The Portfolio Management Process.ppt
- 1. PORTFOLIO MANAGEMENT PROCESS A broad overview of the By Yinka Daramola, Fund Manager
- 2. Why do we do what we do @ ARIAN Capital? Because we want to help investors to build their wealth over time • We have the know-how to achieve this objective • As this is our full-time occupation, we are at a distinct advantage over the individual because as a team, we can pool bits of data and convert them into meaningful information that will help us to make investment decisions on behalf of our clients • We are able to use our resources to offer attendant scrip and other yield management services
- 3. Accumulation Phase Consolidation Phase Spending and Gifting Phase 25 55 65 85 75 35 45 The rise and fall of Personal Networth over a Lifetime Net Worth Age
- 4. Asset Allocation: The process of deciding how to distribute an investor’s wealth among different countries and asset classes for investment purposes Asset Class: An asset class is comprised of securities that have similar characteristics, attributes and risk/return relationships. An example of a broad asset class is “bonds”, which can be divided into smaller classes like Treasury Bills, corporate bonds and high yield bonds. GENERALLY, HIGHER COMPOUNDED RETURNS TEND TO ACCRUE TO INVESTORS WITH THE LARGER EXPOSURES TO RISKY ASSETS Fundamentals/Preliminaries
- 5. Equities- 40% Fixed Income- 32% Specialist Investments- 8% Cash- 2% Real Estate-18% Investible Funds Asset Allocation: An Example
- 6. Investible Assets: Refers to liquid assets such as cash, jewelry etc. Net Worth: Refers to the balance between your Assets and your Liabilities Pure Income: Refers to your gross income Income Type Grouping The RELEVANT income IS NET WORTH- It forms a more REALISTIC AND PREDICTABLE basis for measuring investible funds
- 7. No serious investment plan should be started until a potential investor has adequate income to cover living expenses and a safety net, should the unexpected occur How individuals structure their financial plan should be related to their: 1. Age 2. financial status 3. future plans 4. risk aversion characteristics, and 5. needs Financial Planning Principles
- 8. • Liquidity Constraints • Time Horizon • Tax Concerns • Legal and Regulatory • Unique Circumstances Investment Constraints
- 9. POLICY STATEMENT Focus: The Investor’s short-term and long- term needs, familiarity with capital market history, and expectations MACROECONOMIC EVALUATION Focus: Examine current and projected financial, economic, political and social factors. These will help inform us about short and long- term possibilities to use in constructing a specific portfolio IMPLEMENTATION Focus: Construct a portfolio that meets the investor’s needs at minimum risk levels FEEDBACK LOOP Focus: Monitoring and updating the investor’s needs, environmental conditions, and evaluating portfolio performance The Portfolio Management Process
- 10. • The Policy Statement is a road map. In it, investors specify the types of risk they are willing to take and their investment goals and constraints. • All Investment decisions are based on the policy statement to ensure that they are appropriate for the investor. Hence, a carefully constructed policy statement determines exactly what kind of assets to be included in a given investor’s portfolio • Because of lifecycle needs, the policy statement is typically reviewed and updated periodically The Policy Statement
- 11. Return •Comes in the form of cashflows attached to the purchase of a security. Examples include dividends, coupons/interest income •Different securities for different reasons may also provide opportunity to the investor to benefit from capital appreciation Our business is to continually seek out opportunities to maximize return for our clients. Usually, the better our performance the higher the reward. To achieve this, certain principles are important to grasp
- 12. Compounded Annual Returns: 1981-2004 Before Taxes and Inflation After taxes After taxes and Inflation After inflation (only) Common Stocks 12.36% 9.83% 6.52% 8.98% Long Term Govt Bonds 11.23% 8.38% 5.12% 7.88% Treasury Bills 6.20% 4.48% 1.33% 3.46% Municipal Bonds (etc) 6.00% 6.00% 2.81% 2.81% Source: CFA Institiute Real Investment Returns After Taxes and Costs Assumptions: 28% tax rate on income, 20% on capital appreciation. Compound rate was 3.1% for full period
- 13. 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% Before Taxes and inflation After taxes After taxes and Inflation After inflation (only) Common Stocks Long Term Govt Bonds Treasury Bills Municipal Bonds (etc) Real Investment Returns After Taxes and Costs
- 14. Capital Preservation - The need to MAINTAIN CAPITAL. The return should, at a minimum, be equal to the inflation rate. With this objective, an investor simply wants to preserve his existing capital. Capital Appreciation - The need to GROW CAPITAL. To accomplish this, the return objective should be equal to a return that exceeds the expected inflation. With this objective, an investor's intention is to grow his existing capital base. Current Income -The need to CREATE INCOME FROM THE INVESTOR'S CAPITAL BASE. With this objective, an investor needs to generate income from his investments. Total Return - The need to GROW THE CAPITAL BASE through both capital appreciation and reinvestment of that appreciation. Return Requirements
- 15. Strategy 2 20% cash 40% bonds 40% stocks Strategy 1 30% cash 50% bonds 20% stocks All Cash 100% cash 0% bonds 0% stocks Strategy 3 10% cash 30% bonds 60% stocks Strategy 2 20% cash 40% bonds 40% stocks Strategy 1 30% cash 50% bonds 20% stocks Strategy 5 0% cash 0% bonds 100% stocks Strategy 3 10% cash 30% bonds 60% stocks Strategy 4 20% cash 80% bonds 0% stocks Lower Moderate Higher 3 – 5 years 6 – 10 years 11+ years Your Time Horizon Your Risk Tolerance Hypothetical Asset Allocations
- 16. An investor’s risk tolerance can be affected by many factors: Age– an investor may have lower risk tolerance as they get older and financial constraints are more prevalent. Family situation – an investor may have higher income needs if they are supporting a child in college or an elderly relative. Wealth and income – an investor may have a greater ability to invest in a portfolio if he or she has existing wealth or high income. Psychological – an investor may simply have a lower tolerance for risk based on his personality Factors Affecting Risk Tolerance
- 17. Risk and Return- Markowitz Portfolio Theory Harry Markowitz (1952,1959) propounded that a single asset or portfolio of assets is considered to be efficient if no other asset or portfolio of assets offers higher expected return with the same (or lower) risk or lower risk with the same (or higher expected return) He used variance, or standard deviation of expected returns returns to measure risk Variance is a statistical measure of the dispersion of returns around the expected value whereby a larger variance indicates greater dispersion. The more the dispersion, the greater the uncertainty of returns
- 18. Probability Possible rate of return (%) Expected return 0.35 0.08 0.0280 0.30 0.1 0.0300 0.20 0.12 0.0240 0.15 0.14 0.0210 E' (R) 0.1030 Computing Expected Return for An Individual Asset
- 19. Weight (W!) (% of Portfolio) Expected Security Return (R!) Expected Portfolio Return (W! X R!) 0.20 0.10 0.0200 0.30 0.11 0.0330 0.30 0.12 0.0360 0.20 0.13 0.0260 E' (Rport) 0.1150 Computing Expected Return for a Portfolio of Risky Assets
- 20. Thank you for your kind attention