Equity Portfolio MGT (Gist)

OVERVIEW OF EQUITY PORTFOLIO MANAGEMENT

by James Clunie, PhD, CFA and James Alan Finnegan, CAIA, RMA, CFA.

James Clunie, PhD, CFA, is at Jupiter Asset Management (United Kingdom). James Alan Finnegan, CAIA, RMA, CFA (USA).

LEARNING OUTCOMES

The candidate should be able to:

• describe the roles of equities in the overall portfolio

• describe how an equity manager’s investment universe can be segmented

• describe the types of income and costs associated with owning and managing an equity portfolio and their potential effects on portfolio performance

• describe the potential benefits of shareholder engagement and the role an equity manager might play in shareholder engagement

• describe rationales for equity investment across the passive–active spectrum

SUMMARY

This reading provides an overview of the roles equity investments may play in the client’s portfolio, how asset owners and investment managers segment the equity universe for purposes of defining an investment mandate, the costs and obligations of equity ownership (including shareholder engagement) and issues relevant to the decision to pursue active or passive management of an equity portfolio. Among the key points made in this reading are the following:

• Equities can provide several roles or benefits to an overall portfolio, including capital appreciation, dividend income, diversification with other asset classes, and a potential hedge against inflation.

• The inclusion of equities in a portfolio can be driven by a client’s goals or needs. Portfolio managers often consider the following investment objectives and constraints when deciding to include equities (or asset classes in general, for that matter) in a client’s portfolio: risk objective; return objective; liquidity requirement; time horizon; tax concerns; legal and regulatory factors; and unique circumstances.

• Investors often segment the equity universe according to (1) size and style; (2) geography; and (3) economic activity.

• Sources of equity portfolio income include dividends; securities lending fees and interest; dividend capture; covered calls; and cash-covered puts (or cash-secured puts).

• Sources of equity portfolio costs include management fees; performance fees; administration fees; marketing/distribution fees; and trading costs.

• Shareholder engagement is the process whereby companies engage with their shareholders. The process typically includes voting on corporate matters at general meetings and other forms of communication, such as quarterly investor calls or in-person meetings.

• Shareholder engagement can provide benefits for both shareholders and companies. From a company’s perspective, shareholder engagement can assist in developing a more effective corporate governance culture. In turn, shareholder engagement may lead to better company performance to the benefit of shareholders (as well as other stakeholders).

• Disadvantages of shareholder engagement include costs and time involved, pressure on a company to meet near-term share price or earnings targets, possible selective disclosure of information, and potential conflicts of interest.

• Activist investors (or activists) specialize in taking stakes in companies and creating change to generate a gain on the investment.

• The participation of shareholders in general meetings, also known as general assemblies, and the exercise of their voting rights are among the most influential tools available for shareholder engagement.

• The choice of using active management or passive management is not an “either/or” (binary) alternative but rather a decision involving a passive–active spectrum. Investors may decide to position their portfolios across the passive–active spectrum based on their confidence to outperform, client preference, suitable benchmarks, client-specific mandates, risks/costs of active management, and taxes.