Portfolio Management: Strategies and Approaches

The Portfolio Manager: Role and Qualifications

• Portfolio managers select and manage securities in mutual funds.
• They aim to maximize returns within the fund's risk constraints.
• Portfolio managers are registered with provincial securities commissions.
• Many portfolio managers hold designations like the Chartered Financial Analyst (CFA).

Investment Management Strategies

• Passive Portfolio Management replicates a benchmark's performance, instead of outperforming it.
• It's based on the Efficient Market Hypothesis (EMH), assuming all public information is in security prices.
• Active Portfolio Management selects securities to outperform a benchmark.
• Active managers believe they can identify mispriced securities via research.

Investment Approaches

• Top-Down Approach analyzes the economy and market trends before focusing on industries and companies.
• Bottom-Up Approach focuses on individual companies, downplaying macroeconomic factors.

Investment Styles

• Growth investing targets companies with above-average growth potential.
• Value investing seeks undervalued companies trading below their intrinsic value.
• Growth at a Reasonable Price (GARP) combines growth and value and seeks companies with consistent earnings growth at reasonable prices.

Investment Selection Methodologies

• Technical Analysis evaluates securities based on market trends, prices, and volume.
• Fundamental Analysis analyzes a company's financials, management, and competitive position.

Modern Portfolio Theory

• Modern Portfolio Theory (MPT) emphasizes diversification to reduce risk and enhance returns.
• The efficient frontier represents optimal portfolios with the highest return for a given risk level.

Financial Analysis: Financial Statements

• Portfolio managers use financial statements to evaluate a company's performance.
• Balance Sheet provides a snapshot of a company's financial position at a specific point in time.
• Income Statement shows a company's revenues, expenses, and profits across a period.
• Cash Flow Statement tracks the flow of cash in and out of a company.
• Statement of Retained Earnings reveals amount of company profits retained versus dividends.

Financial Ratios

• Financial ratios are used to assess a company's financial health and performance.
• Profitability Ratios measure a company's ability to generate profits (e.g., gross profit margin).
  • Liquidity Ratios assess a company's ability to meet short-term obligations (e.g., current ratio).
  • Debt-Equity Ratios gauge a company's reliance on debt financing.
• Valuation Ratios evaluate the investment value of a security (e.g., price-to-earnings ratio).

Mutual Fund Performance and Risk: Sources of Return

• Mutual funds generate returns through income (interest, dividends).
• Returns also come from capital gains (selling securities at a profit).
• Returns also derived from capital appreciation (increase in security prices).

Calculating and Effect of Mutual Fund Performance

• Performance is measured using standard data, including return calculations for non-money market funds.
• Distributions (e.g., dividends) increase the fund’s net asset value (NAV).
• Distributions reduce the NAV per unit (NAVPU) when distributed to investors.

Mutual Fund Risks

• Systemic Risk is the risk of a single event that causes widespread financial instability.
• The collapse of Lehman Brothers in 2008 is an example of Systemic Risk..
• Systematic Risk is market-wide risks that affect investments (e.g., interest rate changes, inflation, recession).
• Unsystematic Risk is risks are specific to a company or industry (e.g., business risk, liquidity risk).

Measures of Investment Risk

• Standard Deviation measures the volatility of a fund's returns around its average.
• Beta measures a fund's movement sensitivity relative to a benchmark.
• Duration measures the sensitivity of fixed-income investments to changes in interest rate.
• Higher-risk investments offer higher potential returns, but also come with greater losses.