Term
Believe client outcomes improved (i.e. they are more likely to act on advice) given four sections:
Establishing the relationship
Profiling the client
Making recommendations
Evaluating performance and renewing the relationship |
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Definition
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Term
Betrayal aversion
People less likely to take on risk when that source of risk is from another person |
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Definition
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Term
| Overconfidence - people continuously overestimated their performance relative to the market despite regular upates |
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Definition
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Term
Active managed funds consistently underperform passive funds, even net of fees
In 2011, 84% of fund managers were outperformed by the S&P500 |
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Definition
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Term
| Why do high fees persist? |
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Definition
| Brand names - demand curve for mutual funds may be upward sloping (Malkiel 2013) |
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Term
| Investors lost billions between 2000 and 2011 by chasing the best performing actively managed funds from the previous year |
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Definition
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Term
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Definition
| Small client investing in investment vehicle run by financial institution |
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Term
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Definition
| Large client, may have in house fund manager |
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Term
| Unit trust vs investment trust |
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Definition
Unit trust - open ended, unlimited investment
Investment trust - close ended, finite number of shares traded on stock exchange |
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Term
| Investment management process |
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Definition
1) objectives and policy (which assets)
2) select portfolio strat (SAA)
3) allow some TAA
4) Select specific assets within class
5) Measure and evaluate performance |
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Term
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Definition
| Person's willingness to take on risk is influenced by recent market performance (Olson and Riepe 2010) |
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Term
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Definition
| Use information that is most available (but not necessarily relevant) (Olson and Riepe 2010) |
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Term
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Definition
Advisor uses sophisticated returns measures
Client thinks about "return vs mates" or "return vs what i wanted" (Olson and Riepe, 2010) |
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Term
| If markets are efficient you invest in |
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Definition
| a passive fund - if inefficient choose active |
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Term
| Uses an IV approach (number of funds family controls at the time a fund is started) to show that outsourced funds perform worse than in house funds |
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Definition
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Term
| Funds underperform benchmarks by about 65pb / year |
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Definition
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Term
| Funds that are outsourced underperform in house by around 50bp/year |
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Definition
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Term
| In house funds outperform by 85bp (t stat 3.7) |
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Definition
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Term
| Why do outsourced underperform in house |
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Definition
Less scrutiniy
Run on the cheap
Outsourced received less IPOs (Chuprinin 2015) |
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Term
| Asset allocation policy overwhelmingly the largest contributor to total return (not so important within classes - active investment managers not needed) |
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Definition
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Term
| Performance is unrelated to the level of active management |
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Definition
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Term
| Asset allocation 4 stages |
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Definition
1) formulate IPS and CME
2) SAA
3) Create policy portfolio with asset weights
4) Short run TAA |
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Term
| Asset Allocation is responsible for 94% of a portfolios return (stock selection just 4%) |
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Definition
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Term
| Active portfolio management typical strategy |
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Definition
Choose an index portfolio + replicate
Use valuation to over/underweight sectors within it |
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Term
| Relationship between aggregate stock prices and economic series like employment, income and production |
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Definition
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Term
| 3 step, top down plan for valuing companies and selecting stocks |
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Definition
1) think about economy as a whole and how it will affect financial markets
2) which industries will it benefit (also consider demographic changes and politics)
3) which companies are best placed to perform - compare to investment style (growth / value) |
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Term
| Investors prefer to realize winners rather than losers |
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Definition
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Term
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Definition
1) Identify the cash flow - earnings/div/interest
2) Discount flows at Req. RoR |
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Term
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Definition
Reflects uncertainty of a cash flow
Risk free rate + Exp inflation + risk premium |
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Term
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Definition
1) constant div growth
2) continue infinitetly
3) requires RoR (k) > growth rate |
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Term
| Two ways of estimating g in DDM |
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Definition
1) historical average
2) g = retention ratio * ROE |
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Term
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Definition
When good measure of cash flow available
Depenedent on the growrth rate and discount rate |
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Term
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Definition
Provides info about how market valuing stocks
But no guidance as to whether valuations are appropriate - best used when we have comparable entities |
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Term
| Implications of the Efficient Market Hypothesis for portfolio management |
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Definition
If stocks are valued correctly, go passive
If inefficient, exploit this via active |
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Term
Use bootstrap methods to find that the average UK manager does not deliver outperformance.
Gross of fees, 95% of managers fail to outperform the luck distribution. |
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Definition
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Term
| Persistence in mutual fund performance does not reflect superior stock picking - rather due to common factors in stock returns |
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Definition
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Term
| Investors spend 67 basis points per year on searching for superior returns - would make 67bp more by going passive |
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Definition
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Term
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Definition
| = MV assets - Liabilities / Shares outstanding |
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Term
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Definition
Geometric average of holding period return
Preferred industry standard - not sensitive to contributions or withdrawals |
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Term
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Definition
| Is like the IRR - sets PV CF = to current value of investment |
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Term
| Money weighted return is unfair to FM when |
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Definition
| His best years occur when the fund is small - then fund grows and conditions suffer |
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Term
| Risk adjusted portfolio measures |
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Definition
Sharpe
Treynr
Jensen
Information ratio |
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Term
| Formula of perfromance measures and advantages and disadvantages |
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Definition
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Term
| Abnormal net return across funds were -1.1% |
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Definition
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Term
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Definition
| When a manager takes aggressive position in bull market but defensive in bear market |
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Term
| Portfolio managment process (PEIM) |
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Definition
Policy statement
Examine market conditions
Implement
Monitor and update |
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Term
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Definition
1) decide realistic goals and inform investors about risks
2) creates standard on which to judge PM |
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Term
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Definition
1) Protect investors vs mismanagement
2) Transition - if new PM comes in immediately understand client wants |
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Term
| Choice between top down vs bottom up |
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Definition
Depends how important you consider global factors to be
Consider RORO (Trading FX in a RORO world, McDonald, 2016) |
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Term
Evidence strongly supports weak form market efficiency
BUT |
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Definition
Fama (1970)
daily returns are not a random walk |
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Term
| Indepency of returns accepted for weekly + higher but daily rejected |
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Definition
| Sewell (2012) - autocorrelation was small but positive for all |
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Term
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Definition
High growth (not infinite!)
Transition
Maturity |
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Term
| Active returns net of fees and expenses are virtually 0. BUT active management... |
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Definition
| Jones and Wermers (2011) ...provides a vital service in the economy. Ensures efficient allocation of capital which leads to higher growth and increased sociatal wealth |
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Term
| Grossman Stiglitz paradox |
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Definition
| If markets are efficient then prices convey perfectly all info. Hence no point in buying info. Noone buys info. Markets become inefficient - no equilibrium! |
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Term
| Better managers produce higher returns. Capital flows in. Convex cost function - perform worse. Capital flows out. |
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Definition
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Term
| Challenge against Berk and Green (2004) |
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Definition
| Blake et al 2016 - 95% of managers fail to outperform the luck distribution |
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Term
| Why might markets actually be inefficient |
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Definition
Behavioural inefficienies (naive strategies - extrapolation)
Bubbles
Lack of dynamism (slow to react to news)
Emotion (link to Odean 1998) |
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Term
| Grossman and Stiglitz (1980) link with Jones and Wermers (2011) |
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Definition
G&S say that in strong form efficiency market insiders can make abnormal returns - only to cover costs and fees
Jones and Wermers say that net of fees and costs active managers make around 0% return - i.e. positive alpha offset by fees |
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Term
| Contrast Blake et al (2016) with Berk & Green (2004) |
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Definition
| Berk and Green's model includes managers with different abilities. Blake et al finds that 95% of managers fail to outperform the luck distribution. |
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Term
| No evidence that any fund managers have any ability |
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Definition
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Term
| The arithmetic of active management |
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Definition
| Sharpe (1991) trading zero sum game. With fees involved it must be a negative sum game |
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Term
| DDM has more applicability than critics give credit for |
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Definition
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Term
| Risk premiums can change over time (k) |
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Definition
| Poterba and Summers (1988) |
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Term
| PE can be used as predictor or subsequent performance |
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Definition
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Term
| Multiples only have modest predictive ability |
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Definition
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Term
| Result is sensitive to the method use |
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Definition
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