Day One
Criteria and Tools Designed to Strategically Manage the Risk-Return Equation
Introduction: Investment Management Sector Up-Date
· Up-date on the continuing effects of the credit crunch and financial crisis
· Main changes in the financial and investment management sector
· Constructing new investment management criteria to successfully manage the 2012 economic and financial challenges
· Designing an investment strategy for different economic recovery scenarios
Session 1
A Strategic Approach to Managing Investment Risk
· Defining risk and its different sources
o Re-defining risk after the credit crunch and financial crisis
· Evaluating different quantitative tools and criteria to measure and manage risk
· Examining the concepts of uncertainty and risk:
o Are these concepts the same? Are they measured and managed differently?
· Relevance and value of Harry Markowitz’ Modern Portfolio Theory in today’s world
o Markowitz’ concept of portfolio risk and its measurement
§ Considerations when using the Variance and Covariance analysis
§ Probabilities of occurrence and normal distribution concept in an abnormal financial world
§ Calculating the Standard Deviation of a portfolio composed of different asset classes with different correlations
§ The problem of correlation in our asset allocation strategy
· Portfolio Optimisation and the Efficient Frontier Concept
o The limitations of optimisation models in portfolio management
§ The client’s investment needs vs. mathematical recommendations
§ The efficiency of asset allocation models in scenarios of changing correlations, volatilities, and expected returns
Exercise: Delegates will discuss in groups how efficient and successful their quantitative tools and criteria have been in managing volatile markets and will analyse in an Excel spreadsheet provided by the Course Director, the effects of positive and negative asset correlations when measuring the volatility of a multi-asset class portfolio.
Session 2
Post Modern Portfolio Theory: A Strategic View on Down-Side Risk
· Understanding the concept of Down-Side risk and its importance in meeting investment goals and managing investment risk
· Fundamentals of Post Modern Portfolio Theory
o Assessing investment risk according to the investor’s investment goals
o Measuring risk below the client’s Minimum Accepted Return (MAR)
o Using the semi-variance and down-side volatility to measure risk according to different risk profiles
· Managing investor’s expectations and investment goals with Port Modern Portfolio Theory – a quantitative approach to satisfying client’s needs
Case: Delegates will analyse a practical case that illustrates the differences between the total volatility and the down-side volatility of two assets – determining which asset offers more risk considering the client’s minimum accepted return.
Session 3
Pricing Risky Assets: How Much Return should and Investor Require for taking Risk?
· Relevance of Markowitz’ Capital Market Theory and William Sharpe’s and Jack Treynor’s Capital Asset Pricing Mode (CAPM) in calculating required rate of returns for risky assets
o Examining the CAPM variables and their efficiency in determining risk premiums
o Practical uses of the CAPM in determining the strategic value of an asset
o Using the Securities Market Line (SML) concept to spot over-valued and under-valued assets
o The market reality of the CAPM
§ Practical uses in corporate finance and asset management
o Limitations and problems of Beta as a risk measure
§ Adjustments to Beta and the CAPM for practical uses
Exercise: Delegates will calculate the expected and the required rates of return of different assets, in order to determining which assets are undervalued, fairly valued, and overvalued, using the CAPM
· Relevance of Steven Ross’s Arbitration Pricing Theory in calculating required rates of return for risky assets
o Incorporating macro and microeconomic variables into our model
o Comparing the Arbitration Pricing Theory to the CAPM
· Practical difficulties of implementing the Arbitrage Pricing Theory
o What can investors learn from the Arbitrage Pricing Theory when calculating risk premiums
Exercise: Delegates will calculate the required rate of return of different assets using the Arbitration Pricing Theory, and compare these returns with those obtained using the CAPM
Session 4
Risk Adjusted Performance Measures
· Determining the efficiency of the Risk-Return equation in portfolios composed of different asset classes
o Is the investor compensated for the risk taken?
· Analysing different Risk-Adjusted Performance ratios:
§ The Sharpe Ratio
§ The Treynor Ratio
§ The Sortino Ratio
§ Other tailored-made risk-adjusted return ratios
· The concept of Alpha according to Michael Jensen
o The real meaning of Alpha:
§ The strategic value of Alpha and its misconceptions in portfolio management
§ The expected benefits of “Portable Alpha” and the investment risks incurred in its pursue
Exercise: Delegates will compare the returns and risk indicators of different portfolios to determine which portfolios were more efficient considering different risk profiles.
Asset Allocation Exercise: Group Practical Application
Exercise: In small groups delegates will conduct an asset allocation exercise in a given Excel Spread-Sheet, with the objective of achieving a desired return within specific risk parameters and limitations. The Spread-sheet will incorporate all of the concepts and quantitative measures learned during the day. The course Director will provide feed-back to each group and will analyse the asset allocation’s performance in an adversely critical financial scenario.
Exercise: Delegates will construct the asset allocation of a portfolio in order to meet with a client’s
s. The allocation will be conducted taking into
Day Two
The Importance of Economic Cycles and Indicators in the Investment Growth Strategy
Session 1
Investing through the different Economic Cycles
· What are economic cycles and what causes them?
· The causes of economic recoveries, expansions, slow-downs and recessions
o Analysing what asset classes and sectors outperform the rest in different economic cycles
· Economic Indicators to watch during the cycles
o Macroeconomic figures
o Monetary and fiscal policy
§ Stimulus, Demand and Supply shocks
§ Experiences and realties behind the economic indicators
Exercise: Delegates will analyse different up-dated global economic indicators and their significance in asset allocation and portfolio management.
Session 2
Strategically Managing Growth in Emerging Markets
· Concepts and criteria for defining Emerging Markets
o What are they and why invest in them at all?
o Do they ever stop being emerging?
· World Strategic importance of emerging markets
o Statistics, trends, and facts
· The stages of development of an Emerging Market
o The Emerging Market cycle
o Factors that begin and end the cycle
· Emerging Markets opportunities and risks
· Constructing investment management criteria to successfully manage investments in Emerging Markets
Case Study: Delegates will analyse the different experiences of investors in Emerging markets in the last decades, examining the different crises in Asia, Latin America and Europe. Delegates will analyse the common factors and signs of warning of Emerging Markets before a crisis, proposing an investment strategy that would allow them to earn rewarding returns with an efficient investment risk management strategy.
Session 3
Using Equity Portfolios to achieve Strategic Value and Growth
· Unique characteristics of equity investments
o Benefits and considerations to the investor
· An accounting and legal view at equity investments
· Approaches to Stock Valuation
o Comparing Discounted Cash-Flow Models to Relative Valuation Models
· Earnings: historical trend analysis and realistic forecasting
· Where is the value in equity?
o Spotting the difference between cheap prices and great value
· Analysing beyond equity ratios and market multiples
o What ratios and multiples really mean and what they do not show
· Understanding ratios of efficiency, size, value, growth, and distress
· Dividend Discount Models in today’s financial scenario
Case: Delegates will analyse market and financial ratios of different companies from chosen sectors in order to choose the ones that would offer more value, more growth, and are better managed companies.
· Discounted Cash-Flows Models
o Rational, characteristics, and value drivers
o Perpetuity method and residual value
o Limitations of the Valuations Methods
· Issues when valuating distressed companies
o Is there any value in a company with negative earnings or negative equity?
· Credit and company risk indicators
o Credit risk ratings for corporate issues: crossing the investment risk between debt and equity
Session 4
Practical Company Valuation Case: Analysing Value under different Valuation Models and Approaches
Case: Delegates will go through an equity valuation using the DCF (Discounted Free Cash Flows Method) to then compare the valuation with market multiples such as PER, PEG, and multiples of EBITDA, Book Value, Sales, Assets, Cash-Flow, etc. The aim is to detect possible economic value not incorporated in the market price or an overpricing of the equity in the market place using different valuation methods and approaches.
Day Three
The strategic use of alternative investments during critical scenarios and the post-crisis recovery phase
Session 1
The Universe of Alternative Investments
· The universe of investing opportunities and the rational for alternative investments
o The limitations and restrictions of traditional investment funds
· Mutual Funds and Special Funds vehicles
o Legal structures, style, practical uses, and fees.
o Evolution, pros and cons and the reason for alternative investments
· The problem of product offering differentiation and the investment strategy performance through time
Session 2
Benefits and Risks of Exchange Traded Funds and their Strategic use in a Portfolio
· The concept of an Exchange Traded Fund and the Concept of Indexing
· Exchange Traded Funds
o Rational for using ETFs in the Asset Allocation Process
o Comparing the benefits of ETFs for the investor and for the Fund Manager
o Types and legal structures
§ Different structures provide different risks
o Hidden risks and issues of ETF’s
o The effect of ETFs in the investor’s portfolio
Case: Delegates will analyse different structures and types of ETF’s determining the risks and the benefits for both the investor and the portfolio manager.
Session 3
Evaluating the Risks and Benefits of using Hedge Funds and Specialty Funds in our Investment Strategy
· What are really hedge funds about?
o The legal concept and definition
o Origins and characteristics
o Legal vehicles available
· The Hedge Fund Universe
o By styles, strategy, tools, type of assets, sectors, and securities
o Rational of hedge funds in the investor’s portfolio
· Hedge Fund Structures and Fees
· Absolute returns vs. relative returns
· Analysis of the following Hedge Funds strategies
o Macrocentric or Global Macro
o Managed futures
o Emerging Markets
o Long-Short
o Equity Market Neutral
o Distressed Securities
o Merger Arbitrage
o Multi-strategy
o Fund of Hedge Funds
o Values-based investments
· Hedge Funds Collapses & Crashes
· Misconceptions of Hedge Funds
· What are the alternatives to including Hedge Funds in the investors’ portfolio?
Case: Delegates will analyse different proposed Hedge Funds characteristics, fee structures, styles and strategies, and vehicles, in order to choose the more suitable ones to match different clients’ profiles and requirements.
Session 4
A Strategic Approach to investing in Private Equity
· The concept of Private Equity and its strategic relevance in an investor’s portfolio
· Different types of private equity transactions
o Direct Investing
o Private Equity Funds
o Start-Up projects, Venture Capital, Buy-outs, Capitalising stable companies
§ Different risks different returns
· Discovering the value in Private Equity
· Stages in a Private Equity investment
· Planning the exit
o The importance of planning the way out of the transaction
· Integrating private equity in the investor’s portfolio
o Where is Private Equity in the Efficient Frontier?
o How does it improve the risk-return equation of the portfolio?
Day Four
Managing Portfolios with a Strategic Approach and
Investor’s Expectations with Behaviour Finance
Session 1
Strategic Asset Allocation
· The Strategic view to investing and its process
o The benefits of strategic investment vs. trading and following the market
· The impact of market perception and market reality in our portfolio
o The importance of the cycle of earnings expectations
· Setting objectives that can be defined, quantified, and achieved successfully
· Types of Asset Allocation
o Strategic, Tactical, Integrated, and other unique types
· Asset allocation styles and their strategic use
o Macro economic Top-Down Allocation
o Microeconomic Bottom-Up Allocation
o Fundamental vs. Technical Analysis
· Active and passive asset management and their strategic use
· Comparing different investment strategies:
o Buy and hold, Market Timing, Growth, Value, GARP, Quality, Income, Cost Averaging, Contrarian, etc.
Session 2
Market Efficiency and the Behaviour Finance Anomalies
· The fundamentals and implications of Eugene Fama’s Market Efficient Theory
· Analysing the case of rational markets with irrational investors
· Investors’ believes and expectations
o What do our clients believe and what do we believe regarding market efficiency and the risk-reward equation?
· Managing investor’s expectations, needs, and portfolios using Behaviour Finance Concepts
o Fundamentals of the Behaviour Finance discipline
§ Psychology applied to finance: Framing and Cognitive biases
§ Description of the main anomalies analysed by behaviour finance
§ Behaviour Finance ratios and market indicators
§ Analysis of different behaviour anomalies and biases including: loss aversion, regret, herd behaviour, confirmation bias, hindsight bias, mental accounting, over-reaction and over-confidence, winner’s course, and other chosen ones based on delegates’ experiences
· Constructing portfolios using behaviour finance concepts
o Products that match clients’ believes, preferences, and risk aversion attitude
· The cycle of emotions and the cycle of bubbles
· Integrating traditional, quantitative, and behaviour finance managers styles
Exercise: Delegates will analyse how to spot behaviour anomalies, preferences, and requirements among their clients by using behaviour profiling and questioning techniques.
Session 3
Technical Analysis and Market Timing: the tactical approach
· Incorporating a tactical view in our long term strategic approach
· The benefits of determining market trends in our strategy
· The value of technical analysis
o A practical use of technical analysis
o Misconceptions of technical analysis
§ What technical analysis shows and does not show
· Determining market trends and trend changes
· Charting, volume, moving averages and technical analysis main indicators
· Integrating technical analysis to fundamental analysis
Exercise: The delegates will analyse different market movements in order to determine if there is a bullish, bearish, or side-ways trend. In addition, the delegates will determine if the market movements present an opportunity to buy or to sell.
Session 4
Portfolio Rebalancing
· Monitoring the Investment Process and Investment Mandate
o Objectives, Planning, Execution, and Control
· What is rebalancing and why should we do it?
o When should we rebalance?
o How to conduct an efficient rebalancing: what do we look for?
o The benefits and costs of rebalancing and the costs of not rebalancing
· Meeting our investment goals through rebalancing
Closing Session
· Brief questions and answers session
· Course Director’s recommendations and summary
· Analysis of additional training needs
· Course Valuation on behalf of the delegates