PORTFOLIO MANAGEMENT AND EVALUATING

INVESTMENTS

BUY-SIDE

Buy-side analyst: reports to PM, delivers

trade ideas from research/analysis

Buy-side trader: carries out PM’s

instructions

MARKET PARTICIPANTS

Portfolio Manager (“PM”) makes decisions about which securities to buy and sell in his/her

portfolioSELL-SIDE

Sell-side analyst: makes recommendations on

stocks in his/her “space”Salesperson:

markets sell-side analyst’s research, recommendations

to the buy side Sell-side trader:

executes trades for buy side

• Total Return: the percentage change in the value of a security over a specific time horizon• Has two components:• Price appreciation (capital gain)• Dividends (distributions)

• Individual Security total return analysis• TRA<GO>, COMP<GO>• Risk-Free Return• Excess Return

EVALUATING PERFORMANCE: TOTAL RETURN

• Market Value of individual security price * number of shares• Market value of portfolio

sum of all individual security’s market values• Weight of individual security

MV of security / MV of portfolio• Total return

(current value – initial value) / initial value• Total return of portfolio

weighted average (i.e. sum of each security’s weight * TR) • P&L = MV of day 2 – MV of day 1

PORTFOLIO RETURN CALCULATIONS

• A PM uses a benchmark to determine if the return on their portfolio over a specific time period was relatively good or bad

• Active strategy: Attempt to beat the benchmark in risk-adjusted return

➔ Alpha/Active Return • Passive strategy: Attempt to replicate the

risk/return of the benchmark➔ Tracking Error

RELATIVE RETURNS

• Beta: correlation of the returns of a stock with the returns of the overall market; BETA<GO>, HRA<GO>• The percent change in price of a stock

given a 1% change in the price of the overall market • Beta < 1• Beta = 1• Beta > 1

• Portfolio Beta: weighted average

RISK MEASURES

• What is a portfolio?• Who are the market players?• Why is diversification important?• What are the two approaches of asset

allocation? • What are the two components of an

individual security’s total return?• If I am a passive portfolio manager what

is my goal? Would I track alpha or tracking error?

REVIEW OF PORTFOLIO THEORY

• PRTU: You can manually enter in your positions and costs on PRTU.

• Excel• Drag & Drop into PRTU• BBU<GO> upload

CREATING A PORTFOLIO

IMPORTANT PRTU SETTINGS

Field Description

Position type Defines if the portfolio uses fixed weights, drifting weights, or shares. This cannot be changed once selected.

Asset Class Defines the asset class of the portfolio. Choices are: Equity, Fixed income, Balanced, or Fund of Funds

Base Currency

Defines what currency the portfolio is denominated in

Enable history

Allows history to be stored for the portfolio

Enable data acquisition

Allows historical analytics to be run on the portfolio (HFA, attribution, performance)

Futures margin type

Sets what type of margin will be associated with futures

Short margin type

Sets what type of margin will be associated with short positions

• Mkt Px: exchange price in local currency• Market Val: value of total position in portfolio currency

➔Position*Mkt Px*FX Rate• Cost Price: price the security was bought

➔ Can we write in the same security for different cost prices?

➔ Holdings based vs. Transaction based analysis

PRTU COLUMNS

• Fixed weight – Securities have fixed weights which remain the same over time. This implies that the portfolio is rebalanced each day

• Drifting weight – Securities have weights which will change daily to reflect the price changes from the previous day; act like Shares portfolios

• Shares - securities have actual number of shares or par amount of bonds you hold

FIXED VS. DRIFTING VS. SHARES

IMPORTING TO PRTU

Date you are importing from (copy from this date)

Date you are Importing to (Pasting on this date)

• CHECK POINT: ANY date we made ANY changes on the portfolio, ANY date we inputted / removed ANYTHING from our portfolio

PRTU: CHECK POINTS

TODAY01/01/10 03/01/11

• BBU<GO> is a way for clients to automatically upload their portfolio holdings without having to manually go into PRTU and change them.

• Types of uploads:• FTP Upload – Portfolio holdings come directly from 3 rd

party (accounting service, holding company, etc.)• Basic – Portfolio holdings are stored on clients

computer and are uploaded by the client. • ***Note: basic uploads can be scheduled to run

“automatically once per day”

UPLOADING USING BBU<GO>

Basic FTP

Client must be logged in to terminal for upload to take place

File will automatically be uploaded even if the client is not logged in

No additional software or configuration needed

Small additional cost for software needed for setup

Must be run from the same location/machine as Bloomberg terminal

Can be run on any machine

BASIC VS. FTP

• Both are limited to 2 years of history when uploading • Both can update up to 50 portfolios a day

Prepare Upload File• The required columns will be different

depending on the type of portfolio you want to upload. For all uploads Security ID and Quantity are needed. • Valid Security ID’s : ISIN, CUSIP, SEDOL,

Equity Ticker, Any ID with Yellow market sector key• Quantity values: Shares or weights (short

positions are not available for weights)• Margin and Cash: • Ticker for short margin = CASH SHORTS• Ticker for futures margin = CASH FUTURES• Cash ticker is just spot ticker. USD CURNCY

BBU<GO> STEPS TO UPLOAD

Format• The file should be a list of end of day holdings for the dates you made changes to the portfolio, even for positions that did not change on that day. • For example if you have 100 shares of IBM and 100

shares of GOOG on 1/1/2011 and then you sell 25 shares of IBM on 3/1/2011 the file should look like:

STEPS TO UPLOAD

Port name Security ID Quantity Date

Sample IBM 100 01/01/2011

Sample GOOG 100 01/01/2011

Sample IBM 75 03/01/2011

Sample GOOG 100 03/01/2011

• Upload the file• Save the sheet to your computer. Run BBU<GO>

choose the fi le using the fi le paths on the top half of the screen then 4) Upload

• Map the file• Once the fi le is uploaded choose “CLICK TO MAP”• The idea is to tell which columns in the sheet represent

the columns in PRTU.

• Map unknown identifiers• Any errors that appear from the upload (unknown

identifiers, wrong tickers) can be fixed

• Set file and portfolio defaults

STEPS TO UPLOAD

• What are the two tools we can use to create a portfolio? How do they differ?

• If I want to upload two portfolios with history, how many columns do I need in my excel sheet?

• If I create a portfolio today and want to see my total return for the last year, how do I go about doing this?

REVIEW OF CREATING PORTFOLIOS

• Classification: a way to place a security in a particular group according to their characteristics • Examples: GICS sectors, market cap, analyst• PCLS<GO>• You can also upload custom classification using BBU<GO> uploads

CLASSIFICATIONS

Cash Margin – a dollar amount . They type is mainly used when clients get their daily holdings from their back office and they simply upload this to our system.

Percentage – Allows users to assume that they are posting x% of the total market value of the short positions without having to calc the dollar amount.

MARGIN TYPES

Individual Functions PORT<GO> Tabs

PRT<GO> Intraday

PSD<GO> Characteristics

HPA<GO>, BBAT<GO> Holdings

Holdings

HFA<GO> Performance

BBAT<GO> Attribution

VAR<GO> VaR

RSKF<GO> Tracking Error

WRST<GO> Scenarios

INDIVIDUAL FUNCTIONS VS. PORT<GO>

Attribution: BBAT<GO> or Attribution tab• Definition: Analysis of the impact of a

portfolio manager’s decisions

• Looks at both Allocation and Selection effects of active return • Helps to determine whether investing with

a specific fund has been money well spent

ANALYZING RETURNS- ATTRIBUTION

Value at Risk• Technique used to analyze potential portfolio

losses. • Portfolio is subjected to a series of scenarios in

order to simulate returns over a given period.

• Two primary methodologies in calculating VaR:• Monte Carlo• Historical

ANALYZING RISK - VAR

• Shares/Par amount, Fixed or Drifting weight• Review of the columns on PRTU• Being able to back date to generate

history• Importing option on PRTU and

“checkpoints”

PRTU REVIEW

• PRTU<GO> does NOT automatically adjust for corporate actions• Two ways to fix this• Go to PRTU<GO> and manually adjust for

your corporate actions• Use PMNT<GO> to adjust for your

corporate actions

• Sharing portfolios: PDIS<GO>

PORTFOLIO MAINTENANCE

Fixed Income View on PORT<GO>

Released to all clients with no additional cost

Currently we do not support balanced portfolios, equity and fixed income on separate views COMING SOON!

FIXED INCOME PORTFOLIOS

PRTU Settings: need to ensure that the asset

class of the portfolio is set to Fixed Income

Entry of position Divide by 1000 on PRTUOption on BBU divide by 1000Entry of a unique ID: ex. VOD 4.625 Corp, VOD 7

7/8 2030 Corp Position types supported for Fixed

IncomeNo shortsOnly Cash/Par amount (no weighted portfolios)

CREATING AND SETTING UPFIXED INCOME PORTFOLIO

Assess total return of portfolio AbsoluteRelative to benchmark

Assess risk of portfolioInterest rate risk

Sensitivity to curve changesSensitivity to tenor changes

Credit riskSensitivity to credit spread changes

WHAT DO FIXED INCOME PORTFOLIO MANAGERS LOOK AT?

YAS<GO> What is Duration (Macauley’s)? What is modified duration? What is DV01?

Is yield to maturity accurate? Is it realistic?

Credit spread What is Spread to benchmark? What is G spread, I spread? Why do we have OAS (conceptually)?

This is standard when looking at portfolios (most logical)

LETS START WITH ONE BOND…

Basics of the overall portfolioYield, Average life, Coupon (ALM)Want to see this compared to the benchmark?

How do I want to define relative characteristics? Credit (overall)

OASComposite credit rating

Interest rate sensitivity measures (overall)DV01Modified Duration

This is a current snapshot, Use “As of” date on top right to see historical

CHARACTERISTICS TAB

How has my portfolio done? What is the total return? How much have I outperformed / tracked the benchmark?

Total return for a FI portfolio: Where does it come from? How to break it down?

Can I see components of total return?

HISTORICAL PERFORMANCE

Explaining the total return values In equity we have Attribution, Selection, and Currency, in Fixed Income how do we break this down?

What can we quantify? Currency (for sure)

How do price and yield move?Curve change (how has the change in curve

affected my return)Curve carry (How much has this contributed to

my return): This is quantifiable as we can directly observe the change – what is remaining is “Excess Return”

FIXED INCOME ATTRIBUTION

Excess Return broken down intoAllocationSelection

But this depends on the Model – There are 4 choices Brinson (Total Return)*Excess Return (% Market Weighted)Excess Return (Spread Duration Weighted)

Spread Return (Spread Duration Weighted)

FIXED INCOME ATTRIBUTION – EXCESS RETURN

Like Equity

Brinson (Total Return) More for equities than Fixed Income Only breaks down total return into

allocation, currency, selection, [interaction] (Curve return is not there)

Excess Return (% Market Weighted) Breaks it down in to Curve return and excess Everything that is not explained by curve is

Excess The excess is then broken down into

Allocation and Selection

FI ATTRIBUTION MODELS

Excess Return Model (SD weighted) Similar to the previous: Still have curve return, in fact the curve return will be identical

Difference is the way its weighted: using spread duration (sensitivity to credit)

More applicable for corporates rather than govies Excess is broken down into: Currency, Allocation, selectionInterpretation of Allocation and Selection similar to

previous: if a sector’s credit spread (relative to benchmark) widens (more risky), decision to LONG sector would generate negative return

Spread ↑ Price ↓ Negative return ➔ negative allocation effect

If credit spreads of portfolio constituents widens Portfolio less sensitive to credit (relative to benchmark) in terms of spread duration ➔ positive selection effect in the case where credit spreads have widened.

FI ATTRIBUTION MODELS

Spread Return (Spread duration weighted) Again – curve Return is the same Weighting are the same as previous Only difference is that Attribution and Selection effects now broken down furtherAllocation (spread) carry, Allocation (spread)

changeSelection (spread) carry, Selection (spread)

Change Don’t worry about this, specifics not in exam, BUT if curious: IDOC 2065864<GO>

FI ATTRIBUTION MODELS

Assessing sensitivity: See which sector/group/breakdown has the highest sensitivity so you know what to address first Identify where your interest risk is highly concentrated Identify versus benchmark where your interest risk lies

Passive PM does not want differences between benchmark (immunization)

Active PM will want to outperform the benchmark (therefore want negative)

Key rates – partial sensitivity Relative to benchmark – Long or Short duration?

What is my expectation? Why have I taken this bet? How to configure which curve? What is Key rate and what is DV01? How to show DV01?

KEY RATES ON PORT

Similar to PORT Shift in interest rates is 1BP UPWARD shift

Cannot do it relative to a benchmark Shows dollar/monetary sensitivity (can see this on PORT as well, cannot change on KRR)

Algorithmics (supports Swaps as well which PORT does not)

KEY RATES ON KRR<GO>

Similar to equity, factors are differentSpreadYield CurveCurrency

Decompose risk to these factors

Non-factor: cannot be explained

TRACKING ERROR

Same as equities in methodology

Only factors used in the model are differentCurrencyYield curveSpread

NOTE: If portfolio has swaps and other non-cash instruments, use VAR<GO> instead

VAR ON PORT

Look at scenarios and how that will affect your position

Assessing how your return changes pending the different scenarios You expect Market value to go UP when interest rates go

DOWN (vice versa) Can it be that Market value go UP when interest rate go UP?

WHY? HINT: Think of what is contributing to my returns

Creating Custom Scenarios Can change the nature of the shock

Instantaneous At horizon date

Security list supported on BSA<GO> help pages

SCENARIOS ON BSA<GO>

Can do custom shifts like BSA, but also have preset scenarios (Scenario detail tab)

Can stress other factors too (FX rates, Macro etc)

Same reasons/rationale as BSA essentially

SCENARIOS (PORT)