Portfolio Management Principles Flashcards

What is 'portfolio construction' in the context of equity management?

Answer: The process of selecting and weighting individual securities to create a portfolio that meets specified objectives and risk parameters

Portfolio construction involves translating investment ideas and views into a portfolio of securities with appropriate weights, balancing expected returns, risk (including active risk/tracking error), transaction costs, liquidity, and client-specific constraints.

What is 'ESG' and why is it increasingly important in investment management?

Answer: Environmental, Social, and Governance — non-financial factors used to evaluate the sustainability and ethical impact of investments, increasingly material to financial performance

ESG (Environmental, Social, Governance) factors assess a company's sustainability practices, social impact, and governance quality. They are increasingly integrated into investment analysis as evidence grows that ESG risks (climate change, poor governance) can be financially material.

What is 'active share' as a measure of active management?

Answer: A measure of how much a portfolio's holdings differ from its benchmark, with 0% meaning identical and 100% meaning no overlap

Active share measures the proportion of a portfolio that differs from its benchmark. A high active share (e.g., 80-90%) indicates significant differentiation from the index, suggesting meaningful active management. Low active share ('closet indexers') charge active fees for near-index returns.

What does 'total expense ratio' (TER) or 'ongoing charges figure' (OCF) measure?

Answer: The total annual costs of running a fund, expressed as a percentage of assets, impacting investor net returns

The TER/OCF represents the total annual costs of managing and administering an investment fund, including the management fee, administration, custody, and other operating costs, expressed as a percentage of average assets. It directly reduces investor returns.

What is 'liquidity management' in a fund management context?

Answer: Ensuring a fund holds sufficient liquid assets to meet investor redemptions while maintaining an investment strategy

Liquidity management involves maintaining an appropriate balance of liquid assets so the fund can meet investor redemption requests without being forced to sell illiquid assets at unfavourable prices. Poor liquidity management can lead to fund suspension (gating).

What is 'factor exposure' in multi-factor investing?

Answer: The degree to which a portfolio is influenced by specific systematic return drivers (value, momentum, quality, size, low volatility)

Factor exposure measures how much of a portfolio's return and risk is driven by specific well-documented factors such as value, momentum, quality, size, and low volatility. Understanding factor exposures helps explain performance and manage unintended risk concentrations.