The principal aim of this course is to develop and enhance participants' skills that are commonly used in equity, debt and alternative investment management. The course starts of with statistical and theoretical approaches to fund management, asset allocation, investor profiles and behavioral finance applications. The 2^nd day is dedicated to fixed income, including topics such as valuing, pricing and risk management. The 3^rd focuses on equity portfolio management including asset pricing models, portfolio management techniques, indexing strategies and emerging market equities. The last day is dedicated to alternative investments and performance measurement. The last case study will allow participants to use all topics learned during the previous days to evaluate a group of investment portfolios.

How will this course assist you?

On completion of 4-day training course you will be able to:

• Strengthen your understanding of modern portfolio theory.
• Understand the process of building efficient portfolios of bonds, equities and alternative investments.
• Know about the importance of behavioural investment biases.
• Appreciate the specifics of emerging markets equity portfolio construction.
• Gain an insight in alternative investment strategies as portable alpha and the use of derivative strategies.
• Learn about performance measurement, evaluation and attribution.

Who should attend?

• Portfolio managers
• Equity and fixed income analysts
• Wealth managers and private bankers
• Independent financial advisors
• Back and middle office professionals
• Pension fund trustees

  
  

 

Day 1

We begin the course with an introduction to the fundamentals of today’s portfolio management – Modern Portfolio Theory (MPT).  We will explore concepts such as efficient frontier, risk/return trade-offs, the asset allocation process and conclude the day with a look at investor characteristics and new developments in behavioural finance. 

Principles of modern portfolio management

Introduction and objectives

• Overview of course.
• What is Portfolio Management?

Statistical and theoretical approaches to investment management

• Commonly used statistical measures.
• Diversification and the efficient frontier.
• Risk vs. return trade-off.
• Other applications of Modern Portfolio Theory (MPT).
• Essential asset pricing models.

Case study – portfolio management decisions

Participants will be given a historical portfolio of common stock, debt securities and other assets and will be asked to calculate related portfolio statistics: expected returns, standard deviation of returns, covariance, correlation coefficients and beta of the assets. Participants will then use this information to construct an efficient portfolio.

The asset allocation decision

• Steps in the portfolio management process.
• Analysing risk and return objectives.
• Influence of political and economic factors in determining optimal asset mix.
• Strategic vs. tactical AA.
• The cases for and against international diversification.

 

Case study: strategic asset allocation

Participants will be given a background information for a variety of different investors and asked to design appropriate portfolio mixes. 

Investor characteristics & qualities

• Investor concerns.
• The active vs. passive management debate.
• Forecasting alpha using the Treynor-Black model for security selection.
  

Exercise – the importance of behavioral finance topics

Participants will examine how a series of behavioural investment biases affect optimal investment decisions as defined by MPT. Biases to be evaluated include:

• Frame dependence.
• Overconfidence.
• Representativeness.
• Loss aversion.

Day 2

The fixed income market is one of the largest and fastest growing areas in the global financial marketplace, as government and private debt constitute nearly half of the wealth in international financial markets.  Day  2 explores the fundamentals of fixed income investments, sensitivity measures to evaluate bond performance, and several commonly employed strategies used by fixed income portfolio managers.

Managing fixed income portfolios

The yield curve

• Deriving par coupon and zero coupon curves.
• Use of present value factors.
• Yield curve shapes and cash flows.
• What moves the yield curve?

Exercise:  yield curve analysis

Participants are given government and swap yield curves from four currencies: Euro, US Dollar, Yen and Sterling. Groups will discuss implications and answer the following:

• What do the yield curves tell us about current financing conditions?
• What implications do the yield curves have for future interest rate movements?
• What capital markets possibilities do market conditions present for the Bank’s clients?

Valuing fixed income instruments: duration and convexity

• Bond price sensitivity.
• Price value of a basis point.
• Macaulay and modified duration measures.
• Calculating effective convexity.
• Using Duration and Convexity as Summary Statistics for Active Management of Fixed Income Portfolios:  Parallel Yield Curve Shifts, “Steepeners”, “Flatteners”, and “Butterfly” Shifts.
  

Exercise: bond pricing
Participants will be given a series of par coupon rates from which present value factors, securities prices and bond coupons must be computed.

Fixed income portfolio management

• Objectives and constraints.
• Active vs. Passive strategies.
• Using diversification to minimize risk.
• Immunisation strategies.

Case study: portfolio pricing
Participants are given a group of bonds from a portfolio of a fixed income manager and must forecast their price changes as interest rates fluctuate. Participants will also determine the appropriate amount of hedging bond needed to immunize the portfolio.

Special topics in fixed income

• Role of repurchase agreements to finance bond purchases.
• Using futures vs. cash market instruments to adjust portfolio exposure.
• Impact of credit derivatives.
• Investing in emerging market debt.
  

Day 3

Equity portfolio management is often a critical component of overall investment success since equity securities often represent a significant portion of many investment portfolios.  After a review of equity vital equity valuation techniques, we will discuss the role of equities in an investment portfolio, the major approaches employed to manage equities and conclude with a look at strategies used to manage international and emerging market equity portfolios.

Equity portfolio management

Asset pricing models revisited and equity valuation

General principles

• Using the Capital Asset Pricing Model (CAPM).
• Weighted Average Cost of Capital (WACC).
• Fundamental equity valuation.
• Multiples analysis.

Exercise – using asset pricing models

Participants will answer a series of questions related to applications of CAPM and equity valuation techniques

Equity portfolio management

 

• Underlying drivers for use of equity.
• Issuer/investor perspectives.
• Equity style management.
• Security selection approaches: top-down or bottom up.
• Establishing relevant benchmarks.
• Long-short vs. long-only strategies.
• Equitising market-neutral portfolios.
• Alpha / Beta separation.
• Applications of portable alpha.
  

Exercise – evaluating equity funds

We will review several equity portfolios, discussing relative weightings, sector allocation and other important attributes affecting performance

Equity indexing

• Weighting schemes of major indices.
• Equity index futures and their role.
• Index mutual funds.
• Exchange-traded funds.
• Strategies and benchmarking approaches.

International equity portfolio management

• Constructing international equity benchmarks.
• Classification issues: Developed, emerging of frontier?
• To hedge or not to hedge FX risk.

Case study – emerging markets portfolio construction
Participants will first examine some of the major issues confronting emerging market portfolio construction, including high correlations during crisis, cost of capital computation difficulties, and non-normal return distributions. Then, groups will prepare a presentation to investors demonstrating the advantages of an emerging market portfolio.
 

Day 4

Alternative investments & performance analysis

The alternative investments universe

• Different investments and their investor characteristics.
• Common features of alternative investments.
• Special issues for investment managers and advisers.

Principal classes of alternative investments including:

• Hedge funds.
• Private equity.
• Commodities.
• Real estate.
• Distressed securities.

Alternative investment management & strategies

• Different investments and their investor characteristics.
• Key drivers of hedge fund returns.
• 130/30 Funds.
• Portable alpha strategies.
• The risk of hedge funds.
• Alpha and beta separation.
• Identifying suitable hedge funds.
• Core-Satellite programs.
• Use of derivative strategies.

Exercise: alternative investment analysis
Participants will evaluate different alternative investments and select suitable investors to match various portfolios.

Performance measurement, evaluation and attribution

• Computing sub-period returns and arithmetic average rates of return.
• Time- and dollar-weighted rates of return.
• Overview of GIPS – Global Investment Performance Standards.
• Benchmark portfolios and return attribution analysis.

Case study: putting it all together
Participants will use all topics covered to evaluate a group of investment portfolios, determining the strengths and weaknesses, etc.

Course Summary & close

 

 

• Richard Levine

  Richard Levine has over twenty years of financial services industry and teaching experience. He spent several years managing securitisation and consulting engagements in Ernst & Young’s Structured Finance group. Richard created and implemented cash flow models to value complex derivative securities for both portfolio and risk management purposes. He also worked at PaineWebber and Donaldson, Lufkin & Jenrette, where he originated fixed income relative value strategies. He developed his expertise in financial engineering and securitization at KPMG Peat Marwick. 
  
  He currently serves as an Adjunct Professor at New York University’s Stern School of Business. He received an M.B.A. with a concentration in Finance from NYU’s Stern School and earned a B.S. in Systems Engineering from the University of Virginia’s School of Engineering and Applied Science. Mr. Levine is a Chartered Financial Analyst (CFA) and is a member of the New York Society of Security Analysts (NYSSA).

Portfolio Management Techniques

Interested in holding this course in-house? Please fill out your details and a member of our team will be in touch with more information.

London School of Investment Management

2-12 Jul 2012 (London, UK)
3-13 Dec 2012 (London, UK)

A 9-day intermediate financial training course exploring the asset classes, innovative portfolio strategies and asset allocation

 

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