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Strategic Risk Management: A Practical Guide to Portfolio Risk Management by David Iverson

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CHAPTER 12

Active Global Equities Structure

This chapter assumes that an investor has decided to be actively invested in global equities. The four key risks and issues that need to be addressed are listed next.

1. Active risk
  • What level of active risk is desirable?
  • How much value-add is consistent with the desired active risk?
2. Style risks
  • Should the portfolio have style biases—for example, a value bias or market capitalization bias?
3. Management structure
  • What manager structure should be employed; single manager or multiple-managers? With multiple-manager structures, how many managers are necessary and how should managers be combined?
  • Is manager selection best outsourced or conducted internally?
4. Market extensions
  • Within the global equities allocation, should small capitalization companies and emerging markets be included?

Although we deal specifically with an active global equities allocation, many of the issues also apply to a domestic equities allocation.

ACTIVE RISK AND RETURN

Active managers are paid to take views. These views may be on individual companies, countries, interest rates, or currencies. The aim in taking such views it to produce returns that exceed those generated by the market. As a result of taking views, the manager will have portfolio positions that differ from benchmark, or index, holdings. These different positions will result in the manager's performance differing from the benchmark. If the manager's views turn out to be correct, value ...

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