Portfolio Managament and Investment Analysis
Contents
Page Number
Course Details
3
Course Description and Objectives
3
Learning Outcomes
3
Planned Student Learning Experiences
4
Teaching Approach
4
Assessment
5
Feedback
8
Plagiarism Statement
9
Appeals
9
Consultation
9
Required Text(s)
9
Course Website
9
Advised Preparatory Work
10
Course Lecturer
10
Study Programme
11
Course Details
Course Code:
Title:
College:
School:
Course Co-ordinator:
Contact Hours:
Semester:
Lectures:
Tutorials:
P00235
Portfolio Management and Investment Analysis
Humanities and Social Science
Business School
James Clunie
30
Semester 2 Optional Course
Tuesday, 17:30 – 19:30
Friday, 12:30 – 13:30 OR 10.00-10.50 OR 11.10-12.00
This is a 20-credit course. As per the Scottish Credit Qualifications Framework (SCQF), this means
that it should entail 200 hours of student effort. For example:
Contact hours
Preparatory reading
Tutorial work
Assignment
Exam
10 x 2hr lectures
10 x 1hr tutorial
10 x 6hrs in advance of lecture
10 x 3hrs in advance of tutorial
20hrs reading,
20hrs writing up
2hrs attendance
38hrs revision
Total
20
10
60
30
20
20
2
38
200 student effort hours
Course Description and Objectives
This course aims to help students develop a broad knowledge and understanding of portfolio
management and investment analysis. Students build on the knowledge gained from the Financial
Markets and Investment Mathematics core courses in semester one (or Foundations of Finance in the
case of A&F students). Students will build on theory and learn the importance of understanding client
objectives in the portfolio management process. They will also explore practical issues (such as
taxation and trading costs) that arise in managing client portfolios. We will review a number of
investment and trading strategies that have been suggested as having the potential to create superior
returns. Students should gain an understanding of the distribution of returns of a number of trading
strategies, and also an understanding of risk in a portfolio context.
Learning Outcomes
Knowledge and Understanding:
On completion of the course, students should have developed an understanding of:
 Client objectives and the investment policy statement
 Utility functions
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Applying portfolio theory in practice
Asset allocation and international investment
Portfolio risk management
Risk-adjusted performance measurement
Taxation
Trading and portfolio execution
Value strategies
Momentum strategies
Hedge fund strategies
Intellectual Skills and Personal Development:
The course will develop analytical, numerical and problem-solving skills.
Subject Specific Skills:
On completion of the course, students should have:
 Gained an ability to understand, speak and write the language of investment analysis and
portfolio management.
 Become familiar with output from investment and risk management tools such as Style
Research, Thomson One Banker and Datastream.
Planned Student Learning Experiences
You will have to read the core textbooks for the class and most of the additional references that will be
provided. The weekly lectures will explore particular aspects of the reading and attempt to help you put
material in context, but are not a substitute for the reading. During lectures you will be asked to be
active, completing exercises and discussing issues with your fellow students. Questions will be assigned
prior to the weekly tutorials. These will be announced in the previous lecture and posted on WebCT.
You will be expected to do your own research and thinking prior to the tutorial and to come prepared to
discuss the issues with the class. The discussions are the learning process, so printed solutions may not
be provided to all questions. In any case, the nature of the material means that in most cases there is not a
single acceptable answer. The important thing is being able to argue a case and present evidence to back
your argument.
The group-work assignment provides a different type of learning experience; it is a project which
requires teamwork. The assignment simulates the approach in investment management and investment
banking where teamwork and individual skill sets need to be directed and managed to achieve
deadlines. As in the investment industry, teams are rewarded and judged based on co-ordinated team
outputs.
Teaching Approach
Weekly lectures, plus weekly tutorials.
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Assessment
Form of Assessment:
There is one group assignment which counts for 30% of the total mark and a final two hour exam
which counts for 70% of the total mark.
If required, specific reasonable adjustments will be made to enable disabled students to sit
examinations, including any written, practice or oral examination, or continuously assessed
coursework which counts towards the final assessment. The Business School encourages
disabled students to discuss, in confidence, any appropriate requirements or adjustments with
their Programme Director. In all cases, students should have these discussions as early as
possible so that your needs may be considered and responded to.
Dates of Assessment:
The deadline for the course assignment is 10.30am on Monday 15th March 2010.
The examination will take place during the Semester 2 exam period (with the exact date to be
determined by the University during the second Semester).
Assignment:
The development of a successful investment process
In recent years, there has been an increase in the variety of investment processes offered by investment
management firms to their clients. The growth of the hedge fund industry has seen growth in
convertible bond arbitrage, capital structure arbitrage, and long-short portfolios amongst others. Longonly portfolio management has been sub-divided into a variety of style, sector and geographical
approaches. To retain existing clients and to win new clients, investment firms must convince
consultants and clients that their processes are credible, robust and successful.
For the Portfolio Management and Investment Analysis assignment, each team of students is asked to
identify one successful investment management company or investment fund, and to undertake a study
of the investment process underlying the firm or fund. This is Part One of the assignment. Then, using
the knowledge and understanding gained from this exercise, students must then create an investment
process for a new fund or firm. This process should be based on exploiting existing academic research
into market inefficiencies or anomalies. This is Part Two of the assignment.
Part One
Students should choose one successful investment management company or investment fund already
in existence. For example, students might choose firms such as Capital Group (Los Angeles), Baillie
Gifford (Edinburgh), Brandes LLP (San Diego); or individual funds such as Fidelity Magellan
(Boston), Man Group’s AHL fund (London), or Aberdeen’s Asia Pacific funds (Singapore). Students
may wish to describe the following:
 The origins of the firm or fund
 The aims of the firm or fund
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What client-needs the firm or fund serves
The structure and ownership of the firm or fund
Any academic research that assisted with the creation and development of the investment
process
The investment process, including security analysis, portfolio construction and risk
management
Relevant benchmarks or indices
Historic performance and risk for the fund (or the firm’s various funds)
People issues at the firm or fund (e.g. management team, team stability, compensation and
rewards)
Factors that assisted in the growth of the firm or fund
How the fund (or firm’s funds) have been marketed.
Part Two
Having completed this task, students are then asked to identify one or more pieces of academic
research that examine possible market anomalies or inefficiencies. Markets for any asset class may be
considered. Inter-market anomalies may also be considered. Students are asked to design and create an
investment process that will exploit this research, with the aim of producing superior risk-adjusted
returns for future clients. In particular, students should:
 Summarise the academic research used, identifying potential weaknesses in the research.
 Examine the practicalities of an investment process based on exploiting the possible anomaly
or inefficiency identified in the research
 Describe the investment process in full.
Student should also describe:
 The aims of the firm or fund
 The structure and ownership of the firm or fund
 Relevant benchmarks or indices
 Performance targets and risk tolerances for the fund (or the firm’s various funds)
 People issues at the firm or fund (e.g. management team, staff retention, compensation and
rewards)
 How the fund (or firm’s funds) will be marketed.
Working in your allocated groups, you are required to write a report of no more than 5000 words. Part
One will be worth 30% of the total marks. Part Two will be worth 70% of the total marks. Thus,
greater marks will be awarded for the creative component of the assignment (Part Two) than for the
descriptive component of the assignment (Part One).
Useful start-up references:
1. Ellis, C.D. Capital: the Untold Story of the Capital Group’s Long-Term Investment Excellence,
John Wiley & Sons, 2004.
2. Swensen, Pioneering Portfolio Management, The Free Press, 2000, ch9.
3. Websites for the various investment management firms.
4. Clarke, R.G., de Silva, H. and Sapra, S., 2004. Towards More Information-Efficient Portfolios.
Journal of Portfolio Management, Fall 2004, 54-63.
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5. Jegadeesh, N., and Titman, S., 2001. Profitability of Momentum Strategies: an Evaluation of
Alternative Explanations. Journal of Finance, 56 (2), 699-720.
6. Visscher, S., & Filbeck, G.,2003. Dividend Yield Strategies in the Canadian Stock Market.
Financial Analysts Journal 59, 1, 99-106.
7. Wang, Fenghua and Xu, Yexiao, 2004. What Determines Chinese Stock Returns? Financial
Analysts Journal 60, 6, 65-77.
8. Krishnamurthy, A., 2002. The Bond/ Old Bond Spread. Journal of Financial Economics 66, 463506.
9. Brunnermeier, Markus K., and Pedersen, Lasse Heje, 2005. Predatory Trading. Journal of Finance
60, 4, 1825-1863.
10. Keim, Donald B., 1999. An Analysis of Mutual Fund Design: the Case of Investing in Small-Cap
Stocks. Journal of Financial Economics 51, 173-194.
Format of assignment appendices
The appendices may contain more detailed analyses. They may expand on the reasons behind the
analysis and should definitely show any calculations used in the report.
Please note that 5000 words is the maximum length of the body of the report; marks will not be
deducted if it is shorter but of high quality. You are not expected to devote much space to press
reports. Where appendices are used these should be provided in synopsis form only and the impact on
the analysis should be discussed, cross-referenced and explained.
Assessment and Purposes of the Exercise
Marking will be weighted 30:70 between part one and part two of the assignment. The assessor will
check the supporting data and reasoning in appendices only to the extent that they are
comprehensively referenced or referred to in the core report. The purposes of the exercise are:
1. To test understanding of the factors that might lead to success in investment management;
2. To test understanding of the link between academic research and evidence-based management;
3. To test ability to think creatively;
4. To test ability to deliver a concise executive summary.
Guidelines for formatting and handing in assessed work:
All completed assignments should be word processed, stapled, page numbered and clearly
labelled with your name, team members (where appropriate), title of the work, course title, name
of your tutor, required submission date; and one (1) paper copy must be returned to Course
Secretary (Room 130, WRB) by the hand-in deadline and an electronic version must be
submitted to TurnItIn via WebCT, also by the hand-in deadline (for the group assignment, once
the groups have been composed, they should decide who will be responsible for this). The
Assignment/Assessment submission form, which must accompany each piece of submitted
coursework, can be downloaded from WebCT.
Late submission of coursework:
The University has a standardised penalty for late submission of coursework. To conform with this
University policy, the School will apply a uniform penalty of a reduction of 5 marks for each 24 hours
beyond the coursework deadline (Saturday, Sunday and University Public Holiday not included)
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unless late submission has been requested in advance of the submission date, and approved in writing
by the Course Coordinator. For example:
 an essay with a mark of 65% which is less than 24 hours late will be given a final mark of 60%
 an essay with a mark of 65% which is between 24-48 hours late will be given a final mark of 55%
 an essay with a mark of 65% which is 48-72 hours late will be given a final mark of 50%
and so on…..
COURSEWORK DEADLINES ARE ABSOLUTE AND MUST BE STRICTLY ADHERED TO
OTHERWISE THE STANDARDISED PENALTY WILL BE APPLIED WITHOUT
EXCEPTION.
Extensions to coursework deadlines will normally only be granted in cases of illness or other
extenuating circumstances. An extension can only be granted by the Course Coordinator; requests
for an extension to the deadline must be agreed with the Course Coordinator prior to the coursework
deadline. If this proves impossible, students must attach a letter of explanation to the coursework,
signed and dated. If you are given an extension, you must ensure that the PG Office (WRB 130) has
written proof of this, e.g. in the form of an email from the Course Coordinator.
Failure to attempt or complete assessed coursework or an examination:
Where a student fails to attempt or fails to complete assessed coursework or an examination, the
Course Organiser will seek to establish from the student whether the failure is legitimate (i.e.
supported by appropriate documentary evidence) or not. A failure to attempt assessed coursework or
an examination without good reason will result in a zero mark being awarded for that element of
assessment. In the case of a legitimate failure to attempt or complete assessed coursework, the Course
Organiser may decide to offer an extended submission deadline (without marks deduction for late
submission). Where a student is able to produce evidence of legitimate reasons for failure to attempt or
complete an examination, and where it has not been possible to offer an extended submission deadline
for a legitimate failure to attempt or complete assessed coursework, the Course Organiser will refer the
case to the Special Circumstances Committee.
Groupwork Issues:
Where group work is involved, should there be any problems with the group dynamic, these
should be raised by two concurring members of the team with the course lecturer before the
Reading Week (Week 6).
In the event of personal circumstances preventing coursework being submitted on time, students
should contact the Programme Director.
Feedback
Team assignment feedback will be provided on a feedback form for each team member.
Assignment marks and feedback will be made available within one month of submission or
before students sit their degree examination.
The course organiser will also provide comments on any feedback issues before each lecture.
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Plagiarism Statement
This is covered in the Code of Practice for Taught Postgraduate Programmes.
Appeals
The process for students appealing against the assessment of grades is described in the Code of
Practice for Taught Postgraduate Programmes.
Consultation
Students are encouraged to raise any concerns of a subject specific nature with the course
lecturer; more general issues of concern should be directed to the Programme Director.
Required Text(s)
Maginn, Tuttle, Pinto, and McLeavey (2007) ‘Managing Investment Portfolios: A Dynamic Process’
published by CFA Institute and Wiley.
A number of journal articles and other publications will be made available in class or on WebCT.
Some of these are required reading while others are optional.
Science Direct
The Library subscribes to a variety of journals in print and electronic form. Highly regarded journals
in Finance include: The Journal of Finance; The Journal of Financial Economics; and the Review of
Financial Studies. Finance articles can also appear in economics journals such as: The American
Economic Review; Quarterly Journal of Economics; Journal of Political Economy.
The Financial Analysts Journal – published by CFA Institute – is also highly regarded and typically
publishes articles of practical relevance.
Course Website
The Course Website can be found on the WebCT system, which you can access through the
MyEd Portal (https://www.myed.ed.ac.uk/). On the Course Website you will be able to find a
copy of this booklet, course handouts, announcements and other facilities. It is important that
you regularly check the WebCT system in order to keep up to date with the course. You should
be automatically registered for all your courses; if you are not, please consult the Programme
Administrator to ensure that your records are in order. A User Guide and full details of how to
logon and use the system are available on the Website. N.B. course secretaries will use the
WebCT Mail function to send out important announcements to the whole class. It is vitally
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important that you check your WebCT mailbox regularly OR set it up so that it forwards
messages automatically to your regular e-mail account.
Advised Preparatory Work
Success in the Financial Markets and Investment Mathematics (or Foundations of Finance in the
case of A&F students) core courses during semester one will prepare students well for this
course. Students should read the Financial Times daily and The Economist weekly as part of
their work for this course (and indeed for the whole programme!).
Course Lecturer(s)
James Clunie
James is Investment Director – UK Equities for Scottish Widows Investment Partnership. He is manager
of a £1.5 billion mutual fund and of a UCITS III absolute return fund. He is also investment analyst for
the UK banking and utility sectors. James worked at the University of Edinburgh between 2003 and
2007 as a Senior Lecturer in Finance and as Director of the MSc Finance and Investment programme.
He conducts research into securities lending, short selling and risk. Prior to this, James worked for
Murray Johnstone International from 1989 to 2000, latterly as Head of Asset Allocation; and at
Aberdeen Asset Management as Head of Global Equities. James is qualified as a Chartered Financial
Analyst. He studied at the University of Edinburgh, graduating with a BSc (Hons) in Mathematics and
Statistics and completing his PhD on indirect short-selling constraints.
Tel: 0131 6552557
Email: james.clunie@swip.com
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Study Programme
TITLE
WEEK
1
2
3
4
5
TOPIC
Basic Investment Theory and its Applications
LECTURER
Funds: Structures, Strategies and Key Issues
The Asset Management Industry and Innovations
in Fund Structures
James Clunie
Portfolio Managers and Portfolio Management
Risk Management
James Clunie
Reading Week
6
7
James Clunie
James Clunie
James Clunie
No lectures
James Clunie
8
Investing for Taxable Clients
Industry Analysis
9
Trading
James Clunie
10
Socially Responsible Investing, Corporate
Engagement and Corporate Social Responsibility
Hedge Fund Strategies
James Clunie
11
James Clunie
James Clunie
Lecture Outlines and Readings
Week 1. Basic Investment Theory and its Applications
A review of investment theory and its implications for investment management. A review of financial
markets and asset classes. Perfect markets and markets in practice. The role of institutions and clients
in financial markets.
Maginn et al. chapters 1 and 2.
Week 2. Funds: Structures, Strategies and Key Issues
Types of fund. Regulatory issues. Key issues, including: permitted assets, liquidity, leverage,
concentration and limits to arbitrage.
Maginn et al. chapter 3.
Black, F., 1986. Noise. Journal of Finance, 41 (3), 529-543.
Brunnermeier, M.K. and Pedersen, L.H., 2005. Predatory Trading. Journal of Finance, 60 (4), 18251863.
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Coval, J.D. and Stafford, E., 2007. Asset Fire Sales (and Purchases) in Equity Markets. Journal of
Financial Economics, 86 (2), 479-512.
Shleifer, A. and Vishny, R., 1997. The Limits of Arbitrage. Journal of Finance, 52 (1), 35-55.
Week 3. The Asset Management Industry and Innovations in Fund Structures
Alpha versus beta. Fund management companies and the shape of the fund management
industry. Price to book value, market capitalisation and price momentum as factors that appear
to influence equity returns. Apparent return anomalies associated with earnings quality, asset
growth and IPOs. Credit risk and active bond management returns. A case study in innovation:
short-extension portfolios.
Chan, K., Chan, L.K.C., Narasimhan, J., & Lakonishok, J, 2006. Earnings Quality and Stock
Returns. The Journal of Business, Vol. 79, 1041-1082.
Keim, D.B., 1999. An Analysis of Mutual Fund Design: the Case of Investing in Small-Cap
Stocks. Journal of Financial Economics, Vol. 51, 173-194.
Leibowitz, M.L., 2005. Alpha Hunters and Beta Grazers. Financial Analysts Journal, Vol. 61, No. 5,
32-39.
Clarke, R.G., de Silva, H. and Sapra, S., 2004. Towards More Information-Efficient Portfolios.
Journal of Portfolio Management, Fall 2004, 54-63.
Week 4. Portfolio Managers and Portfolio Management
Licensing requirements; fund reporting and accounting. Top-down considerations in
investment, including asset allocation, currency and style.
Maginn et al. chapters 4, 5, 6, 7 and 11.
Kothari, S.P., and Shankan, J., 2004. Asset Allocation with Inflation-Protected Bonds. Financial
Analysts Journal, Vol. 60, No. 1, 54-70.
Week 5. Risk Management
The distribution of investment returns; gaining an understanding of risk; risk-adjusted
performance measurement. Risk assessment techniques, including value at risk and estimated
tail losses, Monte Carlo simulation and the use of stochastic models. Liquidity risk. Software
tools; attempting to control risk; integrating risk management into the investment process;
communicating risk.
Maginn et al. chapter 9.
Taleb, N.N., Fooled by Randomness, Texere 2001.
Holton, G.A., 2004. Defining Risk. Financial Analysts Journal, Vol. 60, No. 6, 19-25.
Damodaran, A., 2005. Value and Risk: Beyond Beta. Financial Analysts Journal, Vol. 61, No. 2, 3843.
Week 6: Reading Week
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Week 7. Investing for Taxable Clients
The impact of tax on portfolio returns. Designing tax efficient portfolios.
Maginn et al. pp847-855.
Barber, B.M., and Odean, T., 2004. Are Individual Investors Tax Savvy? Evidence from Retail
and Discount Brokerage Accounts. Journal of Public Economics, 88, Issues 1-2, 419-442.
Week 8. Industry Analysis
Analytical techniques, value chain analysis, profit pools.
Gadiesh, O., & Gilbert, J.L., 1998. Profit Pools: A Fresh Look at Strategy. Harvard Business
Review, May-June.
Week 9. Trading
Implementation shortfall; opportunity cost; execution cost; market impact. Measuring trading
costs. Approaches to trading. Algorithmic trading.
Maginn et al. chapter 10.
Keim, D.B., & Madhaven, A., 1998. The Costs of Institutional Equity Trades: an Overview.
Financial Analysts Journal, Vol. 54, No. 4: 50-69.
Week 10. Socially Responsible Investing, Corporate Engagement and Corporate Social
Responsibility
Client and fiduciary issues; empirical evidence of performance impact from socially
responsible investment; investment processes. Shareholder engagement with corporations.
Corporate governance.
Brav, A., Jiang, W., Partnoy, F & Thomas, R, 2008. Hedge Fund Activism, Corporate
Governance and Firm Performance. Journal of Finance, Vol. 63, No. 4, 1729-1775.
Week 11. Hedge Fund Strategies
Hedge funds: investment processes, risks, performance measurement, replicating strategies, fees,
marketing and client expectations. Funds of hedge funds.
Maginn et al. chapter 8.
Brunnermeier, M.K. and Nagel, S., 2004. Hedge Funds and the Technology Bubble. Journal of
Finance, Vol. 59, No. 5, 2013-2040.
Malkiel, B.G. and Saha, A., 2005. Hedge Funds: Risk and Return. Financial Analysts Journal, Vol. 61,
No. 6, 80-88.
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Mitchell, M., & Pulvino, T., 2001. Characteristics of Risk and Return in Risk Arbitrage. Journal of
Finance, Vol. 56, No. 6, 2135-2175.
Yu, F., 2006. How profitable is Capital Structure Arbitrage? Financial Analysts Journal, Vol. 62, No.
5, 47-62.
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