Actuarial Investment

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Actuarial Investment

• Portfolio Management

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Introduction to Portfolio Management

• Covers principal points in the management of a
  portfolio of investments
• Generally top-down approach outlined
• As this is by far the most common approach used
  in practice
• Contrasts with the bottom up (or stock-picker)
  approach
• We discuss in relation to overall portfolio, then
  bond sub-portfolio, equity sub-portfolio, and
  others
• Finally, discuss some problems in implementing
  strategic asset re-allocations

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Top Down Approach

• Structured Decision-Making
• Start with Benchmark Portfolio that passive
  asset-allocation that best reflects objectives
  of investors.
• Tactically, how do we deviate from given
  benchmark portions? And to what extent?
• This is tactical asset allocation. Indicators
  used depend of review frequency.
• Decide here on approach to currency hedging, no.
  of stocks held, style emphasis, etc.
• Then, within each broad sector, how and to what
  extent the stock selection differs from the
  (benchmark) index.
• Duration in bond portfolio
• Sub-equity categories within equity market
• Then individual stock selection within the
  sub-sectors

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Investment Process
Investmentobjectives
Strategicassetallocation
Monitoring Evaluation
Tactical Asset allocation
Bias against index/benchmark in each sector
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Bond Portfolio

• Switching - Add value by trading
• Ideas is to sell a stock that will relatively
  underperform the bought one. Hence stock switch
  has added relative value.
• Two ways to switch
• Anomaly switching switch between two
  near-identical stocks, so as to profit from the
  percieved pricing anomaly between them.
• Little risk (but then little return nowadays)
• Policy switching to profit by an expected
  change in either the level or shape of the yield
  curve.
• Switching is between quite different bonds, hence
  more risky.
• Such switching is done by anticipating a change
  in those factors the determine the level of the
  yield curve (see bond market section).

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Bond Portfolio Anomaly Switching

• Techniques for identifying anomaly switches
• Yield differences, relative to past.
• Price ratios (but not as good as yield
  differences as can display a trend)
• Price models multifactor models so price
  anomaly if too high or low relative to the price
  model.

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Bond Portfolio Policy Switching

• This is where majority of gains come in active
  management of bond portfolios.
• Switches based on
• Pure changes in yield curve
• Reinvestment rates
• Spot/forward curve

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Final Remark on Bond Portfolio management

• Bond portfolios have a special role as they can
  be used to match or immunise real or nominal
  liabilities, hence of great use to control risk
  of assets being sufficient to meet liabilities,
  see earlier topics in..
• Matching
• Immunisation

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Managing Equity Portfolio

• We can decide to invest
• Passivelytrack an index
• Activelytry to outperform an index
• Using fundamental analysis
• In an extreme, quantitative models
• Technical analysis
• In an extreme, mechanical trading rules

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Indexation Cost Savings in US Non-US Equity
Markets
Source The Relevance of Index Funds for Pension
Investment in Equities, Shah Fernandes, World
Bank, 2000 . (with turnover figures
made more conservative).
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of Pension Equity Assets that are Passive
Source Watson Wyatt, End 1998
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Mechanics of Passive Management

• We can track an index by
• full replication
• hold every share in index with its index weight
• stratified sampling
• Ensure every key characteristic of the index is
  replicated in same proportion in portfolio
• use futures on indices
• A mix of above

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Active Portfolio Management

• Fundamental Analysis
• In an extreme, this reduces to a multi-factor
  model. Think of this as an expert system. That
  is I know all the factors that drive stock prices
  in a neat equation. I can forecast these factors
  better than the market. Hence I can determine the
  future price of all stocks better than the
  market.
• In less extreme form, I have a good feeling that
  this share is cheap/going to perform better than
  another share using some numerical indicators
  (p/e, nav, etc), coupled with qualitative
  arguments.

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Technical analysis

• Past price (or past price and volume data) used
  to forecast future price movements
• Can be informal look at graphs to detect
  patterns, and based on the hypothesis that
  certain patterns tend to repeat, use this to
  forecast the future price trend
• This is called chartism.
• Can be more objective than above with mechanical
  trading rules, i.e. a buy or sell signal based on
  a pattern that is so well-defined that it can be
  detected using a program.
• One can use absolute price data or relative
  performance data. The latter is known as relative
  strength analysis.

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Actuarial Investment

• Ends
• Portfolio Management

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Actuarial Investment

• Conclusion a glance at the global distribution
  of financial assets

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Financial Assets by source World Distribution
Source OECD, Institutional Investors,
Statistical Yearbook 2000
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Financial Assets Distribution in EU (10 trn)
Source OECD, Institutional Investors,
Statistical Yearbook 2000
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World Financial Assets by Investing Institution,
1998
Source OECD, Institutional Investors,
Statistical Yearbook 2000
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Asset Distribution by Institution, EU (plus CH)
Source OECD, Institutional Investors,
Statistical Yearbook 2000
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Financial Assets Growth, 1990 1998 ( p.a.)
Source OECD, Institutional Investors,
Statistical Yearbook 2000
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Financial Assets Growth, 1990 1998 ( p.a.)
Source OECD, Institutional Investors,
Statistical Yearbook 2000
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Growth Rates by Institution, 1990 1998 ( p.a.)
Source OECD, Institutional Investors,
Statistical Yearbook 2000
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Growth Rates in EU by Institution, 1990 1998 (
p.a.)
Source OECD, Institutional Investors,
Statistical Yearbook 2000
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Composition of Institutional Investment Market in
EU, 1998
Source OECD, Institutional Investors,
Statistical Yearbook 2000
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Pension Assets World Distribution
Source OECD, Institutional Investors,
Statistical Yearbook 2000
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Pension Assets Growth, 1990 1998 ( p.a.)
Source OECD, Institutional Investors,
Statistical Yearbook 2000
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Pension Assets Distribution in EU
Source OECD, Institutional Investors,
Statistical Yearbook 2000
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Pension Assets Growth, 1990 1998 ( p.a.)
Source OECD, Institutional Investors,
Statistical Yearbook 2000
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Financial Assets as of GDP
Source OECD, Institutional Investors,
Statistical Yearbook 2000
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• Completes
• Actuarial Investment