class/fund
Risk and accuracy monitoring of portfolios related to objectives
Proposal 4 : Report.
Fundamental step to build up long term confidence between the asset manager and the investor.
Wiseam has set up different reporting tools to :
▫
▫
▫
31, rue des Poissonniers
92200 Neuilly-sur-Seine
01 55 62 19 80
01 55 62 19 81
@
[email protected]
Measure performances and risks
Explain investment strategy, trades and results
Present outlooks
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Management methodology (investment process)
While investment philosophy summarize general investment principles, investment process details
implementation of the investment philosophy
How do you detect an opportunity (idea generation)? What are the criteria for security selection?
Quantitative / discretionary filters
Value analysis
Catalyst search
Valuation model
▫
▫
DDM securities
Bonds: Yield curve
How to build the portfolio?
Concentration vs diversification (constraints)
Frequency of portfolio review
Optimization tools or decision support
Do you have a sell discipline?
is there a price target?
Failures management
Depending on how often the strategy is re-evaluated ?
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Example of process: WORLD EQUITY Fund
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Risk monitoring
Operations Control
Compliance with the funds approval
Quality of execution (timing)
Control at different levels
▫
▫
▫
Manager / middle office / Back Office
Risk Management Unit
Depositary
A priori Risks control
What are the potential risks of the portfolio? Are they accepted?
Sectorial, factorial, concentration .... bias
Stress test
VaR, stress test
Tracking error
A posteriori
Performance monitoring
But it's too late!
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Analytical tools
Documentation produced by the Asset Management Company
Institutional presentation of the company, what is environmental management?
Powerpoint presentation of the expertise or funds
Due diligences
Periodic reporting
▫
▫
Monthly
Quarterly
Investigation of the breeder
Analysis of results
▫
▫
Factor models
Evaluation of the universe
Analysis of relevant documents vs analysis of results.
One to One with the manager or product specialist
▫
▫
Confrontation between the quant and qualitative analysis
Reading of the market dynamics
–
Are the concepts in line with the process presented?
Société de Gestion de Portefeuille agréée par l’Autorité des Marchés Financiers AMF sous le n° GP 11000028 du 01/08/2011
SAS au capital de 300 000 € - SIREN 533 756 938 RCS Nanterre
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