Chapter 24 Investment Analysis andPortfolio Management

1、Investment Analysis and Portfolio Management by Frank K. Reilly & Keith C. BrownProfessional Money Management Alternative Assets, and Industry Ethics Structure and Evolution Private Management and Advisory Firms Investment Companies Investing in Alternative Asset Classes Ethics and Regulation24-

2、2The Asset Management Industry: Structure and Evolution Two Organization Forms Contract directly with a management and advisory firm Commingling of investment capital of several clients in an investment company Differences between These Two Forms Private management and advisory firms develop a perso

3、nal relationship with clients A Investment company offers a general solution See Exhibit 24.124-3Exhibit 24.124-4The Asset Management Industry: Structure and Evolution Contract directly with a management and advisory firm Relationship with client Assets under management (AUM) Separate accounts Custo

4、mized Commingling of investment capital of several clients in an investment company Invest a pool of funds belonging to many individuals in a single portfolio of securities Issue new shares representing the proportional ownership of the fund.24-5Private Management and Advisory Firms The majority of

5、private management and advisory firms are still much smaller More narrowly focused on a particular niche of the market Investment Strategy Each clients assets are held in a separate account The security portfolio are likely to be guided by the firms overall investment philosophy While the specific s

6、tock allocations might vary, the same fundamental orientation toward stock selection will be applied to all accounts24-6Organization and Management of Investment Companies Investment Companies They are the financial intermediaries that pool the assets of individual investors and invest the fund in s

7、ecurities or other assets Major Duties Investment research Management of the portfolio Administrative duties The management fee is generally stated as a percentage of the total value of the fund Family of funds helps achieve economies of scale24-7Organization and Management of Investment Companies V

8、aluating Investment Company Shares The NAV for an investment company is analogous to the share price of a corporations common stock. The NAV of the fund shares will increase as the value of the underlying assets (the fund security portfolio) increases() ()()Total Market Value of Fund Portfolio Fund

9、ExpensesFund NAV=Total Fund Shares Outstanding-24-8Organization and Management of Investment Companies Valuating Investment Company Shares The NAV for an investment company is analogous to the share price of a corporations common stock. The NAV of the fund shares will increase as the value of the un

10、derlying assets (the fund security portfolio) increases() ()()Total Market Value of Fund Portfolio Fund ExpensesFund NAV=Total Fund Shares Outstanding-24-9Closed-End Versus Open-End Investment Companies Closed-End Investment Company Functions like any other public firm and its stock trades on the re

11、gular secondary market The fund generally doesnt issue or redeem shares once it is established The price of the fund is different from its NAV It is a puzzle for modern finance why close-end funds often sell at a discount from NAV It is often a means of investing in a pool of assets from a foreign c

12、ountry24-10Closed-End Versus Open-End Investment Companies Open-End Investment Companies The company continues to sell and repurchase shares after their initial public offerings The fund stands ready to issue or redeem shares at the net asset value (NAV) Investors who buy or sell the shares may have

13、 to pay sales charges (the load) These funds are normally called mutual funds See Exhibit 24.824-11Exhibit 24.824-12Closed-End Versus Open-End Investment Companies Load versus No-Load Open-End Fund The offering price for a share of a load fund equals the NAV of the share plus a sale charge. A no-loa

14、d fund imposes no initial sales charge so it sells shares at the NAV. Several variations exist between the full-load fund and the pure no-load fund Low-load fund 12b-1 plan Funds have contingent, deferred sales loads24-13Closed-End Versus Open-End Investment Companies Fund Management Fees Charge ann

15、ual management fees to compensate professional managers of the fund The fee typically is a percentage of the average net assets of the fund varying from about 0.25 to 1.00 percent Management fees are a major factor driving the creation of new funds Mutual fund fees have been declining due to the ind

16、ustry consolidation24-14Closed-End Versus Open-End Investment Companies Investment Company Portfolio Objectives Equity funds: They invest almost exclusively in common stocks Bond funds Bond funds : These funds concentrate on various types of bonds to generate high current income with minimal risk Ba

17、lanced funds: They diversify outside a single market by combining common stock with fixed income securities Money market funds: They invest in diversified portfolios of short-term securities24-15Closed-End Versus Open-End Investment Companies Breakdown by Fund Characteristics By major Means of Distr

18、ibution Sales force Direct purchase from the fund Direct institutional marketing By Investment Objective Equity funds Equity funds Hybrid funds Money market funds See Exhibit 24.1124-16Exhibit 24.1124-17Closed-End Versus Open-End Investment Companies Global Investment Companies Funds that invest in

19、non-U.S. securities are generally called either international funds or global funds International funds often hold only non-U.S. stocks from such countries as Germany, Japan, Singapore, and Korea Global funds contain both U.S. and non-U.S. securities A increasing large number of non-U.S. investment

20、companies that offer both domestic and global products in their local markets24-18 Investing in Alternative Asset Classes Basic Concepts Alternative Assets Hedge funds Private equity Real estate Natural resources and commodities Management Structure Structured as a limited partnership rather than as

21、 a mutual fund to manage the commingled assets The Fund “alpha” Abnormal returns generated by the fund, implying the superior performance by the fund management24-19 Investing in Alternative Asset Classes Basic Concepts Alternative Assets Hedge funds Private equity Real estate Natural resources and

22、commodities Management Structure Structured as a limited partnership rather than as a mutual fund to manage the commingled assets The Fund “alpha” (See Exhibit 24.14) Excess returns generated by the fund, implying the superior performance by the fund management24-20 Exhibit 24.1424-21Hedge Funds The

23、 Development One of the most significant developments in the professional asset management industry over the past 20 years has been the emergence of the global market for hedge fund investing Hedge fund investing is not new and can be traced back to 1949, structured as a partnership structure with a

24、n incentive fee for superior performance Form a portfolio that combines both long and short position in the equity market with the use of financial leverage to enhance return Better able to produce superior returns than traditional investment structures, such as mutual funds24-22Hedge Funds The Deve

25、lopment One of the most significant developments in the professional asset management industry over the past 20 years has been the hedge fund investing Hedge fund investing is not new and can be traced back to 1949, structured as a partnership structure with an incentive fee for superior performance

26、 The increase in both the number of hedge funds and assets under management are phenomenal over the last two decades See Exhibit 24.1524-23Exhibit 24.1524-24Hedge Funds The Characteristics As a private partnership, hedge funds are generally less restricted in how and where they can make investments

27、Less correlated with traditional asset class investments, providing diversification benefits Hedge fund investments are far less liquid than mutual fund (or even closed-end fund) shares There are severe limitations on when and how often investment capital can be contributed to or removed from a part

28、nership Performance allocation and high-watermark See Exhibit 24.1624-25Exhibit 24.1624-26Hedge Fund Strategies Equity-Based Strategies Long-short equity: Managers attempt to identify misvalued stocks and take long positions in the undervalued ones and short positions in the overvalued ones Equity m

29、arket neutral: attempt to limit the overall volatility exposure of the fund by taking offsetting risk positions on the long and short side, an effort that might also involve adopting derivative positions.24-27 Arbitrage-Based Strategies Fixed-income arbitrage: Returns are generated by taking advanta

30、ge of bond pricing disparities caused by changing market events, investor preferences, or fluctuations in the fixed-income market Convertible arbitrage: Seeks to profit from disparities in the relationship between prices for convertible bonds and the underlying common stock Merger (risk) arbitrage:

31、Returns are dependent upon the magnitude of the spread on merger transactions, which are directly related to the likelihood of the dealHedge Fund Strategies24-28 Opportunistic Strategies High yield and distressed: Invest in risky bonds Global macro: This broad class of strategies seeks to profit fro

32、m changes in global economies Managed futures: This strategy entails using long and short positions in a variety of futures contracts Special situations: Events like bankruptcies, spinoffs Multiple strategies Fund of funds: Invest in a number of funds so as to achieve a well-diversified allocation t

33、o the hedge fund investment spaceHedge Fund Strategies24-29Risk Arbitrage Investing: A Closer Look Take equity positions in companies that are the target of a merger or takeover attempt Require managers to compare their own subjective judgment about the success of the proposed takeover with the succ

34、ess probability implied by the market price of the target firms stock following the announcement of the deal If the manager thinks the takeover is more likely to occur than the market does, he or she will buy target firm shares. The manager might short sell the target firm shares if he or she thinks

35、 the proposed deal is less likely to be completed24-30Hedge Fund Performance Not all hedge funds are the same when it comes to their risk and return profiles The returns to these strategies show a high degree of variability on a year-to year basis, in both an absolute and a relative sense There are

36、only two (of 14) years in which every strategy class earned positive returns Emerging markets was the worst performing strategy in 1995 (-16.9%). However, it was the best performing strategy in 1996 ( +34.5%) The long/short equity strategy performed well in 2003 and 2004, but lost money in 200224-31

37、Private Equity Basic Concepts Refers to any ownership interest in an asset (or assets) that is not tradable in a public market Typically fund either new companies or established firms that are seeking to change their organizational structure or are experiencing financial distress Generally far less

38、liquid than public stock holdings and are therefore considered to be long-term positions within an investors overall portfolio Characteristics Higher return and low liquidity Good sources of diversification See Exhibit 24.2124-32Exhibit 24.2124-33Private Equity Development and Organization Organized

39、 private equity investing began in the United States back in 1946 Three Subcategories Venture Capital Seed Early stage Later stage Buyouts Special Situations Distressed Debt Mezzanine Financing Exhibit 24.22: Private equity investing in the U.S.24-34Exhibit 24.2224-35Private Equity The Investment Pr

40、ocess The zero-stage capital: Using their personal savings and bank loans The venture capital: Seek to obtain the additional seed and early-stage funding they need to advance their idea to the next level; in exchange, the venture capital firm receives an equity stake in the company The venture capit

41、al firm will ultimately want to liquidate their equity holdings in order to create a return on their investment Buyout IPO See Exhibit 24.2324-36Exhibit 24.2324-37Private Equity Returns to Private Equity Funds Private equity commitments should be viewed as long-term, highly illiquid investments The

42、return pattern known as the “J-curve effect” Average annual returns for these investments tend to be quite high over time The initial years of a new private equity commitment usually produce negative returns In addition to its higher overall risk level, there exists a huge dispersion in fund returns

43、, that is, good performance vs. bad performance managers See Exhibit 24.2524-38Exhibit 24.2524-39Ethics and Regulation in the Professional Asset Management Industry Agency Problem Regulation in the Asset Management Industry Principal securities laws that govern investment companies The Investment Co

44、mpany Act of 1940 The Securities Act of 1933 The Securities Exchange Act of 1934 The Investment Advisers Act of 1940 The Employee Retirement Income Security Act of 1974 The Pension Protection Act of 200624-40Ethics and Regulation in the Professional Asset Management Industry Regulatory agencies The U.S. Securities and Exchange Commission (SEC) is the main federal agency responsible for regulating professional asset management activities in the United States U.S. Department of Labor: For protection of