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Multi-Asset Investing: A practical guide to modern portfolio management

Book Description

Planning, constructing and managing a multi-asset portfolio A multi-asset investment management approach provides diversification benefits, enhances risk-adjusted returns and enables a portfolio to be tailored to a wide range of investing objectives, whether these are generating returns or income, or matching liabilities. This book is divided into four parts that follow the four stages of the multi-asset investment management process: 1. Establishing objectives: Defining the return objectives, risk objectives and investment constraints of a portfolio. 2. Setting an investment strategy: Setting a plan to achieve investment objectives by thinking about long-term strategic asset allocation, combining asset classes and optimisation to derive the most efficient asset allocation. 3. Implementing a solution: Turning the investment strategy into a portfolio using short-term tactical asset allocation, investment selection and risk management. This section includes examples of investment strategies. 4. Reviewing: Evaluating the performance of a portfolio by examining results, risk, portfolio positioning and the economic environment. By dividing the multi-asset investment process into these well-defined stages, Yoram Lustig guides the reader through the various decisions that have to be made and actions that have to be taken. He builds carefully from defining investment objectives, formulating an investment strategy and the steps of selecting investments, leading to constructing and managing multi-asset portfolios. At each stage the considerations and strategies to be undertaken are detailed, and the description of the process is supported with relevant financial theory as well as practical, real-life examples. 'Multi-asset Investing' is an essential handbook for the modern approach to investment portfolio management.

Table of Contents

  1. Cover
  2. Publishing details
  3. About the Author
  4. Acknowledgements
  5. Preface
    1. The objectives of this book
    2. Book structure
  6. Introduction
    1. What is multi-asset investing?
    2. Multi-asset investor types
    3. Multi-asset investment management process
    4. Advantages of multi-asset investing
    5. Professional standards
  7. Part 1: Establishing objectives
    1. Introduction
      1. Return objectives and risk objectives
      2. Investment constraints
      3. Summary
    2. 1. Return objectives
      1. Total return versus income
      2. Desired versus required return
      3. Absolute versus relative return
      4. Inflation
      5. Fees and costs
      6. Taxes
      7. Return objectives in the presence of liabilities
      8. Return range
      9. Summary
    3. 2. Benchmarks
      1. Setting a benchmark
      2. Characteristics of a valid benchmark
      3. Hedge fund indices
      4. Peer group benchmarks
      5. Pricing time and relative returns
      6. Fundamental weighted indices
      7. Benchmark linked to investment objectives
      8. Summary
    4. 3. Risk objectives
      1. Risk tolerance
      2. Definition of risk
      3. Absolute versus relative risk
      4. Standard deviation
      5. Tracking error
      6. Fat tails
      7. Return distributions
      8. Downside risk measures
      9. Value-at-risk
      10. Stress testing
      11. Other downside risk measures
      12. Risk measurement and risk management
      13. Categories of risk
      14. Fixed income risk measures
      15. The Greeks
      16. Bad risk and good risk
      17. Summary
    5. 4. Rational or irrational markets
      1. Efficient market hypothesis
      2. Behavioural finance
      3. Prospect theory
      4. Regret and pride
      5. Company specific new versus economy-wide news
      6. Representativeness
      7. Reference points
      8. Familiarity, quality and availability
      9. Lack of self-control
      10. Overestimating the precision and importance of information
      11. Law of small numbers
      12. Overconfidence
      13. Optimism
      14. House money, snake bite, trying to break even and endowment effects
      15. Hindsight bias
      16. Poor probability calibration
      17. Investor myopia and high frequency performance monitoring
      18. Adaptive market hypothesis
      19. The role of the advisor
      20. The role of a portfolio manager
      21. Conclusion
      22. Summary
    6. 5. The relationship between reward and risk
      1. Capital Asset Pricing Model (CAPM)
      2. Multi-factor models
      3. Risk-adjusted performance measures
      4. Alpha
      5. Summary
    7. 6. Investment constraints
      1. The five categories of constraints
      2. Impact of investment constraints
      3. Summary
  8. Part 2: Setting an investment strategy
    1. Introduction
      1. Summary
    2. 7. Strategic Asset Allocation
      1. Summary
    3. 8. Historical performance of asset classes
      1. Do equity markets behave?
      2. Bubbles and market crashes
      3. The lesson from history
      4. Summary
    4. 9. Combining asset classes
      1. Diversifying across asset classes
      2. Summary
    5. 10. Diversification
      1. Modern Portfolio Theory
      2. Using MPT in practice
      3. MPT criticism
      4. Evaluating securities in portfolio context
      5. Global diversification and where it is needed the most
      6. The importance of asset allocation
      7. The Yale Model
      8. Risk-based asset allocation
      9. Asset allocation for multiple horizons
      10. Concentration and focus investing
      11. Summary
    6. 11. Capital Market Assumptions
      1. CMAs based on history
      2. The flaws of constant CMAs
      3. Past and future equity returns
      4. Sophisticated approach to establish CMAs
      5. Fixed income expected return
      6. Expected volatility and correlation
      7. Pay-out ratios, share repurchase and lag between GDP and earnings growth
      8. Breakeven inflation as a guide for expected inflation
      9. CMAs for other asset classes
      10. What CMAs ignore
      11. CMAs for SAA
      12. Summary
    7. 12. Optimisation
      1. The efficient frontier
      2. Optimisation in relative space
      3. Peer benchmarks
      4. Utility theory
      5. Alternative to the utility function
      6. Optimisation for a single asset class
      7. Investment horizon
      8. Sensitivity to assumptions
      9. Bootstrapping
      10. Resampled optimisation
      11. Optimisation based on historical performance
      12. Multi-period optimisation
      13. Dynamic CMAs and current market environment
      14. Black-Litterman
      15. Reverse optimisation
      16. Combining investor views – the Black-Litterman formula
      17. Optimisation
      18. Summary
  9. Part 3: Implementing a solution
    1. Introduction
      1. Summary
    2. 13. Tactical Asset Allocation
      1. The fundamental law of active management
      2. Filling the gap between SAA and TAA
      3. Budgeting the risk of TAA
      4. TAA overlay versus standalone TAA vehicle
      5. Sizing positions based on conviction and risk
      6. Medium-Term Asset Allocation (MTAA)
      7. Conclusion
      8. Summary
    3. 14. Forecasting
      1. Three methods of forecasting
      2. Forecasting markets over the short term
      3. Quantitative multi-factor model
      4. Summary
    4. 15. Economic cycle
      1. Four stages of the economic cycle
      2. Global economic cycle
      3. Economic scenarios versus a single view
      4. Thematic investing
      5. Price and value
      6. Expectations
      7. Financial stress
      8. Summary
    5. 16. Investment selection
      1. Summary
    6. 17. Investment selection process
      1. Quantitative analysis
      2. Qualitative analysis
      3. Factors to consider in investment selection
      4. Manager selection
      5. Due diligence process
      6. Ongoing process
      7. Style rotation and manager selection
      8. Investment selection
      9. Summary
    7. 18. Active versus passive investments
      1. Cross-sectional volatility
      2. Enhanced indexing
      3. Active/passive split in portfolio context
      4. The debate
      5. Summary
    8. 19. Investment vehicles
      1. Collective Investment Schemes (CIS)
      2. Passive investments
      3. Segregated accounts
      4. Conclusion
      5. Summary
    9. 20. Single-manager versus multi-manager
      1. Choosing between single and multi-manager
      2. Manager of Manger versus Fund of Funds
      3. Conclusion
      4. Summary
    10. 21. Single asset classes
      1. Conservative assets and risk assets
      2. Different portfolio roles for asset classes
      3. Summary
    11. 22. Investment Management Process
      1. The eight steps in the process
      2. Organising the multi-asset team
      3. Process, process, process
      4. Summary
    12. 23. Portfolio Construction
      1. Minimum investment
      2. Blending different investment styles
      3. Core satellite
      4. Relationship between risk and return
      5. Portfolio construction example
      6. Model portfolios
      7. Conclusion
      8. Summary
    13. 24. Implementation
      1. Portfolio implementation
      2. Cash management
      3. Rebalancing
      4. Liquidity
      5. Conclusion
      6. Summary
    14. 25. Derivatives
      1. Futures contracts
      2. Forward contracts
      3. Call and put options
      4. Swaps
      5. Credit Default Swaps (CDS)
      6. Exotic derivatives
      7. Summary
    15. 26. Currency
      1. Currency hedging
      2. Optimal currency hedging for long-term investors
      3. Forecasting currencies
      4. Currency hedging of foreign bonds
      5. Currency hedging of equities
      6. Currency hedging of illiquid investments
      7. Alpha currency overlay
      8. Carry trade
      9. Conclusion
      10. Summary
    16. 27. Risk budgeting
      1. Quantitative approach
      2. Practical approach
      3. The slope of the efficient frontier
      4. Conclusion
      5. Summary
    17. 28. Risk management
      1. Risk measurement
      2. Sensitivity analysis
      3. Scenario analysis
      4. Multi-factor risk models
      5. Backtesting and backtested analytics
      6. Risk decomposition
      7. Asset allocation versus risk allocation
      8. Adjusting VaR and standard deviation to fat tail risk
      9. Autocorrelation
      10. Risk management tools – mind your money
      11. Delta hedging
      12. Conclusion
      13. Summary
    18. 29. Investment strategies
      1. General principles
      2. Types of multi-asset portfolios
      3. Short-term investment strategies
      4. Long-term investment strategies
      5. Momentum versus contrarian
      6. Strategies to reduce fat tail risk
      7. Insured asset allocation
      8. Absolute return
      9. Volatility targeting portfolios
      10. Target-date funds
      11. Portable alpha
      12. Solutions for concentrated stock positions
      13. Bond ladder
      14. Dollar cost averaging
      15. Barbell
      16. Substitute asset classes
      17. High-yield portfolios
      18. Liability Driven Investments (LDI)
      19. Actively-managed passive investments
      20. Inflation
      21. Stagflation
      22. Deflation
      23. Investment strategies for rational and irrational markets
      24. Conclusion
      25. Summary
  10. Part 4: Reviewing
    1. 30. Portfolio review
      1. Summary
    2. 31. Performance attribution
      1. Return decomposition analysis (performance attribution)
      2. Performance contribution
      3. Multi-dimensional performance attribution
      4. Global, multi-asset, multi-currency, multi-manager
      5. Futures
      6. Geometric versus arithmetic relative returns
      7. Conclusion
      8. Summary
  11. Conclusions
  12. Bibliography