Overview of Equities as an Asset Class
- How does equity ownership compare to other financial claims?
- Position of equity vis à vis other elements in corporate capital structure
- Review of equity capital from an accounting perspective
Characteristics of ordinary, bearer and registered shares
- Cumulative, participating, and convertible preference shares
- Ranking for dividends and liquidation
- Overview of the primary issuance of Equity Securities
Equity Markets and Trade Execution
- Order driven/quote driven platforms
- Warrants and Covered warrants
- Contracts for Difference (CFD’s)
- Overview of equity based collective investment vehicles
Primary Issuance, Clearing, Custody and Trading Of Equity Securities
- Listing securities – the regulatory framework, investor disclosures
- Structure and stages of an initial public offering (IPO)
Alternative routes for going public - direct listings, SPAC's
- Role of intermediaries, book building, pricing
- Benefits for the issuer and investors
- Underwritten versus best efforts
- Oversubscribed issues and greenshoe options
- Role of exchanges in providing secondary market facilities, platforms
- Alternative Trading Venues
- Multilateral Trading Facilities and dark pools
- The meaning of ‘books closed’, ‘ex-div’ and ‘cum div’, cum, special ex, special cum, and ex rights
- Explanation of the nature and objectives of High Frequency Trading (HFT)
- Principles of Delivery versus Payment (DVP) and Free Delivery
- International Central Securities Depositories (ICSD)
- Examination of the role of Custodians/Nominees
- Purpose, requirements and implications of securities lending SBLI’s
- Short selling, collateral management, re-hypothecation etc.
Global Equities Markets/Indices
- Principal indices/exchanges
- Emerging and frontier markets
- Classification systems of global equity markets – MSCI, FTSE
Historical survey of performance of main global equity indices
- Historical P/E ratios
- Regulatory and supervisory environment
- Shareholder protections etc.
- Structure and size of markets, volumes
- Liquidity and transparency
- Trading characteristics e.g. prevalence of off exchange activities
- Financial Statement Analysis
- Purpose, structure and use of balance sheets, income statements and cash flow statements
- Key classes of financial ratios:
- Profitability, Liquidity, Asset turnover, Gearing
- Key Investor ratios
- Earnings Per Share (EPS), P/E Ratios (historic and prospective), Price/Earnings-to-Growth (PEG) ratio
- Dividend yield, Dividend/interest cover
- Advantages and challenges of performing financial analysis
- Comparing companies across and within sectors
Accounting for Corporate Actions
- Stock and cash dividends
- Rights issues, open offers, offers for subscription and for sale
- Calculation of theoretical effect on the issuer’s share price of bonus/scrip, consolidation, rights issues
- Corporate Valuation Methods
- Fundamental equity valuation – Discounted Cash Flow (DCF) techniques
Models based on calculating the Present Value of future dividend flows
- Simple Model
- Multi-stage model
- Comparing valuations across different sectors
- What discount rate should be used in DCF models?
- Determining the Weighted Average Cost of Capital (WACC)
- What multiples should be used for individual companies, for overall market?
- How to value high growth enterprises with no dividends
- Sustainability of profits and commercial disruptions
- Relationship of corporate valuations to underlying interest rate environment
- Return on Equity (ROE) measurements – including risk-adjusted return on capital (RAROC)
- Risk Adjusted valuations – incorporating beta into valuation methods
- Importance of changes in the regulatory environment on valuation forecasting
Equity Allocation and Performance Attribution
- Criteria for determining the relative allocations for equities, fixed income, alternative assets etc.
- Contribution of each to overall portfolio return
- Strategic versus tactical
- Core versus satellite holdings
- Active equity allocation – stock selection vs. passive investment
- Relative performance of active managers to benchmarks
- Performance attribution – allocation to specific securities vs. overall exposure to benchmarks
- Examination of contrasting styles of Growth vs. Value investing
- Warren Buffet’s investment philosophy
- Portfolio Theory and the Risk/Return Trade Off
Cornerstones of Capital Asset Pricing Model (CAPM)
- Securities market line (SML), beta, alpha, risk free rate etc.
- The concept of the efficient frontier
- Systematic Risk and idiosyncratic or specific Risk
- Modern Portfolio Theory (MPT) and diversification
- Markowitz model and covariance matrix analysis
Risk Adjusted Return
- Sharpe Ratio, Sortino Ratio, Treynor Ratio, Calmar Ratio, Total Expense Ratio (TER)
- Risk-adjusted return on capital (RAROC)
- Difference between CAPM and Arbitrage Pricing Theory (APT)
- Active and passive strategies – index tracking, stock picking, transaction costs
- Hedging and use of derivatives in risk management
- Survivorship bias phenomenon
Risk Budgeting
- Explanation of risk premia – excess return or compensation for not holding riskless assets
- Risk as a scarce resource and how to allocate exposures according to risk premia and expected returns
- Statistical distributions for modelling probability structures
- Benchmarks and tracking errors – active versus passive risk
- Recognizing importance of drawdowns - holding periods, needs for liquidity
- Expected returns from a risk-budgeting perspective
- Obligations to market – trading book, Basel III approaches
- Calculations and mechanics of standard deviation / tracking error/ M 2 / beta
- Value at Risk – methodologies, Expected Shortfall, Extreme Value Theory
Exchange Traded Funds (ETF’s)
- Compare availability and range of ETF’s traded on US, European platforms
- Number of funds, assets under management, growth trajectories
- Contrast features of ETF’s to other collective investment vehicles (CIV’s)
- Fiduciary/trust architectures, role of sponsors, creation units
- Contrast passive index tracker ETF’s (the majority) with actively managed funds
- Examination of MSCI geographical indices which many ETF’s track
- Features of inverse ETF’s, leveraged funds
- Contrast between funds which hold “physicals” versus those which are synthetic – hold futures, swaps, structured products.
- Replication strategies – stratified sampling vs. full replication, use of synthetics
- Examination of tracking error for exchange traded products
- Risks associated with ETF’s, liquidity risk, risks with synthetic ETF’s
Special Risk Factors for Emerging Market Equities
- Examination of how capital flows into emerging markets are influenced by the intention of central banks especially Federal Reserve to push asset managers into risk assets
- Globalization of resourcing and capital flows has invalidated much traditional macro-economic theory regarding economic cycles
- Differentiation between EM economies which have trade surpluses/deficits
- Examination of negative feedback loops for EM markets when advanced economies reduce their accommodative monetary policy
- Examination of ETF’s which provide exposure to emerging market equity and debt
- Analysis of correlation between emerging market equities and commodities
- Challenges and strategies for hedging and managing risk of emerging market equities because of lack of depth in markets for hedging exotic currencies
Techniques For Forecasting Expected Returns
- Risk Factor Asset allocation strategies – reversing the trend of MPT and focusing on specific factors which “account” for asset class behaviour
- Identifying key risk factors as drivers of asset prices
- Insights from behavioural finance – risk seeking versus risk aversion
- Long term correlations amongst asset classes – mean reversion
- Contrarian indicators – sentiment, positioning of traders, hedge funds
- Is there any evidence of asset returns having cyclical behavior?
- Overview of Equity Based Derivatives
Terminology – underlying, spot markets, options, futures, swaps
- Initial margin, variation margin, cost of carry, basis risk
- Equity index futures contracts
- Options on individual equities and equity indices
- American, European, Asian style
- Puts and calls – perspective of buyer and writer
Risk elements of derivatives
- Counterparty risk, Market risk, Liquidity risk
- Risks to the buyer of futures/options
- Risks to the writer/seller of futures/options
- Explain the key contrasts between Exchange traded versus Over-the-counter (OTC) derivatives
- Central clearing versus counterparty risk
- Role of options/futures in hedging equity portfolios
- Role of Total Return Swaps - collateral issues, lessons from Archegos debacle
- Managing Risk for Equity Portfolios
Main types of portfolio risk
- Market risk – asset price volatility, currency, interest rates etc.
- Investment horizon and holding period
- Systemic and tail risk
- Principles used to mitigate portfolio risk:
- Seeking relatively uncorrelated assets
- Benefits/limitations of diversification
- Use of derivatives in hedging and risk management
- Modeling risk scenarios – stress testing, stress regression based on outlier values, tools of statistical analysis, Monte Carlo simulations, back testing
- Tail risk protection strategies
Smart Beta Strategies
- Review of the logic behind smart beta – risk factor asset allocation models
- Examination of the performance of various widely used smart beta ETF’s
- Crowding and herding issues with smart beta strategies
- Are the promises provided by smart beta ETF sponsors warranted?
ESG Strategies
- Examine arguments for and against ESG in relation to investment performance and effectiveness
- Analyze how ESG can create both risks and opportunities for investors
- Review case studies and actual examples of decision making regarding ESG
Concluding Themes
- The benefits of strategic investment vs. short term trading and market timing
- Recognition that investor behavior can be emotion driven in the short term but more calculated over longer term horizons
- Sources of bias in decision making and judgment in asset allocation
- Establishing investment objectives that can be defined, quantified, and achieved successfully
- Importance of periodic re-balancing and refreshment of portfolios
- Synthesis of different asset allocation approaches
- Macro-economic top-down allocation
- Micro-economic bottom-up allocation
