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Equity PortfolioManagement
Curso: Gestin de Portafolios y Planificacin de Inversiones
Profesora: Patricia Martinez, CFA / Alonso Segura, CFA, FRM
Setiembre de 2013
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Agenda
Role of equity investments
Basics of equity valuation
Approaches to equity investing:
Passive Investing
Active Investing
Semi-active Investing
Research
Appendix
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Role of Equity Investments
Diversification benefits (apdx) Equities can reduce the total risk of a diversified portfolio
Role as inflation hedge Equities returns can be positively correlated with inflation.
Companies earnings tend to increase with inflation (as long as they can passthe inflation to their customers: depends of the competitive position and the
industry)
Growth role (apdx) Greater return than fixed income in the long term
Current income role (dividends)
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Basics of equity valuation
Fundamental valuation
Total Return of equities:
Expected Return = (DIV1/ P0) + [ (P1P0)/ P0]
= Dividend Yield + Capital Gain
DIV1= Expected dividend; DIV0= Last dividend; P1= Expected Price; P0= Last price
Free Cash Flow (FCF) discount model
FV0 = Present Value of FCF discounted at r
FV = fundamental valuer = required return
g = expected growth of companys cash flows= ROE (1- payout ratio)
ROE= return on equity
Payout ratio= % of earnings paid as dividends
-FCF can be: FCFF ( free cash flow to the firm) and should be discounted at WACC; FCFE ( to equity) and
shoulf be discounted at COK
- FCFE = FCFFinterest on debt (1Tax rate) + net borrowing ..(issuesrepayments)
- FCFF = EBITDA ( 1- Tx) + Deprec (Tx)CAPEXWorking Capital Investment
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Basics of equity valuation
Fundamental valuation
Dividend discount model
FV0 = Dividend1/ (rg)
Used when: stable (history of dividend payments) andpredictable dividends
(dividend policy should be clear and related to earnings of the firm); most
likely for mature firms
Required return (opportunity cost of capital or discount rate)
r =Rf+ B(RmRf)
Rf = risk- free rate B = Beta Rm = market return RmRf = Market risk premium
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Basics of equity valuation
Multiples: The lower, the better ( more undervalued)
Price / Earnings
Is Alicorp undervalued or overvalued?
Compaa PasPER 12E PER 13E
Alicorp Per 25.56 20.87
Hypermarcas SA Brasil nd 17.79M Dias Branco Brasil 19.68 15.51
Industria Alimentarias Carozzi Chile nd nd
Grupo Bimbo SAB Mxico nd 25.84
Molinos Rios de la Plata Argentina nd nd
Nutresa Colombia 35.99 27.36
Grupo Herdez Mexico 22.22 18.18
Gruma Mexico 12.99 12.50
17.65 17.6422.22 18.18
Prom. PerProm. Latam
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Basics of equity valuation
Multiples: The lower, the better (more undervalued)
Price / Book value
Price / Sales
Compaa P/ BV
Banco Continental 4.0
Scotiabank Per 1.3
Credicorp 2.8Interbank 3.0
2.9
2.1
Prom. Per
Prom. Latam
Infraestructura p/ Sales
Graa y Montero Per 1.2
Conconcreto Colombia 2.1
Besalco Chile 1.3
Salfacorp Chile 0.4
Ica Mxico 0.5
Granite Construction EE.UU 0.5
Aecon Group Canad 0.2
1.2
0.5
Prom. Latam
Prom. Internacional
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Basics of equity valuation
Technicals / market sentiment
Flow of funds Panic / Euphoria indicators
Support / Resistance
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Approaches to equity investing
Passive management.: When? Markets are efficient; developed vs emerging; international vs. local
Indexing
ETFs.
Active management. Benchmark portfolio
Semi-active management Benchmark portfolio
Tracking risk / Information ratio (active return/tracking risk)
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Passive investing
Equity indices
Price weighted: Arithmetic average of prices; performance as if bought one
share of each ndex component (Dow Jones)
Bias: Higher priced stock are overrepresented
Value weighted (market capitalization weighted):Sum of market cap of
each stock; performance as if held all shares of the ndex (Topix, Japan)
Float weighted: same, but only shares of free-float shares (S&P 500,
Russells, MSCIs); mostly used; best index type
Bias: Large-cap (mature or overvalued) are overrepresented; less
diversified; maximum holding restrictions
Equal weighted: All stocks and their returns are given the same weight.
Bias: More small caps than large caps
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Passive investing
Passive investment vehicles
Index mutual funds
Exchange traded funds (ETFs)
Separeted or Pooled accounts (institutional investors): very low cost (few
investors)
Mutual Funds vs ETFs: ETFs usually more tax efficient: Redemption in-kind (vs Mutual Funds: in
cash) dont generate capital gains. ETFs lighter on shareholder accounting
ETFs usually cheaper
ETFs dont face cost of providing liquidity for redemptions
Mutual Funds may add alpha: Securities lending
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Active investing
Investment styles Growth: Risk: earning dont grow as expected
high earnings growth companies: above average expected growth
consistent growth
earnings momentum: record earnings or g; sell when go down
Industry: technology, healthcare, consumer products
Value: Must be a good reason why the stock is priced so cheaply: + risk? low PERs
high dividend yield
Contrarians: buy when prices go down (temporarily depressed)
Industries: utilities, financials, basic industries, energy
Market oriented With value or growth tilt
Growth at reasonable price
Style rotator
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Active investing
Investment styles
Large caps vs Mid/small caps
Small caps: Less covered by analysts; more likely underpriced; More risky
Large caps: even though more covered, manager can add value; less
risky
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Active investing
Identifying style:
Returns based style analysis
Holdings based style analysis
Multiples; div. yield
Expected EPS g
Earnings volatility
Industry
Style drift
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Active investing
Long-short investing
Long only: Invest in undervalued and avoid overvalued.
Net long or short: earn 2 alphas
Pairs arbitrage: buys 2 stocks of the same industry (one long and the
other short: market neutral)
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Research
Buy side vs Sell side research
Top down vs bottom up approaches (app.)
Investment thesis for stock selection Fundamentals
Valuation tools:
Fundamental valuation
Multiples
Technical valuation
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Appendix
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
EM IG RV Internacion. RV Internacion. RV Internacion. RV Internacion. RV Internacion. Tesoros 1-5 yr USHY MLII EMBIGHY EM IG EMBIGHY
13.418% 37.870% 16.280% 14.920% 22.020% 16.590% 8.827% 57.512% 15.409% 8.560% 24.800%
EMBIGHY EMBIGHY EMBIGHY EMBIGHY EMBIGHY Tesoros 1-5 yr US Barclays 1-5 RV Internacion. USHY MLII EMBIGHY EM IG
12.423% 36.771% 13.958% 12.499% 13.024% 8.158% -1.126% 42.610% 15.189% 6.580% 15.850%
US Barclays 1-5 USHY MLII USHY MLII EM IG USHY MLII US Barclays 1-5 EM IG EMBIGHY RV Internacion. USHY MLII USHY MLII
8.875% 28.149% 10.869% 6.371% 11.767% 6.092% -7.619% 40.724% 11.670% 4.382% 15.600%
Tesoros 1-5 yr EM IG EM IG USHY MLII EM IG EMBIGHY EMBIGHY EM IG EM IG Tesoros 1-5 yr RV Internacion.
7.627% 11.359% 9.004% 2.739% 5.695% 5.829% -19.032% 23.927% 9.667% 3.375% 14.060%
USHY MLII US Barclays 1-5 US Barclays 1-5 US Barclays 1-5 US Barclays 1-5 EM IG USHY MLII US Barclays 1-5 US Barclays 1-5 US Barclays 1-5 US Barclays 1-5
-1.895% 5.405% 2.445% 1.348% 4.689% 5.729% -26.390% 13.520% 5.437% 3.041% 5.500%
RV Internacion. Tesoros 1-5 yr Tesoros 1-5 yr Tesoros 1-5 yr Tesoros 1-5 yr USHY MLII RV Internacion. Tesoros 1-5 yr Tesoros 1-5 yr RV Internacion. Tesoros 1-5 yr
-16.230% 2.061% 1.340% 1.338% 3.754% 2.193% -46.070% 0.189% 3.734% -11.590% 0.900%
Equities: Diversification role
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Appendix
Equities: Growth component
USD 123.83
USD 152.85
USD 100.00
USD 958.79
-
100
200
300
400
500
600
700
800
900
1,000
1,100
1,200
1,300
DEP USD
FFMM RF
RV USD
Depositos a Plazo Renta Fija Renta Variable
BancosBonos / Papeles
ComercialesAcciones
1. Rentabilidad
Retorno Acumulado 23.91% 53.22% 851.43%
Retorno Promedio Anual 2.04% 4.08% 26.53%
2. Medidas de Riesgo
Desviacin estndar anual 0.32% 1.55% 30.96%
Tipo de inversin
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Appendix
Peruvian Equities InvestingPrincipales factoresAlto componente minero: Precios commodities
Riesgo Per: P.e. elecciones 2011
ADRs ( BVN, BAP, PCU), siguen bastante a la bolsa EEUU, y luego a los fundamentos del pas y
de la empresa; las ms lquidas: permiten trading
Resto de acciones: poco lquidas
Top Down:Enfoque top down: Se decide apetito de riesgo por view macro, luego sectores con mejores
perspectivas y dentro de stos, acciones con mayor upside.
% caja vs % invertido: es mayor cuanto ms riesgo hay (cada generalizada de bolsas de
emergentes, subida del riesgo pas, salida fuerte de extranjeros medida a travs de destruccin de
EPUs y flujos que canalizan las SABs)
Beta de la cartera de acciones: es menor cuanto mayor riesgo hay
Priorizan sectores defensivos ( elctricas, consumo) y metales preciosos vs cclicos (metales
base, pesca, agro)
Bottom Up: Seleccin de acciones: Mayor upside por precio fundamental, mltiplos, mnimos histricos, y temas tcnicos
(pe. cuando Volcan fue includa en un ndice de acciones que cotiza en el extranjero, subi el precio; cuando
SABs empiezan a recibir rdenes para EPUs, suben las acciones del EPU)
Minimizar nmero de acciones: Para minimizar costos de transaccin, se escogen las mejores acciones para
la estrategia ( aprox 15-18 vs ms de 30 en total en la bolsa local)