Winning Investment Strategies Financial Products Javier Estrada - - PDF document

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Winning Investment Strategies Financial Products Javier Estrada - - PDF document

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Winning Investment Strategies Financial Products Javier Estrada Winter, 2014 1. Performance Absolute and relative 2. Management Active and passive 3. Products Absolute return funds, mutual funds, index funds, and ETFs Structured

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  • 1. Performance
  • Absolute and relative
  • 2. Management
  • Active and passive
  • 3. Products
  • Absolute return funds, mutual funds, index funds, and ETFs
  • Structured products

Winning Investment Strategies

Financial Products

Javier Estrada Winter, 2014

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Performance, Management, & Products Performance

Relative Absolute

Active

Management

Passive

Management

Active

Management

Mutual Funds Index Funds ETFs ARFs (Hedge Fs)

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Performance

Absolute Relative

There is no underlying benchmark Do not provide access to specific assets They are relatively more expensive There is an underlying benchmark Provide access to specific assets They are relatively less expensive

Consider a fund that lost 20% in 2008

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Absolute Performance

Relevant characteristics

There is no underlying benchmark (or it is 0) Do not provide access to specific assets They are relatively more expensive Absolute Return Funds Hedge Funds

Go

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Relative Performance

Relevant characteristics

There is an underlying benchmark Provide access to specific assets They are relatively less expensive And the most important thing …

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Relative Performance

A critical distinction

Active

Management

Passive

Management

Seeks to outperform the benchmark Higher costs (Relative to PM) Seeks to replicate/track the benchmark Lower costs (Relative to AM)

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Relative Performance

Active

Management

Passive

Management

?

One of the most critical investment decisions Having chosen a benchmark, should investors attempt to …

  • utperform

the benchmark? replicate/track the benchmark?

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Relative Performance

The challenges of ‘going active’

Ignoring costs, active management is a 0‐sum game (Considering costs, a negative‐sum game)

Go

can you really pick the winners? can you really stick with the winners?

Then, over your chosen holding period, ask …

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Mutual Funds

What are they? Relevant characteristics

Provide access to specific assets (Virtually ‘unlimited’ choice) Provide diversification at a low cost (Lower than for the individual investor) Provide the expectation of outperformance (But remember the evidence on active management) They are more expensive than index funds and ETFs

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Index Funds & ETFs

What are they? Similarities

Provide access to specific assets (Virtually ‘unlimited’ choice) Provide diversification at a low cost (Lower than for the individual investor) They are less expensive than mutual funds Provide replication of the benchmark

Go

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Index Funds & ETFs

Main differences: ETFs …

are priced continuously track many more benchmarks

  • ffer active strategies

do not allow transfers between products (?)

Go Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

ETFs

Bonds Stocks

Regions Countries Sectors Sizes Styles

Fundamental Indices

Short Levered (Ultra) Ultra‐short

Real estate (REITs)

Commodities Strategies

Go

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

ETFs

iShares

www.ishares.com

Lyxor

www.lyxor.com

PowerShares

www.powershares.com

State Street

www.statestreet.com

Vanguard

www.vanguard.com

WisdomTree

www.wisdomtree.com And many others

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Structured Products

Just two words …

STAY AWAY !!!

Go

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

In Short

  • Absolute and relative performance
  • Absolute performance implies active management
  • It can be obtained with absolute return funds (HFs)
  • Relative performance can be obtained with actively
  • r passively managed products
  • This is one of the most critical investment decisions

 It is not clear that active management adds value  It is clear that active management has higher costs

  • Relative performance and active management can

be obtained with mutual funds

  • Relative performance and passive management can

be obtained with index funds and ETFs

  • Structured products
  • Stay away!!!

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Appendix

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Absolute Return Funds

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Absolute Return Funds

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Absolute Return Funds

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Hedge Funds

Back

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Active Management

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Active Management

Remember underperformance!

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Active Management

Remember reversals!

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Active Management – Buffett

Back

“Most investors, both institutional

and individual, will find that the best way to own common stocks is through an index fund that charges minimal

  • fees. Those following this path are sure

to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”

(Letter to Shareholders, 1996)

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Passive Management

Back Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

ETFs

Back

Source: ETF Landscape, BlackRock, Aug/2013.

1993: Introduced by State Street (SPDR) Aug/2012: $2.1 trillion, almost 5,000 products

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

ETFs – Fundamental Indices

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

ETFs – To Stay Away From!

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

ETFs – To Stay Away From!

Back Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Structured Products

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Structured Products

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Structured Products

Back