Portfolio Investment Management critical
analysis
Market in Crisis**** :- - Black swan: Event that is an outlier, extremely impactful, and
has "retrospective, predictability".
- Cause of 2008/2009 financial crisis was negative int. rates and institutional investors
were taking on too much risk
- CDOs allowed investors to hedge against risk but they were misused and therefore out
of proportion with the subprime mortgage boom.
- Bogle states that investment institutions have abandoned both principle and principal.
Believes in classical investment theory.
- One should buy and hold equity that they have properly researched for a long period.
Turnover rate rose from 30% (1960) to 320% (2008). The industry is incentivized to
benefit the agent over the principal.
SO WHAT
- Bankers should embrace reasonable regulation.
- A clearing house should be implemented to handle CDOs to mitigate counter party
risk. Other forms of regulation that encourage transparency so that investors can better
understand their investments
Analyzing Valuation Measures: A Performance Horse Race over the Past 40 Years :- -
EBITDA/TEV is the best valuation metric tested but other metrics might perform better
in periods of recession (FCF) or when the US economy was more based on physical
over human capital (BV)
- EBITDA/TEV was most effective at identifying underpriced value stocks. FCF/TEV and
GP/TEV provides positive alphas. - FCF adds value because it appears to have the
ability to identify overvalued stocks.
- Worst performer was FE/M
- Equally weighted portfolios outperform value weighted portfolios, because value-
weighted portfolios favour larger companies, valuation metrics are more effective when
used to value smaller companies.
SO WHAT
- Analysts and investors should incorporate EBITDA/TEV and FCF/TEV in their ratio
analysis when valuing a company, especially if its a smaller company.
- B/M is more effective physical capital > human capital. Will become increasingly
important due to high frequency trading, machine learning becoming more effective,
advances in law, accounting, and perhaps consulting.
Ethics and the Financial Analyst** :- - # of Orgs. with Ethics codes has increased from
7% - 60%. - Businesses are becoming more conscientious and going above and
beyond legal compliance.
,- Businesses are still acting unethically because most managers are told to do the bare
minimum and those who acted unethically were rarely punished or the punishments
were inadequate.
- Companies increase ethical training, investigate ethical breaches, and ensure that
punishments match transgressions.
- Ethical companies are better stewards of an investors
capital and tend to pay consistent dividends.
- Most common principles are honesty and integrity, diligence, maintenance and
improvement of competence, and fiduciary duty to clients.
- Three-Legged Stool to ensure an investment practice's ability to act ethically. High
barriers to entry, education, and enforcement.
SO WHAT
- Increase the incentive to act ethically within the org.
- Act ethically because reputation increase and costs associated with legal fees
decreases.
Ethics in Finance II** :- 2 Schools of Thought
- Traditional: Focuses on specific situations, and attempts to set rules to guide
behaviour. Professional adopts "moral schizophrenia", which separates being an
economically
minded professional from an ethically minded one. *Focuses on avoiding wrong doing
instead of doing good.*
- Virtue ethics: "exercising sound moral judgement" the pursuit of virtuous behaviour.
Virtues include courage, wisdom, temperance, fairness, integrity, and consistency.
- Not a set of rules to govern behaviour but guidelines to achieve these virtues.
Comprised of
- 3 pillars: community, moral judgement, and exemplars (senior mgmt).
- Internal goods: Pursuing excellence in one's field, and benefit the community that the
individual belongs to.
- External goods: Individual's property or possessions.
- Corporations must push toward the pursuit of internal goods before external, as they
are congruent with acting ethically.
SO WHAT
- Many professionals will need to be re-educated to view themselves as part of a greater
community that works to moral excellence over personal gain.
- Moving towards virtue ethics can allow the org. to react quickly to a crisis that could
have been much more disastrous if ethics were not taken into account
Financial Engineering in Corporate Finance: An Overview :- 3 types of financial
engineering
1. Securities innovation: Creation of new financial instruments.
, 2. Improving financial processes: Reduction financing costs as result from regulatory or
tech changes.
3. Solves corporate financing problems (RARE) : debt mgmt or optimal capital structure.
- Only innovative when it is non-trivial.
3 factors:
1. Efforts to reduce costs
2. Reducing cash balances when interest rates are high
3. New technology.
- On the decline but still relevant as markets change
- As interest rates, regulation, tax law, and the economic cycle stabilize, opportunities to
engineer new financial solutions will disappear.
SO WHAT
- Be wary of new financial products as many new financial processes and methods are
redundant
- Managers must understand the economics behind any new financial product they plan
to use, and only acquire them if they reduce risk, expenses, or after-tax returns.
Twenty Years of International Equity Investing :- Question: Has International equity
diversification helped investors realize greater returns per unit of risk and what
opportunities are available for global investors
- A portfolio consisting of only US assets underperformed compared a portfolio with
70% of its capital allocated to the EAFE index.
- Historical data isn't useful for predicting future economic performance.
- Losing effectiveness as markets become more dependent and long term economic
relationships are strong.
- Emerging markets and small cap stocks create greater opportunities but require
caution due to uncertainties
- Equal weighting of US and developed markets, with at least 10% allocation to
emerging markets, is near efficient.
SO WHAT
- Manager can realize = returns at lower levels of risk by including international and
emerging market securities
- Must exercise caution as uncertainties are present in property rights, liquidity, agency
problems and lack of info
Performance Characteristics of Emerging Capital Markets :- - Determine if emerging
markets have greater actual returns and if they're useful for diversification purposes.
- Emerging markets may not always provide greater returns but they can provide
benefits of diversification.
analysis
Market in Crisis**** :- - Black swan: Event that is an outlier, extremely impactful, and
has "retrospective, predictability".
- Cause of 2008/2009 financial crisis was negative int. rates and institutional investors
were taking on too much risk
- CDOs allowed investors to hedge against risk but they were misused and therefore out
of proportion with the subprime mortgage boom.
- Bogle states that investment institutions have abandoned both principle and principal.
Believes in classical investment theory.
- One should buy and hold equity that they have properly researched for a long period.
Turnover rate rose from 30% (1960) to 320% (2008). The industry is incentivized to
benefit the agent over the principal.
SO WHAT
- Bankers should embrace reasonable regulation.
- A clearing house should be implemented to handle CDOs to mitigate counter party
risk. Other forms of regulation that encourage transparency so that investors can better
understand their investments
Analyzing Valuation Measures: A Performance Horse Race over the Past 40 Years :- -
EBITDA/TEV is the best valuation metric tested but other metrics might perform better
in periods of recession (FCF) or when the US economy was more based on physical
over human capital (BV)
- EBITDA/TEV was most effective at identifying underpriced value stocks. FCF/TEV and
GP/TEV provides positive alphas. - FCF adds value because it appears to have the
ability to identify overvalued stocks.
- Worst performer was FE/M
- Equally weighted portfolios outperform value weighted portfolios, because value-
weighted portfolios favour larger companies, valuation metrics are more effective when
used to value smaller companies.
SO WHAT
- Analysts and investors should incorporate EBITDA/TEV and FCF/TEV in their ratio
analysis when valuing a company, especially if its a smaller company.
- B/M is more effective physical capital > human capital. Will become increasingly
important due to high frequency trading, machine learning becoming more effective,
advances in law, accounting, and perhaps consulting.
Ethics and the Financial Analyst** :- - # of Orgs. with Ethics codes has increased from
7% - 60%. - Businesses are becoming more conscientious and going above and
beyond legal compliance.
,- Businesses are still acting unethically because most managers are told to do the bare
minimum and those who acted unethically were rarely punished or the punishments
were inadequate.
- Companies increase ethical training, investigate ethical breaches, and ensure that
punishments match transgressions.
- Ethical companies are better stewards of an investors
capital and tend to pay consistent dividends.
- Most common principles are honesty and integrity, diligence, maintenance and
improvement of competence, and fiduciary duty to clients.
- Three-Legged Stool to ensure an investment practice's ability to act ethically. High
barriers to entry, education, and enforcement.
SO WHAT
- Increase the incentive to act ethically within the org.
- Act ethically because reputation increase and costs associated with legal fees
decreases.
Ethics in Finance II** :- 2 Schools of Thought
- Traditional: Focuses on specific situations, and attempts to set rules to guide
behaviour. Professional adopts "moral schizophrenia", which separates being an
economically
minded professional from an ethically minded one. *Focuses on avoiding wrong doing
instead of doing good.*
- Virtue ethics: "exercising sound moral judgement" the pursuit of virtuous behaviour.
Virtues include courage, wisdom, temperance, fairness, integrity, and consistency.
- Not a set of rules to govern behaviour but guidelines to achieve these virtues.
Comprised of
- 3 pillars: community, moral judgement, and exemplars (senior mgmt).
- Internal goods: Pursuing excellence in one's field, and benefit the community that the
individual belongs to.
- External goods: Individual's property or possessions.
- Corporations must push toward the pursuit of internal goods before external, as they
are congruent with acting ethically.
SO WHAT
- Many professionals will need to be re-educated to view themselves as part of a greater
community that works to moral excellence over personal gain.
- Moving towards virtue ethics can allow the org. to react quickly to a crisis that could
have been much more disastrous if ethics were not taken into account
Financial Engineering in Corporate Finance: An Overview :- 3 types of financial
engineering
1. Securities innovation: Creation of new financial instruments.
, 2. Improving financial processes: Reduction financing costs as result from regulatory or
tech changes.
3. Solves corporate financing problems (RARE) : debt mgmt or optimal capital structure.
- Only innovative when it is non-trivial.
3 factors:
1. Efforts to reduce costs
2. Reducing cash balances when interest rates are high
3. New technology.
- On the decline but still relevant as markets change
- As interest rates, regulation, tax law, and the economic cycle stabilize, opportunities to
engineer new financial solutions will disappear.
SO WHAT
- Be wary of new financial products as many new financial processes and methods are
redundant
- Managers must understand the economics behind any new financial product they plan
to use, and only acquire them if they reduce risk, expenses, or after-tax returns.
Twenty Years of International Equity Investing :- Question: Has International equity
diversification helped investors realize greater returns per unit of risk and what
opportunities are available for global investors
- A portfolio consisting of only US assets underperformed compared a portfolio with
70% of its capital allocated to the EAFE index.
- Historical data isn't useful for predicting future economic performance.
- Losing effectiveness as markets become more dependent and long term economic
relationships are strong.
- Emerging markets and small cap stocks create greater opportunities but require
caution due to uncertainties
- Equal weighting of US and developed markets, with at least 10% allocation to
emerging markets, is near efficient.
SO WHAT
- Manager can realize = returns at lower levels of risk by including international and
emerging market securities
- Must exercise caution as uncertainties are present in property rights, liquidity, agency
problems and lack of info
Performance Characteristics of Emerging Capital Markets :- - Determine if emerging
markets have greater actual returns and if they're useful for diversification purposes.
- Emerging markets may not always provide greater returns but they can provide
benefits of diversification.
