Managing Equity Portfolios

Course Outlines:

Module One:

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

Module Two:

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)
  • 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.

Module Three:

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

Module Four:

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

Module Five:

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

Module Six:

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

Module Seven:

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), etc
  • 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

Module Eight:

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 mark to market – trading book, Basel III approaches
• Calculations and mechanics of standard deviation / tracking error/ M 2 / beta
• Risk/Return ratios and their implications in the risk budgeting process:
  • Sharpe, Treynor, Information, Jensen’s Alpha, Calmar, Martin Ratio, Sortino Ratio
• Value at Risk – methodologies, Expected Shortfall, Extreme Value Theory