Investment Management Styles

1
Investment Management Styles

• Wholesaler Name
• Date

MacKay Shields LLC is an affiliate of New York
Life Investment Management LLC.
MAMC10/03
2
Introduction to Investment Manager Styles

• Managers can be categorized by their
• Investment philosophy
• Style
• Approach to managing money

3
General Investment Strategies

• Top-Down
• Assesses the overall economic environment and
  financial trendsgetting the big picture
• Specific sectors and industries within those
  asset classes are then selected
• Specific securities within the chosen industry
  groups are identified

Economic Overview
Sector and Industry Selection
Security Selection in Industries
4
General Investment Strategies

• Bottom-Up
• Concentrates on identifying securities that are
  attractive on their own merits using classical
  financial analysis
• Finds value in the analysis of securities and
  creates opportunity for profit

Identify Attractive Securities Using Financial
Analysis
Security Analysis Creates Opportunity
5
Equity Management

• Equity Management (stocks and cash)
  styles may be broadly grouped
• Value
• Growth
• Value/Growth Hybrid
• GARP (Growth at a Reasonable Price) or Relative
  Value
• Contrarian
• Sector Rotator
• Active Asset Allocator/Market Timer
• Income/Yield
• Core/Indexing

6
Value
Analyze and identify companies that may be
significantly undervalued.
Value Managers
Companies with strong management, balance sheets,
and fundamentals with a dividend yield in excess
of the markets yield.
Focus On
Usually fairly conservative with below-market
volatility.
Relative Risk
Three of the most common measures of value are
the price/earnings (P/E) ratio, price/book value
ratio, and cash flow per share.
Screens Applied
7
Value
The most undervalued stocks become buy candidates
for purchase in client portfolios.
Buy Candidates
When a stock is no longer considered undervalued,
it may be sold and replaced with another
relatively undervalued stock. Sales proceeds may
be held as cash if no attractive stock is
available.
Sell Candidates
8
Growth
Analyze and identify companies whose sales,
earnings, etc. are growing or are expected to
grow more rapidly than other companies in the
same industry or the economy as a whole.
Growth Managers
Companies with earnings acceleration, earnings
momentum, earnings surprise, or those companies
recently outperforming the market.
Focus On
Usually exhibit greater-than-market-volatility.
Relative Risk
9
Growth

• Demonstrated Growth invest in older, larger,
  proven companies with significant market share
  (i.e. Disney, Wal-Mart Stores, Coca-Cola, etc.).
• Expected Growth invest in younger, smaller
  companies that are still proving themselves.

Growth Manager Styles
10
Value/Growth Blend
Analyze and identify companies that have elements
of both value and growth.
Value/Growth Managers
Companies offering growth at a reasonable price
(GARP). Like value managers, companies will have
lower P/E and lower Price/Book ratios. Like
growth managers, the focus is on increasing
earnings.
Focus On
Portfolios usually dont have wide fluctuations
experienced by traditional value or growth styles.
Relative Risk
11
Value/Growth Blend

• Lower P/E and Price to Book Ratios
• Lower Dividend Yields
• Higher Returns on Equity
• Higher Earnings Growth Rates
• Lower Volatility

Key Factors in Identifying Value/Growth Companies
When a stocks P/E ratio exceeds its earnings
growth rate.
Sell Candidates
12
Contrarian
Analyze and identify out-of-favor companies,
i.e. stocks that most other investors are
avoiding or selling.
Contrarian Managers
Companies selling at a large discount to their
perceived true value based on the companys
fundamentals and using traditional value measures
such as P/E ratio.
Focus On

• Lower-than-market volatility due to
• Price fluctuations are usually not wide
• Trading at lower end of price range
• Volatility is usually on the upside

Relative Risk
13
Contrarian

• Extreme value style.
• Investing in fundamentally out-of-favor companies
  whose revenues and earnings are weak
• May include companies that have filed for Chapter
  11 bankruptcy.
• Or companies that have experienced a single
  event, such as an accident, which caused the
  stock price to decline.

Several Approaches Labeled Contrarian
14
Sector Rotation
Identify and overweight sectors of the stock
market that are expected to perform well and
underweight those that are expected to lag the
market.
Sector Rotation Managers
In a strong economic environment, capital goods,
basic industry, technology and other
economically-sensitive sectors. In a weak
economy, utilities, pharmaceuticals, foods and
other recession-resistant sectors are stressed.
Focus On
15
Active Asset Allocators
Believe allocating assets optimally among the
broad asset categories (stocks, bonds, cash) is a
much more important determinant of portfolio
performance than individual security selection.
Active Asset Allocator Managers

• May use a top-down approach. Can use a sector
  rotation strategy to over-and underweight
  industries.
• Change the asset mix of their portfolios by 5-10
  incremental shifts.
• Periodically holds sizable cash positions.
• Use value, growth and/or other styles to select
  individual stocks.
• May be viewed as market timers in extreme cases.

Active Asset Allocators
16
Active Asset Allocators

• Fixed Asset Allocators
• Equity Asset Allocators

Main Groups of Asset Allocators

• Tactical Asset Allocatoradjusts asset allocation
  based on technical or fundamental factors.
• Strategic Asset Allocatorbases allocations on
  forecasts of long-term expected returns and
  likeliness of meeting clients long-term goals.
• Dynamic Asset Allocatoradjusts allocations to
  control the maximum loss while offering the
  prospect of participating in upside return.

Types of Active Asset Allocators
17
Income/Yield
Takes a bottom-up approach, concentrating on
selecting stocks which tend to have high dividend
yields, below-average P/E ratios, and whose
fundamentals allow for capital appreciation.
Income/Yield Managers
Companies that tend to be more mature and
less-growth oriented.
Focus On
The least volatile of all equity management
styles.
Relative Risk
18
Core
Sometimes referred to as closet indexers,
construct portfolios with sector weightings that
match a chosen market index, i.e. SP 500.
Core Managers
Staying fully invested at all times while
maintaining the same weightings as the index they
are compared to, but attempt to beat the market
by strong security selection.
Focus On
Slightly more volatile than the chosen market
index.
Relative Risk
19
Indexing
Replicate the performance of a market index by
purchasing all or a representative sampling of
the stocks in that index.
Index Managers
Buying a portfolio that replicates a chosen index
in all characteristics with the goal of matching
the performance of the index.
Focus On
Essentially the same as the replicated index.
Relative Risk
20
Fixed Income Management

• Fixed Income Management
  (bonds and cash) include
• Interest Rate Anticipation
• Market Timing
• Laddering

21
Fixed Income Management

• Types of bond analysis used in
  conjunction with other fixed
  income styles include
• Sector Analysis
• Coupon Analysis
• Credit Analysis

22
Interest Rate Anticipation
Forecast interest rates and alter a bond
portfolio to take advantage of that forecast.
Interest Rate Anticipation Managers
Movement of interest ratesshortening maturities
if rates are going up, and lengthening maturities
if rates are going down.
Focus On
Riskier than a passively managed portfolio due to
trickiness of forecasting interest rate movement.
Relative Risk
23
Market Timing
May be viewed as extreme Interest Rate
Anticipationmoving between bonds and cash based
on anticipated interest rate movement.
Market Timing Managers
Staying fully invested in long-term bonds if
rates are expected to decline, and entirely in
cash if rates are likely to rise. .
Focus On
Riskiest fixed income style since the market
timer risks either being fully invested when
rates rise, or being 100 in cash when rates
decline.
Relative Risk
24
Laddering
Stagger the portfolios bond maturities
throughout the entire maturity range.
Laddering Managers
Constructing a portfolio that invests
approximately equal amounts in every maturity
within a given range.
Focus On
Relatively low risk since the investor expects
that bonds will be held to maturity, so interim
volatility is not extremely important.
Relative Risk
25
Questions?