Description Assume you have recently been recruited to manage an equity fund. Your line manager has allocated you a fund that has a nominal sum of £100,000,000 and your task is to construct an equity portfolio consisting of no more than 10 stocks using a fundamental approach to stock selection. You are required to prepare a report to your manager for approval which provides the philosophy behind your selection process and explains why customers should invest in your fund. The report is aimed at household investors. General tips: • Although you are free to choose your fundamental-based approach to stock selection, given we have spent a long time discussing value strategy it might be wise to choose a value approach. • Remember the Buffett quote: “No matter how great the talent or efforts, some things take time. You can’t produce a baby in one month by getting nine women pregnant.” Don’t worry that you will not know how they perform over the holding period. Remember, the holding period for value strategies tend to be quite long – longer than the time you have to hand in this assignment. • Another useful Buffett quote: “It is not necessary to do extraordinary things to get extraordinary results.” In other words, don’t allow yourself to feel swamped by this assignment. The basics of value investing are straightforward. The structure of your report should be as follows: 1) The pitch to the customer (20 marks) This should be a fairly brief and concise account of the philosophy behind the selection process. It should be non-technical (no graphs or tables) and written in such a way that non-specialists can understand Tips for pitch to the customer: • Remember who your audience is. You should assume they have not received an education in finance. • You should communicate the philosophy underpinning the management of the fund in a way that is accessible to an intelligent non-specialist. For example, is it an active or passive fund? Have the stocks been chosen because of a risk-return profile or because you have a system for identifying mispriced stocks? • Your clients are going to want to know whether this is a high or low risk fund. 2) Annex 1: The intellectual foundations of the selection process (40 marks) In this section, you should provide a more robust justification for your approach. In doing so, you are expected to refer to the theoretical and empirical literature which underpins your approach taking care to reference relevant research in the area. Tips for Annex 1: • It is crucial that you are clear whether your approach is premised on a belief in the EMH or in exploiting deviations from the EMH. • Explain why you adopt your chosen approach citing literature as appropriate. 3) Annex 2: A description of the stock selection process (40 marks) In this section you should provide a clear written description with appropriate equations (use equation editor in Word) to describe your method. In addition, you should provide appropriate tables with descriptive statistics, including the risk of the portfolio. Tips for Annex 2: •Provide summary stats for any metrics that you use to guide your stock selection •Be careful to present information in a clear manner which is easy on the eye. This especially applies to tables and any equations you use. •In preparing tables, think about what information is useful to justify your stock selection. •Try to avoid providing pages and pages of tables and graphs. If you’re wise about how you construct tables, you can present a lot of information in each table. Word Limit: 2,000 Report and appendix will be submitted to Turnitin assignment dropbox for checking Report should: • Be written in a plain style, using subheadings and lists where appropriate. • Be properly referenced acknowledging all the sources you have used, and only the sources you have used, in the body of the text and at the end in a section headed ‘References’. • Include evidence of locating and reading sources beyond the suggested initial reading. Sources of Data The main sources of data are Bloomberg and Capital IQ. References The main references used during are listed below, but others sources can easily find in the library. Ackert and Deaves (2010), Behavioural Finance: psychology, decision making and markets, especially pp. 63-65, 219-221 and chapter 19 Bird and Casavecchia (2007) ‘Sentiment and financial health indicators for value and growth stocks: The European experience’, European Journal of Finance, 769-793 Fama & French (1998) ‘Value versus growth: the international evidence’, Journal of Finance, 1975-1999. La Porta, Lakonishok, Shleifer, Vishny (1997) ‘Good news for value stocks: further evidence on market efficiency’, Journal of Finance, 859-874. Lakonishok, Shleifer, Vishny (1994) ‘Contrarian investment, extrapolation and risk’, Journal of Finance, 1541-1578. Piotroski and So (2012) Identifying Expectation Errors in Value/Glamour strategies: A fundamental analysis, Review of Financial Studies Piotroski, J.D. (2000) Value investing: The use of historical financial statement information to separate winners from losers, Journal of Accounting Research, 38, 1-41 Siegel, J.J (2014) Stocks for the long run, McGrawHill, chapter 12
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