ADVANCED PORTFOLIO MANAGEMENT

The application framework

Forecasting asset class returns

Individual investors:

Institutional investors:

Overview of asset allocation: role of asset allocation in portfolio management, governance structures, articulation of investment objectives, allocation of rights and responsibilities, governance audit, strategic versus tactical asset allocation; importance of asset allocation in portfolio performance; steps involved in establishing an appropriate asset allocation

Asset allocation and investors and return objectives: dynamic versus static asset allocation; factors affecting asset allocation policy (loss aversion; mental accounting; fear of regret); return and risk objectives in relation to asset allocation, economic balance sheet and asset allocation

Selection of asset classes: criteria for specifying asset classes; inclusion of international assets (developed and emerging markets)

Optimisation approaches to asset allocation: mean-variance approach (Its application when adding an asset class in an existing portfolio); resampled efficient frontier; experience-based approaches; asset only, asset/liability management (ALM);); Black – Letterman approach: Monte-Carlo Simulation

Nondomestic equities and bonds: Their associated risks, costs and opportunities

Conditional return correlations: their importance when evaluating the diversification effects of nondomestic investments

Integrating a segmented market with a global market: expected effects on share prices expected returns, and return volatilities

Formulation and justification of minimum-variance frontier given investment policy statement and capital market expectations.

Asset allocation with practical constraints

Use of liability as a benchmark and use of bond index as a benchmark with respect to investment objectives

Managing funds against a bond market: classification of strategies (pure bond indexing/full replication approach, enhanced indexing and active investing, full- blown); selection of a benchmark bond index and factors to consider (market value risk, income risk, liability framework risk); use of bond market indices

Techniques used to align the risk exposures of the portfolio with those of the benchmark bond index: duration matching technique, key rate durations technique

Assessment of the risk and return characteristics of a proposed trade: total return analysis, scenario analysis

Bond immunisation strategy: its formulation and evaluation under various interest rate scenarios

Spread duration and its importance

Extension of classical immunisation theory: introduction of contingent immunisation (63)

Risks associated with managing a portfolio against a liability structure: interest rate risk, contingent claim risk, cap risk

Immunisation strategies for single liability, multiple liabilities and general cash flows: their advantages and disadvantages

Immunised portfolios: risk immunisation and return maximisation

Cash flow matching: its use in funding a fixed set of future liabilities; its advantages and disadvantages

Effect of leverage on portfolio duration and investment returns

Use of repurchase agreements (repos) to finance bond purchases: Factors affecting the repo rate

Measures of fixed income portfolio risk: standard deviation, target semi variance, shortfall risk and value at risk (VaR)

Use of futures instead of cash market instruments to alter portfolio risk

Formulation and evaluation of an immunisation strategy based on interest rates

Use of interest rate swaps and options to alter portfolio cash flows and exposure to interest rate risk; use of credit derivative instruments to address default risk, credit spread risk and downgrade risk in the context of fixed income portfolio

Potential sources of excess return for an international bond portfolio

Effect of change in value for a foreign bond when domestic interest rates change, and the bond’s contribution to duration in domestic portfolio, given the duration of the foreign bond and the country beta

Hedging currency risk in international bond markets; break even spread analysis in seeking yield advantages across international bond market; investing in emerging market debt

Role of equity in the overall portfolio

Equity investment universe; segmentation by size and style, segmentation by geography, segmentation by economic activity.

Equity investment approaches: passive approach; active approach; semi-active (enhanced-index) approach; their relevance with respect to expected active return and tracking risk

Weighting schemes used in the construction of major equity market indices and the biases associated with each

Passive equity investing: alternative methods for establishing passive exposure to an equity market; indexed separate or pooled accounts, index mutual funds, exchange-traded funds, equity index futures and equity total return swaps

Approaches to constructing an indexed portfolio: full replication, stratified sampling and optimisation

Active equity investing: equity investment–styles classifications and risks associated with each; techniques for identifying investment styles; equity style indices; equity style box analysis and style drift; long–short and long-only investment strategies; ‘equitised’ market-neutral and short-extension portfolios; sell disciplines/trading of active investors

Semi-active equity investing (enhanced-index): derivatives-based and stock- based enhanced indexing strategies

Managing a portfolio of managers: core-satellite approach to portfolio construction; effect of adding a completeness fund to control overall risk exposures (64)

Components of total active return (“true” active return and “misfit” active return) and their associated risk measures; alpha and beta separation as an approach to active management;

Identifying, selecting, and contracting with equity managers

Structuring equity research and security selection: top-down and bottom-up approaches to equity research

Introduction to alternative investments portfolio management

Selection of active managers of alternative investment scheme

Alternative investment benchmarks: construction and interpretation; benchmark bias

Return enhancement and risk diversification effects of adding an alternative investment to a reference portfolio (for instance a portfolio of bonds and equity only)

Venture capital: Major issuers and suppliers; purpose of venture capital; buyout funds; use of convertible preferred stock in direct venture capital investment

Private equity fund: Typical structure and timelines; formulating private equity investment strategy

Commodity investments: Direct and indirect commodity investment; components of return for commodity futures contracts; role of commodities in a portfolio

Hedge funds: Typical structure; high water- mark provisions; fund-of-funds; performance and evaluation

Managed futures: Trading strategies; role in a portfolio

Distressed securities: Risks associated with investing in distressed securities including event risk, market liquidity risk, ‘J-factor’ risk

Effects of currency movements on portfolio risk and return

Strategic choices in portfolio management

Active currency trading strategies based on economic fundamentals, technical analysis, curry trade and volatility trading

Adjusting the hedge ratio using forward contracts and foreign exchange (FX) swaps

Trading strategies used to reduce hedging costs and modify the risk return characteristics of a foreign currency portfolio

Portfolios exposed to multiple foreign currencies: use of cross-hedges ratio, macro-hedges ratio, minimum-variance-hedge ratio

Challenges for managing emerging market currency exposures

The context of trading: market microstructure: order types and their price and execution uncertainties, their effective spread and their quoted bid ask spread; types of markets and their quality; roles of brokers and dealers

Costs of trading: transaction costs components (explicit and implicit costs); implementation shortfall and volume weighted average price (VWAP) as measures of transaction costs; use of econometric methods/models in pre-trade analysis to estimate implicit transaction costs

Major types of traders: their motivation to trade, time versus price preferences and preferred order types; major trading tactics; algorithmic trading strategies and determining factors including order size, average daily trading volume, bid– ask spread and the urgency of the order (65)

Trade execution decision and tactics: meaning and criteria of best execution; firm’s investment and trading procedures, including processes, disclosures and record keeping with respect to best execution

Role of ethics in trading

Monitoring: Fiduciary’s responsibilities in monitoring an investment portfolio; monitoring of investor circumstances, market/economic conditions and portfolio holdings; revisions to an investor’s investment policy statement and strategic asset allocation, given a change in investor circumstances

Rebalancing: Benefits and costs of rebalancing a portfolio to the investor’s strate- gic asset allocation; calendar rebalancing; percentage-of-portfolio rebalancing; optimal corridor width of an asset class; target portfolio rebalancing versus allowed range portfolio rebalancing; rebalancing strategies (linear, concave, and convex rebalancing strategies); constant mix, buy-and-hold, and constant proportion portfolio insurance (CPPI) rebalancing strategies

Importance of performance evaluation from the perspective of fund sponsors and the perspective of investment managers

Components of performance evaluation: performance measurement, performance attribution and performance appraisal

Performance measurement: total, time-weighted, money-weighted rates of return, linked internal rate of return and annualized return

Benchmarks: concept of a benchmark; properties of a valid benchmark; types; steps involved in constructing a custom security-based benchmark; validity of using manager universes as benchmarks; tests of benchmark quality; hedge funds and hedge fund benchmarks

Performance attribution: inputs for micro and macro attribution; use of macro and micro performance attribution methodologies to identify the sources of investment performance; use of fundamental factor models in micro performance attribution

Performance appraisal: risk-adjusted performance measures, including (in their ex post forms) alpha, information ratio, Treynor measure, Sharpe ratio and Modigliani-Modigliani measure (M2); incorporation of portfolio’s alpha and beta into the information ratio, Treynor measure, and Sharpe ratio; use of performance quality control charts in performance appraisal

Practice of performance evaluation: noisiness of performance data; manager continuation policy decisions

Investment manager selection; framework for investment manager search and selection, type I and type II errors in manager selection, elements of manager search and selection, capture ratios and drawdown in manager evaluation, qualitative elements of manager due diligence, investment personnel investment decision-making process

Introduction to the Performance Standards; objectives, key characteristics, and scope, benefits to prospective clients and investment managers; fundamentals of compliance with the performance standards, requirements and recommendations of the performance standards with respect to input data, accounting policies related to valuation and performance measurement; (66)

Role of performance standards with respect to return calculation methodologies, treatment of external cash flows, cash and cash equivalents, and expenses and fees

Performance standards and composite return calculations, methods for asset- weighting portfolio returns; composite construction and portfolio management, role of investment mandates, objectives, or strategies in the construction of composites, role of performance standards and composite construction; switching portfolios among composites, timing of the inclusion of new portfolios in composites, and the timing of the exclusion of terminated portfolios from composites;

Performance standards requirements for asset class segments carved out of multi- class portfolios, performance standards and disclosure requirements, including fees, the use of leverage and derivatives, conformity with laws and regulations that conflict with the global standards, and noncompliant performance periods; performance standards presentation and reporting (timeframe of compliant performance periods, annual returns, composite assets, and benchmarks)

Merits of high/low, range, interquartile range, and equal-weighted or asset- weighted standard deviation as measures of the internal dispersion of portfolio returns within a composite for annual periods

Investments that are subject to performance standards for real estate and private equity; provisions of performance standards for real estate and private equity;

Performance standards for Wrap fee/ valuation hierarchy of the performance standards principles

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