Portfolio Management and Evaluating Investments

PORTFOLIO MANAGEMENT AND EVALUATING INVESTMENTS

MARKET PARTICIPANTS Portfolio Manager ( PM ) makes decisions about which securities to buy and sell in his/her portfolio BUY-SIDE SELL-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 Buy-side analyst: reports to PM, delivers trade ideas from research/analysis Buy-side trader: carries out PM s instructions

EVALUATING PERFORMANCE: TOTAL RETURN 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

PORTFOLIO RETURN CALCULATIONS 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

RELATIVE RETURNS 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

RISK MEASURES 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

REVIEW OF PORTFOLIO THEORY 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?

CREATING A PORTFOLIO PRTU: You can manually enter in your positions and costs on PRTU. Excel Drag & Drop into PRTU BBU<GO> upload

IMPORTANT PRTU SETTINGS Field Field Description Description Position type Position type Defines if the portfolio uses fixed weights, drifting weights, or Defines if the portfolio uses fixed weights, drifting weights, or shares. This cannot be changed once selected. shares. This cannot be changed once selected. Defines the asset class of the portfolio. Choices are: Equity, Defines the asset class of the portfolio. Choices are: Equity, Fixed income, Balanced, or Fund of Funds Fixed income, Balanced, or Fund of Funds Defines what currency the portfolio is denominated in Defines what currency the portfolio is denominated in Asset Class Asset Class Base Currency Base Currency Enable history Enable history Allows history to be stored for the portfolio Allows history to be stored for the portfolio Enable data Enable data acquisition acquisition Futures margin Futures margin type type Short margin type Short margin type Sets what type of margin will be associated with short positions Sets what type of margin will be associated with short positions Allows historical analytics to be run on the portfolio (HFA, Allows historical analytics to be run on the portfolio (HFA, attribution, performance) attribution, performance) Sets what type of margin will be associated with futures Sets what type of margin will be associated with futures

PRTU COLUMNS Mkt Px: exchange price in local currency Mkt Px: exchange price in local currency Market Val: value of total position in portfolio Market Val: value of total position in portfolio currency currency Position*Mkt Px*FX Rate Position*Mkt Px*FX Rate Cost Price: price the security was bought Cost Price: price the security was bought Can we write in the same security for Can we write in the same security for different cost prices? different cost prices? Holdings based vs. Transaction based Holdings based vs. Transaction based analysis analysis

FIXED VS. DRIFTING VS. SHARES Fixed weight Fixed weight Securities have fixed weights which Securities have fixed weights which remain the same over time. This implies that the remain the same over time. This implies that the portfolio is rebalanced each day portfolio is rebalanced each day Drifting weight Drifting weight Securities have weights which will Securities have weights which will change daily to reflect the price changes from the change daily to reflect the price changes from the previous day; act like Shares portfolios previous day; act like Shares portfolios Shares Shares - - securities have actual number of shares or securities have actual number of shares or par amount of bonds you hold par amount of bonds you hold

IMPORTING TO PRTU Date you are Importing to (Pasting on this date) Date you are importing from (copy from this date)

PRTU: CHECK POINTS CHECK POINT: ANY date we made ANY changes on the portfolio, ANY date we inputted / removed ANYTHING from our portfolio 01/01/10 03/01/11 TODAY

UPLOADING USING BBU<GO> BBU<GO> is a way for clients to automatically BBU<GO> is a way for clients to automatically upload their portfolio holdings without having to upload their portfolio holdings without having to manually go into PRTU and change them. manually go into PRTU and change them. Types of uploads: Types of uploads: FTP Upload FTP Upload Portfolio holdings come directly from 3 Portfolio holdings come directly from 3rd service, holding company, etc.) service, holding company, etc.) Basic Basic Portfolio holdings are stored on clients computer and are Portfolio holdings are stored on clients computer and are uploaded by the client. uploaded by the client. ***Note: basic uploads can be scheduled to run automatically once ***Note: basic uploads can be scheduled to run automatically once per day per day rd party (accounting party (accounting

BASIC VS. FTP Basic Basic FTP FTP Client must be logged in to terminal Client must be logged in to terminal for upload to take place for upload to take place No additional software or No additional software or configuration needed configuration needed Must be run from the same Must be run from the same location/machine as Bloomberg location/machine as Bloomberg terminal terminal Both are limited to 2 years of history when uploading Both are limited to 2 years of history when uploading Both can update up to 50 portfolios a day Both can update up to 50 portfolios a day File will automatically be uploaded File will automatically be uploaded even if the client is not logged in even if the client is not logged in Small additional cost for software Small additional cost for software needed for setup needed for setup Can be run on any machine Can be run on any machine

BBU<GO> STEPS TO UPLOAD Prepare Upload File Prepare Upload File The required columns will be different depending on The required columns will be different depending on the type of portfolio you want to upload. For all the type of portfolio you want to upload. For all uploads Security ID and Quantity are needed. uploads Security ID and Quantity are needed. Valid Security ID s : ISIN, CUSIP, SEDOL, Equity Ticker, Valid Security ID s : ISIN, CUSIP, SEDOL, Equity Ticker, Any ID with Yellow market sector key Any ID with Yellow market sector key Quantity values: Shares or weights (short positions Quantity values: Shares or weights (short positions are not available for weights) are not available for weights) Margin and Cash: Margin and Cash: Ticker for short margin = CASH SHORTS Ticker for short margin = CASH SHORTS Ticker for futures margin = CASH FUTURES Ticker for futures margin = CASH FUTURES Cash ticker is just spot ticker. USD CURNCY Cash ticker is just spot ticker. USD CURNCY

STEPS TO UPLOAD Format Format The file should be a list of end of day holdings for the The file should be a list of end of day holdings for the dates you made changes to the portfolio, even for dates you made changes to the portfolio, even for positions that did not change on that day. positions that did not change on that day. For example if you have 100 shares of IBM and 100 shares of GOOG 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 on 1/1/2011 and then you sell 25 shares of IBM on 3/1/2011 the file should look like: should look like: Port name Port name Sample Sample Sample Sample Sample Sample Sample Sample Security ID Security ID IBM IBM GOOG GOOG IBM IBM GOOG GOOG Quantity Quantity 100 100 100 100 75 75 100 100 Date Date 01/01/2011 01/01/2011 01/01/2011 01/01/2011 03/01/2011 03/01/2011 03/01/2011 03/01/2011

STEPS TO UPLOAD Upload the file Upload the file Save the sheet to your computer. Run BBU<GO> Save the sheet to your computer. Run BBU<GO> choose the file using the file paths on the top half of the screen then 4) Upload using the file paths on the top half of the screen then 4) Upload Map the file Map the file Once the file is uploaded choose CLICK TO MAP Once the file is uploaded choose CLICK TO MAP The idea is to tell which columns in the sheet represent the columns in The idea is to tell which columns in the sheet represent the columns in PRTU. PRTU. Map unknown identifiers Map unknown identifiers Any errors that appear from the upload (unknown identifiers, wrong Any errors that appear from the upload (unknown identifiers, wrong tickers) can be fixed tickers) can be fixed Set file and portfolio defaults Set file and portfolio defaults choose the file

REVIEW OF CREATING PORTFOLIOS 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?

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

MARGIN TYPES 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.

INDIVIDUAL FUNCTIONS VS. PORT<GO> Individual Functions Individual Functions PRT<GO> PRT<GO> PSD<GO> PSD<GO> HPA<GO>, BBAT<GO> HPA<GO>, BBAT<GO> Holdings HFA<GO> HFA<GO> BBAT<GO> BBAT<GO> VAR<GO> VAR<GO> RSKF<GO> RSKF<GO> WRST<GO> WRST<GO> PORT<GO> Tabs PORT<GO> Tabs Intraday Intraday Characteristics Characteristics Holdings Holdings Performance Performance Attribution Attribution VaR VaR Tracking Error Tracking Error Scenarios Scenarios Holdings

ANALYZING RETURNS- ATTRIBUTION Attribution: BBAT<GO> or Attribution tab 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 RISK - VAR 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

PRTU REVIEW 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

PORTFOLIO MAINTENANCE PRTU<GO> does NOT automatically adjust for PRTU<GO> does NOT automatically adjust for corporate actions corporate actions Two ways to fix this Two ways to fix this Go to PRTU<GO> and manually adjust for your Go to PRTU<GO> and manually adjust for your corporate actions corporate actions Use PMNT<GO> to adjust for your corporate actions Use PMNT<GO> to adjust for your corporate actions Sharing portfolios: PDIS<GO> Sharing portfolios: PDIS<GO>

FIXED INCOME PORTFOLIOS Fixed Income View on PORT<GO> Fixed Income View on PORT<GO> Released to all clients with no additional cost Released to all clients with no additional cost Currently we do not support balanced portfolios, Currently we do not support balanced portfolios, equity and fixed income on separate views equity and fixed income on separate views COMING SOON! COMING SOON!

CREATING AND SETTING UP FIXED INCOME PORTFOLIO PRTU PRTU Settings: need to ensure that the asset class of the Settings: need to ensure that the asset class of the portfolio is set to Fixed Income portfolio is set to Fixed Income Entry of position Entry of position Divide by 1000 on PRTU Divide by 1000 on PRTU Option on BBU divide by 1000 Option on BBU divide by 1000 Entry of a unique ID: ex. VOD 4.625 Corp, VOD 7 7/8 2030 Corp Entry of a unique ID: ex. VOD 4.625 Corp, VOD 7 7/8 2030 Corp Position types supported for Fixed Income Position types supported for Fixed Income No shorts No shorts Only Cash/Par amount (no weighted portfolios) Only Cash/Par amount (no weighted portfolios)

WHAT DO FIXED INCOME PORTFOLIO MANAGERS LOOK AT? Assess total return of portfolio Assess total return of portfolio Absolute Absolute Relative to benchmark Relative to benchmark Assess risk of portfolio Assess risk of portfolio Interest rate risk Interest rate risk Sensitivity to curve changes Sensitivity to curve changes Sensitivity to tenor changes Sensitivity to tenor changes Credit risk Credit risk Sensitivity to credit spread changes Sensitivity to credit spread changes

LETS START WITH ONE BOND YAS<GO> YAS<GO> What is Duration (Macauley s)? What is Duration (Macauley s)? What is modified duration? What is modified duration? What is DV01? What is DV01? Is yield to maturity accurate? Is it realistic? Is yield to maturity accurate? Is it realistic? Credit spread Credit spread What is Spread to benchmark? What is Spread to benchmark? What is G spread, I spread? What is G spread, I spread? Why do we have OAS (conceptually)? Why do we have OAS (conceptually)? This is standard when looking at portfolios (most logical) This is standard when looking at portfolios (most logical)

CHARACTERISTICS TAB Basics of the overall portfolio Basics of the overall portfolio Yield, Average life, Coupon (ALM) Yield, Average life, Coupon (ALM) Want to see this compared to the benchmark? How do I want to Want to see this compared to the benchmark? How do I want to define relative characteristics? define relative characteristics? Credit (overall) Credit (overall) OAS OAS Composite credit rating Composite credit rating Interest rate sensitivity measures (overall) Interest rate sensitivity measures (overall) DV01 DV01 Modified Duration Modified Duration This is a current snapshot, Use As of date on top right to see This is a current snapshot, Use As of date on top right to see historical historical

HISTORICAL PERFORMANCE How has my portfolio done? What is the total How has my portfolio done? What is the total return? How much have I outperformed / return? How much have I outperformed / tracked the benchmark? tracked the benchmark? Total return for a FI portfolio: Where does it Total return for a FI portfolio: Where does it come from? How to break it down? come from? How to break it down? Can I see components of total return? Can I see components of total return?

FIXED INCOME ATTRIBUTION Explaining the total return values Explaining the total return values In equity we have Attribution, Selection, and In equity we have Attribution, Selection, and Currency, in Fixed Income how do we break this Currency, in Fixed Income how do we break this down? down? What can we quantify? Currency (for sure) What can we quantify? Currency (for sure) How do price and yield move? How do price and yield move? Curve change (how has the change in curve affected my return) Curve change (how has the change in curve affected my return) Curve carry (How much has this contributed to my return): This is Curve carry (How much has this contributed to my return): This is quantifiable as we can directly observe the change quantifiable as we can directly observe the change what is remaining is Excess Return remaining is Excess Return what is

FIXED INCOME ATTRIBUTION EXCESS RETURN Excess Return broken down into Excess Return broken down into Allocation Allocation Selection Selection Like Equity But this depends on the Model But this depends on the Model There are 4 choices choices Brinson (Total Return)* Brinson (Total Return)* Excess Return (% Market Weighted) Excess Return (% Market Weighted) Excess Return (Spread Duration Weighted) Excess Return (Spread Duration Weighted) Spread Return (Spread Duration Weighted) Spread Return (Spread Duration Weighted) There are 4

FI ATTRIBUTION MODELS Brinson (Total Return) Brinson (Total Return) More for equities than Fixed Income More for equities than Fixed Income Only breaks down total return into allocation, currency, Only breaks down total return into allocation, currency, selection, [interaction] (Curve return is not there) selection, [interaction] (Curve return is not there) Excess Return (% Market Weighted) Excess Return (% Market Weighted) Breaks it down in to Curve return and excess Breaks it down in to Curve return and excess Everything that is not explained by curve is Excess Everything that is not explained by curve is Excess The excess is then broken down into Allocation and The excess is then broken down into Allocation and Selection Selection

FI ATTRIBUTION MODELS Excess Return Model (SD weighted) Excess Return Model (SD weighted) Similar to the previous: Still have curve return, in fact the curve return Similar to the previous: Still have curve return, in fact the curve return will be identical will be identical Difference is the way its weighted: using spread duration (sensitivity to Difference is the way its weighted: using spread duration (sensitivity to credit) credit) More applicable for corporates rather than govies More applicable for corporates rather than govies Excess is broken down into: Currency, Allocation, selection Excess is broken down into: Currency, Allocation, selection Interpretation of Allocation and Selection similar to previous: if a sector s Interpretation of Allocation and Selection similar to previous: if a sector s credit spread (relative to benchmark) widens (more risky), decision to LONG credit spread (relative to benchmark) widens (more risky), decision to LONG sector would generate negative return sector would generate negative return Spread Spread Price Price Negative return Negative return negative allocation effect If credit spreads of portfolio constituents widens If credit spreads of portfolio constituents widens Portfolio less sensitive to credit (relative to benchmark) in terms of spread duration to credit (relative to benchmark) in terms of spread duration positive selection effect in the case where credit spreads have widened. selection effect in the case where credit spreads have widened. negative allocation effect Portfolio less sensitive positive

FI ATTRIBUTION MODELS Spread Return (Spread duration weighted) Spread Return (Spread duration weighted) Again Again curve Return is the same curve Return is the same Weighting are the same as previous Weighting are the same as previous Only difference is that Attribution and Selection effects Only difference is that Attribution and Selection effects now broken down further now broken down further Allocation (spread) carry, Allocation (spread) change Allocation (spread) carry, Allocation (spread) change Selection (spread) carry, Selection (spread) Change Selection (spread) carry, Selection (spread) Change Don t worry about this, specifics not in exam, BUT if Don t worry about this, specifics not in exam, BUT if curious: IDOC 2065864<GO> curious: IDOC 2065864<GO>

KEY RATES ON PORT Assessing sensitivity: See which sector/group/breakdown has the Assessing sensitivity: See which sector/group/breakdown has the highest sensitivity so you know what to address first highest sensitivity so you know what to address first Identify where your interest risk is highly concentrated Identify where your interest risk is highly concentrated Identify versus benchmark where your interest risk lies Identify versus benchmark where your interest risk lies Passive PM does not want differences between benchmark Passive PM does not want differences between benchmark (immunization) (immunization) Active PM will want to outperform the benchmark (therefore want Active PM will want to outperform the benchmark (therefore want negative) negative) Key rates Key rates partial sensitivity partial sensitivity Relative to benchmark Relative to benchmark Long or Short duration? What is my expectation? What is my expectation? Why have I taken this bet? Why have I taken this bet? How to configure which curve? How to configure which curve? What is Key rate and what is DV01? What is Key rate and what is DV01? How to show DV01? How to show DV01? Long or Short duration?

KEY RATES ON KRR<GO> Similar to PORT Similar to PORT Shift in interest rates is 1BP UPWARD shift Shift in interest rates is 1BP UPWARD shift Cannot do it relative to a benchmark Cannot do it relative to a benchmark Shows dollar/monetary sensitivity (can see this Shows dollar/monetary sensitivity (can see this on PORT as well, cannot change on KRR) on PORT as well, cannot change on KRR) Algorithmics (supports Swaps as well which Algorithmics (supports Swaps as well which PORT does not) PORT does not)

TRACKING ERROR Similar to equity, factors are different Similar to equity, factors are different Spread Spread Yield Curve Yield Curve Currency Currency Decompose risk to these factors Decompose risk to these factors Non Non- -factor: cannot be explained factor: cannot be explained

VAR ON PORT Same as equities in methodology Same as equities in methodology Only factors used in the model are different Only factors used in the model are different Currency Currency Yield curve Yield curve Spread Spread NOTE: If portfolio has swaps and other non NOTE: If portfolio has swaps and other non- -cash instruments, use VAR<GO> instead instruments, use VAR<GO> instead cash

SCENARIOS ON BSA<GO> Look at scenarios and how that will affect your position Look at scenarios and how that will affect your position Assessing how your return changes pending the Assessing how your return changes pending the different scenarios different scenarios You expect Market value to go UP when interest rates go DOWN (vice versa) 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 Can it be that Market value go UP when interest rate go UP? WHY? HINT: Think of what is contributing to my returns what is contributing to my returns Creating Custom Scenarios Creating Custom Scenarios Can change the nature of the shock Can change the nature of the shock Instantaneous Instantaneous At horizon date At horizon date Security list supported on BSA<GO> help pages Security list supported on BSA<GO> help pages

SCENARIOS (PORT) Can do custom shifts like BSA, but also have Can do custom shifts like BSA, but also have preset scenarios (Scenario detail tab) preset scenarios (Scenario detail tab) Can stress other factors too (FX rates, Macro Can stress other factors too (FX rates, Macro etc) etc) Same reasons/rationale as BSA essentially Same reasons/rationale as BSA essentially