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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)