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Advances in Equity Portfolio Construction

Singapore, 20-21 November, 2012

Institute

Context of the Seminar> Asset management is the art and science of designing investment solutions that match investors’ needs. For more than 50 years, the industry has focused on delivering alpha through security selection as the main source of added-value, based on the assumption that market-cap -weighted indices were efficient portfolios. This sole focus, which did not fare well during recent times of market turbulence, has somewhat distracted the industry from another, more significant, source of added value: beta and risk management.

In the face of these recent crises, and given the intrinsic difficulty in generating alpha, the question of the value-added by both active and passive managers has been raised with heightened intensity. Academic and industry research has offered convincing empirical evidence that neither traditional active management based on security selection and market timing nor purely passive management based on market-cap weighted indices provide investors with efficient risk/reward tradeoffs. The combination of these empirical and theoretical developments has however left investors with a void. While an increasing number of advanced portfolio construction techniques have been proposed by academic research and applied in practice, a host of questions remain regarding how investors can construct portfolios that are both based on sound theoretical and statistical principles and able to address the numerous constraints of the practical portfolio management environment, such as implementation hurdles and peer-group comparisons.

Drawing on the expertise developed at the EDHEC-Risk Institute, the first part of the hands-on seminar equips participants with both the technical and conceptual tools that will allow them to better understand the limits and benefits of different portfolio construction approaches. The second part of the seminar discusses alternative equity index strategies.

Advances in Equity Portfolio Construction — Singapore, 20-21 November, 2012

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Key Learning Benefits

> Understand the limits of various portfolio construction tools; find out about the dangers of naively optimised portfolios and the benefits of robust optimisation.

> Review the state of the art in estimating risk parameters; discover how to achieve robustness of risk parameter estimates, and how to capture the dynamics of risk parameters.

> Examine the challenges in estimating expected return parameters and learn about new approaches for estimating expected returns using parametric portfolios, risk-based estimation, and estimates implied from option prices.

> Study the limits of traditional equity indices; find out about the minimum-variance benchmark, equally-weighted benchmark, fundamentals-based weighting schemes and other new forms of indices; discover the objectives and assumptions underlying alternative indices and learn about model selection and hidden risks entailed in the choice of a particular benchmark.

> Discover how the different steps in alternative equity index construction methodologies contribute to investment outcomes. Understand alternative construction approaches for defensive equity strategies and fundamentals-based equity strategies.

> Investigate relative risk concerns when deviating from market-cap weights and explore approaches to manage model risk and peer-group risk.

Who Should Attend

This programme is intended for investment management professionals who advise on or participate in the design and implementation of portfolio construction models, and for sell-side practitioners who develop new portfolio construction solutions for investors. The seminar will also be insightful for investment professionals who analyse or decide on the adoption of appropriate model portfolios or benchmarks for equity investments or who are interested in customising their strategic equity benchmark.

Past editions of EDHEC-Risk Institute seminars have attracted a large cross-section of buy- and sell-side institutions from twenty-seven countries worldwide. Global giants, national champions, and small boutiques were represented by their senior officers and investment specialists. Participants included practitioners with the following functions and from the following types of institutions:

Functions• Chief executive officers/Managing directors• Chief investment officers/Directors of investments• Heads of asset allocation/investment strategy/ALM• Heads of investment solutions/structuring/financial services• Equity Portfolio managers• Risk managers• Senior analysts and investment officers• Senior investment advisers/consultants• Senior research officers

Institutions• Asset management companies• Consultancies• Insurance and reinsurance companies• Investment banks• Non-financial companies• Pension funds, endowments and foundations• Private banks• Regulatory authorities• Research firms• Sovereign investment vehicles

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Raman Uppal joined EDHEC Business School as Professor of Finance in 2011. He was formerly Professor of Finance at the London Business School, having previously worked at the

University of British Columbia. He has held visiting positions at K.U. Leuven, MIT, and LSE, and has served as co-director of the Financial Economics Programme of the Centre for Economic Policy Research (CEPR). His research focuses on optimal portfolio selection and asset allocation in dynamic environments, valuation of securities in capital markets, risk management, and exchange rates. He has published widely in leading journals such as Journal of Economic Theory, Journal of Finance, Journal of Financial and Quantitative Analysis, Management Science and Review of Financial Studies, and has received numerous grants and awards for his research work. He is also the recipient of several teaching prizes at the University of Pennsylvania, University of British Columbia, and London Business School.

Ram

an U

ppal

Felix

Gol

tz

Seminar Instructors

Felix Goltz is Head of Applied Research at EDHEC-Risk Institute. He oversees the institute’s industry surveys and applied research projects on portfolio construction, performance

measurement and reporting, and passive investing. He also leads the research and development activities related to the indices developed by the Institute. His research focuses on asset allocation and on indexing and passive investments across traditional and alternative investments. His research has been published in leading practitioner journals such as the Financial Analyst’s Journal, Journal of Derivatives, Journal of Fixed Income, and Journal of Investment Management. Felix has contributed to various reference texts on portfolio management and is regularly invited to deliver presentations at leading industry conferences. He holds degrees in economics and finance, as well as a PhD in finance.


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Portfolio Construction: Foundations and Recent Research Advances8:30 - 9:00 am Registration

9:00 – 11:00 am Modern Portfolio Theory Ignoring Estimation Error> Overview of theory of optimal portfolio choice and asset allocation, including the work of Nobel-prize winners Markowitz, Tobin, Sharpe, Samuelson, and Merton. > Designing the appropriate framework to evaluate the performance of static portfolios. > Portfolio optimisation with respect to a benchmark: when is this appropriate and how should one choose an appropriate benchmark. > How to choose optimal portfolios in the presence of position constraints and turnover constraints. > Optimal portfolio choice in the presence of transaction costs and taxes. > Investing over the lifecycle; under what conditions should investors change their portfolios over the lifecycle.

11:00 – 11:30 am Morning Break

11:30 - 12:30 am Post-Modern Portfolio Theory Incorporating Estimation Error > Motivation for models dealing with estimation error.> Understanding the naïve equally weighted (1/N) portfolio.> The Bayesian approach to dealing with estimation error.> The Black and Litterman approach for portfolio selection. > Robust portfolio choice; Keynes meets Markowtiz. > Portfolios with moment restrictions. > Portfolio resampling.

12:30 – 1:30 pm Lunch Break

1:30 - 3:00 pm Evidence: Effect of Estimation Error on Out-of-Sample Portfolio Performance> Understanding the metrics for evaluating the performance of portfolio. > Empirical methodology for evaluating out-of-sample performance. > Performance analysis for actively managed portfolios.> Assessing the dangers of “naively optimised” portfolios. > Understanding why it is difficult to estimate expected returns with the same precision as covariances, and volatilities.> Comparing the performance of the equally weighted portfolio with optimal portfolios and with other benchmarks such as the value-weighted and price-weighted portfolios; identifying the sources of performance differences across these different portfolios.

3:00 – 3:30 pm Afternoon Break

3:30 – 4:00 pm Solution: Imposing Better Constraints > Understanding shortsale constrained portfolios. > The Ledoit and Wolf approach to dealing with error in estimating the covariance matrix.> A more general approach: Constraining the norm of the portfolio weights.

4:00 – 4:30 pm Solution: Selecting Stocks Using Prices of Options> Using information in option prices to improve forecasts of volatilities and correlations.> Using information in option prices to improve forecasts of expected returns.> Out-of-sample performance of portfolios with option-implied information.

4:30 – 5:00 pm Solution: Select Stocks Using Firm Characteristics and Prices of Other Stocks> Parametric portfolio choice; the logic underlying parametric portfolios and how to implement them in practice; limitations of parametric portfolios.> Vector-autoregressive models of expected returns and portfolio choice; the logic underlying these models; how to estimate these models and implement them in practice; limitations of these models.> Other empirical properties of expected returns that can be exploited to improve portfolio performance.

5:00 – 5:30 pm Overall Summary

> Theory: Summary of classical portfolio optimisation that ignores estimation error, and more recent theory that incorporates estimation error.> Evidence: Summary of out-of-sample performance of optimal portfolio models and different benchmark indexes.> Solution: Summary of different methods to improve out-of-sample performance of portfolios using more general constraints, more general sources of information, and more general characteristics of assets.

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Understanding Alternative Equity Index Strategies8:30 - 9:00 am Registration

9:00 – 9:30 am Limits of Traditional Passive Management

> The distinction between indices andbenchmarks: distinguishing between representing asegment of the market and representing investors’expected compensation for risk exposures.

> Limits of cap-weighted benchmarks from thetheoretical perspective: the case for cap weighting;what the CAPM says and does not say about capweighted benchmarks; from the CAPM world tothe real world.

> Limits of cap-weighted from the empiricalperspective: cap-weighted benchmarks as poorlydiversified portfolios; cap-weighted benchmarksas inefficient risk/return trade-off portfolios; capweighted benchmarks versus naïve benchmarks.

9:30-10:30 Alternatives to Standard Cap-Weighted Benchmarks

> Benefits and limits of alternatives to capweighted benchmarks; introduction to the various methodologies and their conditions for optimality.

> Detailed review of existing weighing schemes:fundamentally-weighted benchmarks; equallyweighted benchmarks; minimum-variancebenchmarks; equal-risk contribution (a.k.a. riskparity) benchmarks; maximum diversificationbenchmarks; diversity-weighted benchmarks.

> Conditions of optimality and robustness ofalternative weighting schemes.

10:30 – 11:00 am Morning Break

11:00 to 12:30 Designing Alternative Equity Index Strategies in Practice

> Creating optimization-based strategies:Improving Minimum Volatility Portfolios; Deconcentration, Decorrelation, and Sharpe Ratio objectives.

> Creating fundamentals-based index portfolios: backtesting, variable selection and timing of rebalancing dates.

> Addressing liquidity and turnover constraints;maintaining the implementation benefits ofcapitalisation-weighting in optimised portfolios;setting flexible weight constraints.

> Assessing the portfolio composition and risk-factor exposures of alternative weighting schemes.

12:30 – 1:30 pm Lunch Break

1:30 to 3:00 pm Disentangling Constituent Selection from Weighting Scheme Decisions

> Deconstructing alternative equity index strategies: identifying how the different index construction steps contribute to the choice of risk.

> Combining stock selection and optimaldiversification.

> Low Volatility Strategies versus MinimumVolatility Portfolio Construction.

> Combining fundamental stock selection with optimized weighting schemes.

> Correcting the value biases or small cap biases of alternative weighting schemes.

3:00 – 3:30 pm Afternoon Break

3:30-4:30 pm Risk Management for Alternative Weighting Schemes

> Differences between the manager-selectionprocesses and the index-selection processesand implications of index-selection risk fromthe CIO’s perspective; the role of cap-weightedindices as peer group and average-performancerepresentatives.

> Tracking-error risk and relative-performance riskof alternative beta strategies; identifying periodsof extreme underperformance; distinguishingbetween average tracking-error risk and extremerelative risk.

> Diversifying among equity strategies: Understanding how alternative weighting schemes perform under different market conditions and how various strategies can be combined.

> Spending relative risk budgets: explicit trackingerror and factor constraints; using thecore-satellite approach.

4:30 to 5:30 pm Hidden Risks of EquityStrategies

> Analysing the hidden economic risks of alternative weighting schemes: sovereign risk,inflation risk, economic growth risk.

> Spillover of sovereign risk to equity portfolios. How can we assess sovereign risk exposure ofstocks?

> Achieving target risk exposures within optimallydiversified portfolios; controlling implicit risk.

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Advances in Equity Portfolio Construction — Singapore, 20-21 November, 2012 Advances in Equity Portfolio Construction — Singapore, 20-21 November, 2012

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Since 2001, EDHEC has been pursuing an ambitious policy in terms of international research. This policy, known as “Research for Business”, aims to make EDHEC an academic institution of reference for the industry in a small number of areas in which the school has reached critical mass in terms of expertise and research results.

Among these areas, asset and risk management have occupied privileged positions, leading to the creation in 2001 of a major research facility: EDHEC-Risk Institute. This institute now boasts a team of 85 permanent professors, engineers and support staff, as well as 18 research associates from the financial industry and 6 affiliate professors.

EDHEC-Risk Institute is located at campuses in Singapore, which was established at the invitation of the Monetary Authority of Singapore (MAS), the City of London in the United Kingdom, and Nice, France. In addition, it has a research team located in the United States.

The philosophy of the institute is to validate its work by publication in prestigious academic journals, but also to make it available to professionals and to participate in industry debate through its Position Papers, published studies and conferences. Each year, EDHEC-Risk organises two conferences for professionals in order to present the results of its research, one in London (EDHEC Risk Days— Europe) and one in Singapore (EDHEC Risk Days—Asia), attracting more than 2,000 professional delegates.

To ensure the distribution of its research to the industry, EDHEC-Risk also provides professionals with access to its website, www.edhec-risk.com, which is entirely devoted to international risk and asset management research. The website, which has more than 50,000 regular visitors, is aimed at professionals who wish to benefit from EDHEC-Risk’s analysis and expertise in the area of applied portfolio management research. Its monthly newsletter is distributed to more than 1,250,000 readers.

EDHEC-Risk Institute also has highly significant executive education activities for professionals. In partnership with CFA Institute, it has developed advanced seminars based on its research which are available to CFA charterholders and have been taking place since 2008 in New York, Singapore and London. EDHEC-Risk Institute has an original PhD in Finance programme which, in addition to its highly selective residential track for young talents worldwide, has an executive track for high level professionals who already have masters degrees from prestigious universities and significant industry experience. These professionals are looking to go beyond their usual activities in order to develop research on the concepts that are relevant to their occupation. Complementing the core faculty, this unique PhD in Finance programme has highly prestigious affiliate faculty from universities such as Princeton, Wharton, Oxford, Chicago and CalTech.

CFA Institute is the global association for investment professionals. It administers the Chartered Financial Analyst® (CFA®) and CIPM® curriculum and exam programmes worldwide, publishes research, conducts professional development programmes, and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. As part of its commitment to professional excellence, it has developed the Advances in Asset Allocation Seminar jointly with EDHEC-Risk Institute specifically for senior-level investment professionals. CFA Institute has more than 111,000 members, of which 12,000 reside in the European Union. Globally there are more than 101,000 CFA charterholders, as well as 135 affiliated professional CFA societies in 58 countries and territories. The CFA Institute global operations centre is in Charlottesville, Virginia, USA, with offices also in London, Hong Kong, Brussels, and New York. More information: www.cfainstitute.org

Institute

Institute

CFA Institute560 Ray C. Hunt DriveCharlottesville, VA 22903USATel: +1 434-951-5499 Web: www.cfainstitute.org

EDHEC-Risk Institute393 promenade des AnglaisBP 3116 - 06202 Nice Cedex 3 - FranceTel: +33 (0)4 93 18 78 24

EDHEC Risk Institute—Europe10 Fleet Place, LudgateLondon EC4M 7RBUnited KingdomTel: +44 208 150 6740

EDHEC Risk Institute—Asia1 George Street#07-02Singapore 049145Tel: +65 6438 0030

ScheduleA typical programme day lasts from 8:30 am to 6:00 pm and is usually divided into lectures and application cases. The two class sessions in each half-day period are separated by 30 minute refreshment breaks. Lunch is included.

VenueEDHEC-Risk Institute—Asia1 George Street#07-02Singapore 049145Tel.: +65 6438 0030www.edhec-risk.com

Registration and Fee InformationFeesStandard Rate: SGD 3,570 exc. GST.CFA Institute Member Rate: 2,678 exc. GST.GST at a rate of 7% applies to all sales to Singapore entities and to all sales to individual (i.e. non-corporate) customers. Fees include instruction, documentation and lunch. Other meals and accommodation are not included.

FundingThe Monetary Authority of Singapore (MAS) administers grants to financial sector organisations that sponsor eligible participants to training programmes that meet qualifying criteria. For enquiries, please contact the MAS at +65 6229 9396 or via email at [email protected].

Billing and paymentThe fee is billed following registration and must be settled before the seminar begins. Payment can be made by wire transfer or cheque drawn on a Singapore bank.

Transfer or cancellation Transfer of registration to a colleague, upon written notice, is allowed and free of charge. Transfer of registration fees to another EDHEC-Risk Institute programme must be requested in writing and is subject to the following charges: 45 to 30 days’ notice: 15% of the tuition fee; 29 to 11 days’ notice: 30% of the tuition fee; 10 days’ notice or less: 50% of the tuition fee.

Cancellations of confirmed seats must be received in writing and are subject to the following charges: 45 to 30 days’ notice: 25% of the tuition fee; 29 to 11 days’ notice: 50% of the tuition fee; 10 days’ notice or less: 100% of the tuition fee.

Continuing Education Credits

As a participant in the CFA Institute Approved-Provider Programme, EDHEC-Risk has determined that this programme qualifies for 13 credit hours. If you are a CFA Institute member, continuing education credit for your participation in this programme will be automatically recorded in your CE Diary.

Further Information and Registration

For further information, contact Mélanie Ruiz at: [email protected] or on: +33 4 93 18 78 19

To register,visit: https://www.regonline.sg/equityportfolioconstruction

or send the completed registration form:by email to: [email protected] fax to: +33 (0)4 93 18 45 54

EDHEC Risk Institute–Asia - Singapore Council for Private Education registration No.201025256Z from 22-06-2011 to 21-06-2017

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