Understanding portfolio construction methodology
The methodology used by fund managers to construct their portfolios will very
much depend on the type of fund that they are managing, as well as the style of
management that they use. Although there are many general funds, such as segregated
pension funds, that invest globally, there is a continuing trend towards specialization
in particular funds, such as segregated pension funds, that invest globally, there
is a continuing trend towards specialization in particular markets, and each market
will have its own principal considerations.
Other Analyses: Equities are sensitive to a number of different factors affecting their market prices in the short, medium or long term. This means that the fund manager needs to look at his portfolio, and the securities held in them, from a number of different perspectives and involves assimilating the huge quantities of data available to fund managers, sourced from external brokers as well as their own firms analysts. The Key is the interpretation of the data: what does the news imply for a security or overall industry grouping? Portfolio level analysis includes the following.
Fund Break down By:
Company Size - In an economic upswing smaller companies may grow faster than larger firms, whilst in a recession investors may prefer larger, more resilient (through cash availability or diversification ) companies .
Economics theme E.g. Sensitive to oil prices, interest rates, factors affecting other economics in to products are sold. Over all portfolio factors such as the funds beta can also provide useful risk information. As with most types of fund level analysis, the comparison of the funds against the bench mark is the most useful. Other security level analysis include the price to earning ratio growth which is a dynamic measure of a trend of changing value (if you are a value- style manager ) or changing growth (if you are growth manager ) .
If it is important to the fund manager that he receives dividends (eg if he is running an income fund), then he might look at the dividend cover , which is the ration of earnings per share over dividends per share (ie, a measure of how easily a company can afford to pay the dividend ). Again, the trend of this over time will be useful information.
Industry Case Studies:
Each industries sector will be affected differently by macro economics news as well as by industry specific factors, such as well as by industry specific factors, such as technological innovation. The Following is a very high level review of three industrial sectors, included in attempts to bring out the fact that industries need to be individually analyzed by fund managers.
Telecom Industry :
Telecommunications industry is a relatively new sector and is still experiencing
a high rate of growth as its market continues to develop. Let us look at the share
prices for two participants, Vodafone and British Telecom, for the period from
January 1st 1980 to 1sr January 2001, displayed as relative to the FT All share.
Thus this sub theme can be very important factors: both firms performed well initially , on the back of the general Telecoms Boom, but BSkyB are now in the ascendancy further to their first mover advantage in brining their digital products to market . This analysis also emphasizes the importance of all aspects of a business (e.g. effective marketing as well as innovation and development capabilities).
Consumer Goods :
consumer goods sectors are strongly affected by macroeconomic factors, as well
as changes in tastes which will affect the sales revenue and profits of individual
firms. One of the key assets for consumer goods firms is the strength of their
brand. A good examples of this can be seen their company valuation wax and wane
on the basis of inter alias, the strength of their brand.
oil industry is a relatively old (especially compared to telecoms), well established
industry. The oligopolistic market structure is unlikely to change significantly
in the foreseeable future. Other features of the market include the setting of
the underlying commodity price by the organization of petroleum exporting countries
(opec) which is dominated by Saudi Arabia. The market has a very effective political
and public pressure (eg where Esso were forced to renounce a price increase announced
by its chairman in October 2000 after a public outcry).
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