INVESTMENT STYLE

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INVESTMENT STYLE

• Portfolio Management
• Ali Nejadmalayeri

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Styles

• Stock Capitalization
• Small Cap
• Large Cap
• Growth vs. Value
• High growth
• Stable, high dividend (Value/Income)

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SIZE

• Large Cap MV gt 2B
• Small Cap MV lt 200M

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GROWTH

• Growth
• Sustainable growth retention rate ? ROE
• Dividend yield dividend per share/price
• Growth stocks
• High sustainable growth ( gt 12)
• low dividend yield (lt 1.60)
• Value stocks
• Low sustainable growth ( 7 - 9)
• High dividend yield ( gt 2.8)

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Price Measures of Growth

• P/E and Price-to-Book ratios
• High values correspond with growth
• Price-to-book is used by SP/BARRA to determine
  growth vs. value indexes
• Based on price action
• Growth, Stable, Utilities, and Energy
• Clusters
• hi intra-cluster correlation, low inter-cluster
  correlation

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Passive Portfolio Construction

• For a Passive Fund
• Important to have proportionately same weights on
  each cluster as the market does
• Clusters are growth, stable, cyclical, energy

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Active Rotation Strategy

• With relatively good forecasting ability, then it
  makes sense to shift funds among sectors to take
  advantage of favorable movements in one or more
  sectors

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Sector Rotation

• This chart is based on Sam Stovall's SP's Guide
  to Sector Rotation and states that different
  sectors are stronger at different points in the
  economic cycle.

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Forecasting Ability

• Ways to determine fundamental discriminating
  factors
• Methods of determining relative values of sectors
• A framework to position funds in an optimal mix
  increase return limit risk

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Forecasting Growth

• Macro Factors
• Direction of Interest Rates
• Shape of the Yield Curve
• Relative valuation levels (relative P/Es)
• Micro Factors
• Industry outlook
• Firm outlook
• Price movements

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Interest Rates Growth

• Imagine stocks are perpetual bonds, then value of
  them relates to discount rate
• As discount rate drops, stock prices rise
• The higher the growth is, the more benefit from
  this expansion the stock gets
• ?
• Growth stocks do better than value stocks
• when interest rates (T-Bond Yields) drop

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Yield Curve and Growth

• When earnings grow faster, value stocks benefit
  considerably
• Inverted yield curve (i.e., T-bond yield lower
  than T-bills) signals less robust economy, while
  Steep yield curve signals robust economy
• ?
• When yield curve inverted, growth stocks do well
• When yield curve is steep, value stocks do well

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Relative Valuations Growth

• P/E of growth stocks to that of market indicates
  at what time, approximately, growth stocks pay
  CASH!
• ?
• High relative valuation is followed by
  underperformance of growth stocks!

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Relative Valuations Growth
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Historical Value Growth
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Non-Growth Stocks

• Sources of profit (cost) matters most

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Industry Outlook

• Business Cycles and Industry Performance
• Refer to sector rotation
• Industry Life-Cycle and Growth
• Acerbating vs. Mature
• Industry Competition
• Rivalry among members
• New entrants
• New products
• Consumer bargaining power

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Firm Outlook

• Competitive Conditions and Strategies
• Cost leadership vs. Differentiation
• SWOT analysis
• Find the nightmare and plan for it!
• Peter Lynch
• Product not faddish, comparative advantage, cost
  cutting, stability and share buyback
• Warren Buffett
• Business, Management, Financial Market tenets

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Warren Buffett Way

• Business Tenet
• Simplicity, consistency, long-term prospect
• Management Tenet
• Rational, candid, not follow the crowd
• Financial Tenet
• ROE (not EPS), free cash flow, high profit in its
  industry, at least 1 MV for 1 retained
• Market Tenet
• Intrinsic value (FCF discounted at Gov bond)
• Is MV substantially less than intrinsic value?

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Price Movements

• The Dow Theory
• Major trends like tides in ocean
• Intermediate trends like waves
• Short-run movements like ripples
• Technical indicators
• Relative volume
• Moving averages
• Stochastic
• Relative strength

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