1. Portfolio Management and Evaluating Investments

2. Market Participants Portfolio Manager
(“PM”) makes decisions about which securities to buy and sell in his/her portfolio
BUY-SIDE
Buy-side analyst:
reports to PM, delivers trade ideas from research/analysis
Buy-side trader:
carries out PM’s
instructions
SELL-SIDE
Sell-side analyst: makes recommendations on stocks in his/her “space”
Salesperson: markets sell-side analyst’s research, recommendations to the buy side
Sell-side trader: executes trades for buy side

3. Evaluating Performance: Total Return
Total Return: the percentage change in the value of a security over a specific time horizon
Has two components:
Price appreciation (capital gain)
Dividends (distributions)
Individual Security total return analysis
TRA<GO>, COMP<GO>
Risk-Free Return
Excess Return

4. Portfolio return calculations
Market Value of individual security price * number of shares
Market value of portfolio sum of all individual security’s market values
Weight of individual security MV of security / MV of portfolio
Total return (current value – initial value) / initial value
Total return of portfolio weighted average (i.e. sum of each security’s weight * TR)
P&L = MV of day 2 – MV of day 1

5. Relative Returns
A PM uses a benchmark to determine if the return on their portfolio over a specific time period was relatively good or bad
Active strategy: Attempt to beat the benchmark in risk-adjusted return ➔ Alpha/Active Return
Passive strategy: Attempt to replicate the risk/return of the benchmark ➔ Tracking Error

6. risk measures
Beta: correlation of the returns of a stock with the returns of the overall market; BETA<GO>, HRA<GO>
The percent change in price of a stock given a 1% change in the price of the overall market
Beta < 1
Beta = 1
Beta > 1
Portfolio Beta: weighted average

7. Review of portfolio theory
What is a portfolio?
Who are the market players?
Why is diversification important?
What are the two approaches of asset allocation?
What are the two components of an individual security’s total return?
If I am a passive portfolio manager what is my goal? Would I track alpha or tracking error?

8. Creating A Portfolio
PRTU: You can manually enter in your positions and costs on PRTU.
Excel
Drag & Drop into PRTU
BBU<GO> upload

9. Important PRTU Settings
Field
Description
Position type
Defines if the portfolio uses fixed weights, drifting weights, or shares. This cannot be changed once selected.
Asset Class
Defines the asset class of the portfolio. Choices are: Equity, Fixed income, Balanced, or Fund of Funds
Base Currency
Defines what currency the portfolio is denominated in
Enable history
Allows history to be stored for the portfolio
Enable data acquisition
Allows historical analytics to be run on the portfolio (HFA, attribution, performance)
Futures margin type
Sets what type of margin will be associated with futures
Short margin type
Sets what type of margin will be associated with short positions

10. PRTU Columns Mkt Px: exchange price in local currency
Market Val: value of total position in portfolio currency
➔Position*Mkt Px*FX Rate
Cost Price: price the security was bought
➔ Can we write in the same security for different cost prices?
➔ Holdings based vs. Transaction based analysis

11. Fixed vs. Drifting vs. Shares
Fixed weight – Securities have fixed weights which remain the same over time. This implies that the portfolio is rebalanced each day
Drifting weight – Securities have weights which will change daily to reflect the price changes from the previous day; act like Shares portfolios
Shares - securities have actual number of shares or par amount of bonds you hold

12. Importing to PRTU Date you are Importing to (Pasting on this date)
Date you are importing from (copy from this date)

13. PRTU: Check points
CHECK POINT: ANY date we made ANY changes on the portfolio, ANY date we inputted / removed ANYTHING from our portfolio
01/01/10
03/01/11
TODAY

14. Uploading Using BBU<GO>
BBU<GO> is a way for clients to automatically upload their portfolio holdings without having to manually go into PRTU and change them.
Types of uploads:
FTP Upload – Portfolio holdings come directly from 3rd party (accounting service, holding company, etc.)
Basic – Portfolio holdings are stored on clients computer and are uploaded by the client.
***Note: basic uploads can be scheduled to run “automatically once per day”
BBU uploading
Clients can bring in their sheets to upload
Examples 3) additional info  sample
Long short
Historical
Classification
Multiple portfolios
SECURITY AND QUANTITY
How many fields are required for each example?
Highly recommended: portfolio name
Errors
Scheduled uploads
1 scheduled upload per day upload up to 50 portfolios
Need to be logged into the system
Two weeks of uploads, don’t want to see it? 5) select  delete
Only 2 years of history
FTP vs. BBU
Need to be logged into the terminal

15. Basic Vs. FTP Both are limited to 2 years of history when uploading
Client must be logged in to terminal for upload to take place
File will automatically be uploaded even if the client is not logged in
No additional software or configuration needed
Small additional cost for software needed for setup
Must be run from the same location/machine as Bloomberg terminal
Can be run on any machine
Both are limited to 2 years of history when uploading
Both can update up to 50 portfolios a day

16. BBU<GO> Steps to Upload
Prepare Upload File
The required columns will be different depending on the type of portfolio you want to upload. For all uploads Security ID and Quantity are needed.
Valid Security ID’s : ISIN, CUSIP, SEDOL, Equity Ticker, Any ID with Yellow market sector key
Quantity values: Shares or weights (short positions are not available for weights)
Margin and Cash:
Ticker for short margin = CASH SHORTS
Ticker for futures margin = CASH FUTURES
Cash ticker is just spot ticker. USD CURNCY

17. Steps to Upload
Format
The file should be a list of end of day holdings for the dates you made changes to the portfolio, even for positions that did not change on that day.
For example if you have 100 shares of IBM and 100 shares of GOOG on 1/1/2011 and then you sell 25 shares of IBM on 3/1/2011 the file should look like:
Port name
Security ID
Quantity
Date
Sample
IBM
100
01/01/2011
GOOG 75
03/01/2011

18. Steps to Upload Upload the file Map the file Map unknown identifiers
Save the sheet to your computer. Run BBU<GO>  choose the file using the file paths on the top half of the screen then 4) Upload
Map the file
Once the file is uploaded choose “CLICK TO MAP”
The idea is to tell which columns in the sheet represent the columns in PRTU.
Map unknown identifiers
Any errors that appear from the upload (unknown identifiers, wrong tickers) can be fixed
Set file and portfolio defaults

19. Review of creating portfolios
What are the two tools we can use to create a portfolio? How do they differ?
If I want to upload two portfolios with history, how many columns do I need in my excel sheet?
If I create a portfolio today and want to see my total return for the last year, how do I go about doing this?

20. Classifications
Classification: a way to place a security in a particular group according to their characteristics
Examples: GICS sectors, market cap, analyst
PCLS<GO>
You can also upload custom classification using BBU<GO> uploads

21. Margin Types
Cash Margin – a dollar amount . They type is mainly used when clients get their daily holdings from their back office and they simply upload this to our system.
Percentage – Allows users to assume that they are posting x% of the total market value of the short positions without having to calc the dollar amount.

22. Individual Functions vs. PORT<GO>
PORT<GO> Tabs
PRT<GO>
Intraday
PSD<GO>
Characteristics
HPA<GO>, BBAT<GO>  Holdings
Holdings
HFA<GO>
Performance
BBAT<GO>
Attribution
VAR<GO>
VaR
RSKF<GO>
Tracking Error
WRST<GO>
Scenarios

23. Analyzing Returns- Attribution
Attribution: BBAT<GO> or Attribution tab
Definition: Analysis of the impact of a portfolio manager’s decisions
Looks at both Allocation and Selection effects of active return
Helps to determine whether investing with a specific fund has been money well spent

24. Analyzing Risk - VaR Value at Risk
Technique used to analyze potential portfolio losses.
Portfolio is subjected to a series of scenarios in order to simulate returns over a given period.
Two primary methodologies in calculating VaR:
Monte Carlo
Historical

25. PRTU review Shares/Par amount, Fixed or Drifting weight
Review of the columns on PRTU
Being able to back date to generate history
Importing option on PRTU and “checkpoints”

26. Portfolio maintenance
PRTU<GO> does NOT automatically adjust for corporate actions
Two ways to fix this
Go to PRTU<GO> and manually adjust for your corporate actions
Use PMNT<GO> to adjust for your corporate actions
Sharing portfolios: PDIS<GO>

27. Fixed income portfolios
Fixed Income View on PORT<GO>
Released to all clients with no additional cost
Currently we do not support balanced portfolios, equity and fixed income on separate views  COMING SOON!

28. Creating and setting up fixed income portfolio
PRTU
Settings: need to ensure that the asset class of the portfolio is set to Fixed Income
Entry of position
Divide by 1000 on PRTU
Option on BBU divide by 1000
Entry of a unique ID: ex. VOD Corp, VOD 7 7/ Corp
Position types supported for Fixed Income
No shorts
Only Cash/Par amount (no weighted portfolios)

29. What do Fixed Income Portfolio managers look at?
Assess total return of portfolio
Absolute
Relative to benchmark
Assess risk of portfolio
Interest rate risk
Sensitivity to curve changes
Sensitivity to tenor changes
Credit risk
Sensitivity to credit spread changes

30. Lets start with one bond…
YAS<GO>
What is Duration (Macauley’s)?
What is modified duration?
What is DV01?
Is yield to maturity accurate? Is it realistic?
Credit spread
What is Spread to benchmark?
What is G spread, I spread?
Why do we have OAS (conceptually)?
This is standard when looking at portfolios (most logical)

31. Characteristics tab Basics of the overall portfolio
Yield, Average life, Coupon (ALM)
Want to see this compared to the benchmark? How do I want to define relative characteristics?
Credit (overall)
OAS
Composite credit rating
Interest rate sensitivity measures (overall)
DV01
Modified Duration
This is a current snapshot, Use “As of” date on top right to see historical

32. Historical performance
How has my portfolio done? What is the total return? How much have I outperformed / tracked the benchmark?
Total return for a FI portfolio: Where does it come from? How to break it down?
Can I see components of total return?

33. Fixed income attribution
Explaining the total return values
In equity we have Attribution, Selection, and Currency, in Fixed Income how do we break this down?
What can we quantify? Currency (for sure)
How do price and yield move?
Curve change (how has the change in curve affected my return)
Curve carry (How much has this contributed to my return): This is quantifiable as we can directly observe the change – what is remaining is “Excess Return”

34. Fixed Income Attribution – Excess Return
Excess Return broken down into
Allocation
Selection
But this depends on the Model – There are 4 choices
Brinson (Total Return)*
Excess Return (% Market Weighted)
Excess Return (Spread Duration Weighted) Spread Return (Spread Duration Weighted)
Like Equity

35. Fi attribution models Brinson (Total Return)
More for equities than Fixed Income
Only breaks down total return into allocation, currency, selection, [interaction] (Curve return is not there)
Excess Return (% Market Weighted)
Breaks it down in to Curve return and excess
Everything that is not explained by curve is Excess
The excess is then broken down into Allocation and Selection

36. Fi attribution models Excess Return Model (SD weighted)
Similar to the previous: Still have curve return, in fact the curve return will be identical
Difference is the way its weighted: using spread duration (sensitivity to credit)
More applicable for corporates rather than govies
Excess is broken down into: Currency, Allocation, selection
Interpretation of Allocation and Selection similar to previous: if a sector’s credit spread (relative to benchmark) widens (more risky), decision to LONG sector would generate negative return
Spread ↑  Price ↓  Negative return ➔ negative allocation effect
If credit spreads of portfolio constituents widens  Portfolio less sensitive to credit (relative to benchmark) in terms of spread duration ➔ positive selection effect in the case where credit spreads have widened.

37. FI Attribution models Spread Return (Spread duration weighted)
Again – curve Return is the same
Weighting are the same as previous
Only difference is that Attribution and Selection effects now broken down further
Allocation (spread) carry, Allocation (spread) change
Selection (spread) carry, Selection (spread) Change
Don’t worry about this, specifics not in exam, BUT if curious: IDOC <GO>

38. Key rates on PORT
Assessing sensitivity: See which sector/group/breakdown has the highest sensitivity so you know what to address first
Identify where your interest risk is highly concentrated
Identify versus benchmark where your interest risk lies
Passive PM does not want differences between benchmark (immunization)
Active PM will want to outperform the benchmark (therefore want negative)
Key rates – partial sensitivity
Relative to benchmark – Long or Short duration?
What is my expectation?
Why have I taken this bet?
How to configure which curve?
What is Key rate and what is DV01?
How to show DV01?

39. Key Rates on krr<GO>
Similar to PORT
Shift in interest rates is 1BP UPWARD shift
Cannot do it relative to a benchmark
Shows dollar/monetary sensitivity (can see this on PORT as well, cannot change on KRR)
Algorithmics (supports Swaps as well which PORT does not)

40. Tracking Error Similar to equity, factors are different
Spread
Yield Curve
Currency
Decompose risk to these factors
Non-factor: cannot be explained

41. VAR on port Same as equities in methodology
Only factors used in the model are different
Currency
Yield curve
Spread
NOTE: If portfolio has swaps and other non-cash instruments, use VAR<GO> instead

42. Scenarios on bsa<GO>
Look at scenarios and how that will affect your position
Assessing how your return changes pending the different scenarios
You expect Market value to go UP when interest rates go DOWN (vice versa)
Can it be that Market value go UP when interest rate go UP? WHY? HINT: Think of what is contributing to my returns
Creating Custom Scenarios
Can change the nature of the shock
Instantaneous
At horizon date
Security list supported on BSA<GO> help pages
Do you have a view on interest rates? Are they going down?

43. Scenarios (PORT)
Can do custom shifts like BSA, but also have preset scenarios (Scenario detail tab)
Can stress other factors too (FX rates, Macro etc)
Same reasons/rationale as BSA essentially