2019 Curriculum CFA Program Level III Portfolio Management and Wealth Planning
Introduction to Equity Portfolio ManagementView the full reading (PDF)
Available to members
Equities represent a sizable portion of the global investment universe and thus often represent a primary component of investors’ portfolios. Rationales for investing in equities include potential participation in the growth and earnings prospects of an economy’s corporate sector as well as an ownership interest in a range of business entities by size, economic activity, and geographical scope. Publicly traded equities are generally more liquid than other asset classes and thus may enable investors to more easily monitor price trends and purchase or sell securities with low transaction costs.
This reading provides an overview of equity portfolio management. Section 2 discusses the roles of equities in a portfolio. Section 3 discusses the equity investment universe, including several ways the universe can be segmented. Section 4 covers the income and costs in an equity portfolio. Section 5 discusses shareholder engagement between equity investors and the companies in which they invest. Section 6 discusses equity investment across the passive–active investment spectrum. A summary of key points completes the reading.
The candidate should be able to:
- describe the roles of equities in the overall portfolio;
- describe how an equity manager’s investment universe can be segmented;
- describe the types of income and costs associated with owning and managing an equity portfolio and their potential effects on portfolio performance;
- describe the potential benefits of shareholder engagement and the role an equity manager might play in shareholder engagement;
- describe rationales for equity investment across the passive–active spectrum.
This reading provides an overview of the roles equity investments may play in the client's portfolio, how asset owners and investment managers segment the equity universe for purposes of defining an investment mandate, the costs and obligations of equity ownership (including shareholder engagement) and issues relevant to the decision to pursue active or passive management of an equity portfolio. Among the key points made in this reading are the following:
- Equities can provide several roles or benefits to an overall portfolio, including capital appreciation, dividend income, diversification with other asset classes, and a potential hedge against inflation.
- The inclusion of equities in a portfolio can be driven by a client’s goals or needs. Portfolio managers often consider the following investment objectives and constraints when deciding to include equities (or asset classes in general, for that matter) in a client’s portfolio: risk objective; return objective; liquidity requirement; time horizon; tax concerns; legal and regulatory factors; and unique circumstances.
- Investors often segment the equity universe according to (1) size and style; (2) geography; and (3) economic activity.
- Sources of equity portfolio income include dividends; securities lending fees and interest; dividend capture; covered calls; and cash-covered puts (or cash-secured puts).
- Sources of equity portfolio costs include management fees; performance fees; administration fees; marketing/distribution fees; and trading costs.
- Shareholder engagement is the process whereby companies engage with their shareholders. The process typically includes voting on corporate matters at general meetings and other forms of communication, such as quarterly investor calls or in-person meetings.
- Shareholder engagement can provide benefits for both shareholders and companies. From a company’s perspective, shareholder engagement can assist in developing a more effective corporate governance culture. In turn, shareholder engagement may lead to better company performance to the benefit of shareholders (as well as other stakeholders).
- Disadvantages of shareholder engagement include costs and time involved, pressure on a company to meet near-term share price or earnings targets, possible selective disclosure of information, and potential conflicts of interest.
- Activist investors (or activists) specialize in taking stakes in companies and creating change to generate a gain on the investment.
- The participation of shareholders in general meetings, also known as general assemblies, and the exercise of their voting rights are among the most influential tools available for shareholder engagement.
- The choice of using active management or passive management is not an “either/or” (binary) alternative but rather a decision involving a passive–active spectrum. Investors may decide to position their portfolios across the passive–active spectrum based on their confidence to outperform, client preference, suitable benchmarks, client-specific mandates, risks/costs of active management, and taxes.