1. Mutual Fund Management of Stock Funds

2. Overview Mutual fund managers use two primary types of research:​
Fundamental analysis which evaluates a company’s business prospects.​
Assessment of valuation is a key component of fundamental analysis.​
Quantitative analysis which looks for patterns affecting many stocks at once.​
Managers of index funds try to minimize tracking error through either replication or sampling.​
Active managers seek to outperform or generate positive alpha.​
They often use an investment style to structure decision-making.​
Portfolio construction, risk management and performance analysis are important components of the portfolio management process.​

3. Stock Investing
A share of stock represents a proportional ownership or equity stake in a company. ​
A company sells its stock to the public for the first time in an initial public offering.​
Investors then buy and sell shares in the secondary market.​
Companies may pay out a portion of their earnings to their stockholders in the form of dividends.​
Investors may earn a return from stocks in two ways:​
From dividends.​
From an increase in the price of the stock or capital appreciation.

4. Stock Research
Investors use three types of research to select stocks:​
Fundamental analysis assesses an individual company’s business prospects. ​
Quantitative analysis looks at patterns in the performance of large numbers of stocks.​
Technical analysis seeks to predict stock performance by examining price trends.​
Academic researchers have raised serious questions about the value of technical research.​
Fund managers generally don’t have dedicated technical analysts on their staffs.

5. Technical Analysis
The academic study of historical chart patterns and trends of publicly traded stocks. Technical analysis of stocks and trends employs the use of tools such as bar or candlestick charts and trading volumes to determine the future behavior of a stock.

6. Fundamental Research Sources of information:​
Information from the company itself. ​
10-K = annual report​
10-Q = quarterly report​
Proxy statement for annual shareholder vote​
Prospectus when selling stock to the public​
Reg FD requires that this information be released to all investors at the same time.​
Insights from industry sources.​
Research from other analysts.​
Includes consensus earnings estimates.

7. Assessing Valuation
There are two approaches to assessing stock price valuation:​
Relative valuation, often through ratio analysis. ​
Price/earnings  or P/E ratio ​
Price/cash flow ratio​
Price/book ratio​
Price/sales ratio​
Dividend yield​
Valuations are assessed relative to a stock’s history, other stocks in the same industry and the market as a whole.​
Dividend discount models  or other discounted cash flow approaches.

8. Assessing Valuation Price/cash flow ratio​
Price/earnings  or P/E ratio ​
A valuation ratio of a company's current share price compared to its per-share earnings. Calculated as: Market Value per Share / Earnings per Share​
For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be ($43/$1.95).​
A high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E.​
Price/cash flow ratio​
A measure of the market's expectations of a firm's future financial health (effects of depreciation and other non-cash factors are removed). Provides an indication of relative value. Calculated by: Share Price / Cash Flow per Share​
Can allow investors to assess foreign companies from the same industry (ex. mining industry) with a bit more ease.

9. Assessing Valuation Price/book ratio​ Price/sales ratio​
Compares a stock's market value to its book value, also known as the "price- equity ratio".  Calculated as:​
Stock Price / Total Assets – Intangible Assets and Liabilities​
Lower P/B may mean that the stock is undervalued and gives a sense of what you're paying for what would be left if the company went bankrupt.​
Price/sales ratio​
A ratio for valuing a stock relative to its own past performance, other companies or the market itself. Calculate as:​
Share price / Revenue per Share​
Can vary substantially across industries; therefore, it's useful mainly when comparing similar companies. Because it doesn't take any expenses or debt into account, the ratio is somewhat limited.

10. Assessing Valuation Dividend yield​
A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Calculated as Annual dividends per share / Price per Share​
A way to measure cash flow you are getting for each dollar invested in an equity position.  Investors who require a minimum stream of cash flow from their investment portfolio can secure this cash flow by investing in stocks paying relatively high, stable dividend yields.​
For example: If two companies both pay annual dividends of $1 per share, but ABC company's stock is trading at $20 while XYZ company's stock is trading at $40, then ABC has a dividend yield of 5% while XYZ is only yielding 2.5%. Thus, assuming all other factors are equivalent, an investor looking for income would likely prefer ABC's stock.

11. Assessing Valuation Dividend discount model​
A procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value.​
This procedure has many variations, and it doesn't work for companies that don't pay out dividends.  The principal behind the model is the net present value of the cash flows.​
Discounted cash flow model​
A valuation method used to estimate the attractiveness of an investment opportunity.
Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them to arrive at a present value, which is used to evaluate the potential for investment.​
Despite the complexity of the calculations involved, the purpose of DCF analysis is just to estimate the money you'd receive from an investment and to adjust for the time value of money. 

12. Quantitative Research Process

13. Passive Portfolio Management
Seeks to reduce an index fund’s tracking error versus the index.​
Uses 1 of 2 techniques:​
Replication = buying all stocks in the index in the same proportions as the index​
Sampling = buying a subset of the index with a risk profile similar to that of the index as a whole​
Changes in index composition force index funds to buy and sell securities.

14. Active Portfolio Management
Active managers seek to outperform the index or generate positive alpha.

15. Active Portfolio Management
They often use an investment style to structure their decision making.  Popular styles include:​
Growth = buying stocks expected to have higher-than-average earnings and revenue growth​
Value = buying stocks that are attractively valued​
Growth at a reasonable price = buying stocks with good growth prospects trading at a reasonable price​
Styles can be categorized as:​
Top-down = begins with prediction of big picture trends​
Bottom-up = begins with selection of individual stocks​

16. Active Portfolio Management
Top-down: 
A method of analysis that involves looking at the "big picture" first, and then analyzing the details of smaller components.
By first analyzing the overall picture, such as a macroeconomic trend, an investor can start narrowing potential companies to analyze.
A trader that uses technical analysis may use top-down analysis as part of their trading system.​
For example:
A Fund Manager:
Macroeconomic Factors / Political Factors
Pick an Industry or set of industries
Pick style
Which stocks?
Fundamentals
Relative Valuation
Trends in firms (profitability, revenue etc.)

17. Active Portfolio Management
Bottom-up: 
An investment approach that de-emphasizes the significance of economic and market cycles.
This approach focuses on the analysis of individual stocks.
In bottom-up investing, therefore, the investor focuses his or her attention on a specific company rather than on the industry in which that company operates or on the economy as a whole. ​
For example:
The bottom-up approach assumes that individual companies can do well even in an industry that is not performing very well.
This is the opposite of "top-down investing". Making sound decisions based on a bottom- up investing strategy entails a thorough review of the company in question. This includes becoming familiar with the company's products and services, its financial stability and its research reports.

18. Portfolio Construction
Factors to consider in portfolio construction:​
Investment objectives, style and restrictions, as set forth in the prospectus.​
Benchmark index.​
Weightings in stocks are evaluated relative to their weight in the index.​
Stocks can be overweighted or underweighted.​
Benchmark peer group.

19. Overweight / Underweight Example
Assume: ​
Windy Corner stock is in the S&P 500 with a 2% weight​
Fund’s benchmark is the S&P 500.​
Then:​
If a fund holds a 3% position in Windy Corner, it is 1% overweight.​
If a fund holds a 1% position in Windy Corner, it is 1% underweight.

20. Sample Sector Weights

21. Weighting Shifts