Equity Portfolio

Management

Curso: Gestin de Portafolios y Planificacin de Inversiones

Profesora: Patricia Martinez, CFA / Alonso Segura, CFA, FRM

Setiembre de 2013
Agenda
Role of equity investments

Basics of equity valuation

Approaches to equity investing:

Passive Investing

Active Investing

Semi-active Investing

Research

Appendix
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 pass
the 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)

Basics of equity valuation
Fundamental valuation

Total Return of equities:

Expected Return = (DIV1 / P0) + [ (P1 P0) / 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 value
r = 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 = FCFF interest on debt (1 Tax rate) + net borrowing ..(issues repayments)
- FCFF = EBITDA ( 1- Tx) + Deprec (Tx) CAPEX Working Capital Investment


Basics of equity valuation
Fundamental valuation


Dividend discount model

FV0 = Dividend1 / (r g)

Used when: stable (history of dividend payments) and predictable 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 (Rm Rf)

Rf = risk- free rate B = Beta Rm = market return Rm Rf = Market risk premium




Basics of equity valuation
Multiples: The lower, the better ( more undervalued)

Price / Earnings












Is Alicorp undervalued or overvalued?
Compaa Pas
PER 12E PER 13E
Alicorp Per 25.56 20.87
Hypermarcas SA Brasil nd 17.79
M 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 17.64
22.22 18.18
Prom. Per
Prom. Latam
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 2.8
Interbank 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
Basics of equity valuation
Technicals / market sentiment

Flow of funds Panic / Euphoria indicators










Support / Resistance





















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)
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
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

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


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

Active investing

Identifying style:

Returns based style analysis


Holdings based style analysis
Multiples; div. yield
Expected EPS g
Earnings volatility
Industry


Style drift
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)



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
Appendix
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
EMIG RV Internacion. RV Internacion. RV Internacion. RV Internacion. RV Internacion. Tesoros 1-5 yr USHY MLII EMBIGHY EMIG 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 EMIG
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 EMIG USHY MLII US Barclays 1-5 EMIG 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 EMIG EMIG USHY MLII EMIG EMBIGHY EMBIGHY EMIG EMIG 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 EMIG 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
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
Bancos
Bonos / Papeles
Comerciales
Acciones
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
Appendix
Peruvian Equities Investing
Principales factores
Alto 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)