Equity Portfolio Management Strategies

vERsus PAssrvE AcrrvEMANAcEMENT 653 individualcompanies. Similarly,irrlfel assetallocationis an altemptto limit investrnent losses by shiftingfundsbetweenan existingequityponfolio and a risk-freesecuritydependingon changingmark€tconditions. Finally.€quityportfolioretumprofilescanbe modifiedby theuseof futuresandoptions.ltis possibleto lradefuturescontracts on majorindexes, as well asacquireoptionson stockmarkel indexes,on selected industrygroups.andon individualstocks.Thesederivativesecurities can assisttheponfoliomanager in shiftinga ponfolio's€xposure to systematic andunsystematic risk.

stylesfall into eithera passiv€or an activecaregory. Equitypo(folio nanagement Unlikethe immunization of bondportfolios,no niddle groundexistsbetweenactiveand passiveequity management strategies. Somearguethat "hybrid"active/passive equityportfoliomanagement stylesexist(e.g.enhanc€d ind€xing).bul suchslylesreallyarevariations of activemanagement philosophies. Similarto traditionalactivemanagemenr, hybrid-stylemanagers invesrto find und€rvalued seclorsor securities. The followingdiscussion reviewsthe raditionalmeaningof thetermsparrl,? anda.ri? ponfoliomanagement. Passneequitrporrfolionduas"nerrisr longlermbuy-andholdstrategy. Usually,stocksare purchased so thepo(fol;o\ relumswill trackthoseof an indexovertime.Because ofthe goal of trackingan index.thisapproach to investingis generallyrefen€dto as ir../din8.Occasional rebalancing is needed asdividendsmustbe reinvesled andbecause stocksmergeor dropout of rhetargetindexandotherstocksareadded.Notably,the purposeofan index€dporlfoliois nor ro 'b€af lhe targetindexbut to malchils perfomance. A manager of an equityindexportfolio isjudgedon how wellhe or shetracksthetargetindex-that is,minimizesthedeviationb€tween ponfolioandindexretumssimilarto thebondindexponfoliomanag€r. Actn'eequi^ portlolionardS?nenris an auemptby the nanagerto outperfbm,on a riskadjustedbasis,a passivebenchmarkponfolio.A benchnarkpdnld/io is a passiveponfolio (includingsuchfactorsas beta,divid€ndyield,industryweightwhoseaverage characteristics ing,andfirm size)matchtherisk-rerumobjeclives ofthe clienr. (or somecombination Whendecidingwhelherto follow an activeor a p.ss;vestrarcgy ofthe two).an investormustassess the tmdeoff betweenthe low costbut l€ss-exciting alt€mative of indexingversutthehigheFcost but pot€ntiallymorelucrativeahemative ofactivemanagement. Not surprisingly. Sorensen, Miller.andSamakhavenotedthatthe criticalfaclorin thisevalua tion is the stockpicking skill of the portfoliomanager. Usingpensionfund performance data fromthe I 985-I 997period,theyshowedthattheoplimalallocalion10indexingdeclines asmanagerialskill increases. However, theyalsoconcludethaisomeindexingis appropriate for funds in mostrisk objectiveclasses.l Exhibit 17.I reponstheamountof moneyinvesled in theU.S-equityandfixed-income marketsusingacliveandindexedstrategies for two recentyea$.Thedataarecompiledfrom a suF vey of the srategiesemployedby morethan2.500professional moneymanagement firms on behalfofthei clients.Threeconclusions arenotable.First,activemanagement slralegies domi, nateindexedponfoliosin termsofthe totalamountof moneyconlrolledby theinvestment man, agement industry.Second. theindexedsectoroflhe induslryis growingquiterapidly,a trenddriven in pan by lhe lowermanagement feesch$gedfor passiveponfolios.Third, ahhoughthe

Eric H. Sorcnsen. KeithL Miller. andVeleSmat. Allo.aringheNan Activea.d Passive Mlnagehent. l.ina,.idl A,z^srr J.,n// 5.1.no..1(S. ember/Ocrob€r 1998):18 31.

654 CIIAPTER 17

SrRArEarEs Eoulry PoRrFoLIoMANAGEMENT

MARKETS IN THEU.S.EQUIfYAND FIXED.INCOME AC'IIVEAND PASSIVE INVESTMENT 1995 (BNoNt $1.945.10 275.22 t.67' 1.45 82.?3

t994

s1.338.01 135.5.1 r.370.63 t2.69

45.4 l0l.l 22.1

r53.3

Source:NelsonlNennenl Ma.agenent NeNoa.

surtegiesis roughly€omparable. in activeequityandlixed-income arnounlof moneymanaged indexing. equityindexingis far morepopularthanfixed-income of passiv€and active In the followingsections,we examinemorecloselythe mechanics equity ponfolio management.

attempts to designa po(folio to replicateth€performance Passive equiryportfoliomanagement word here is r.'plr'car?. As discussedin ChapI€r2, lhe ponfolio rnan_ of a sp€cificindex.The key policy statement violating the €lienCs shouldbe firedi a pasagerwho eamshigherretumsby passive passive likewise be dismiss€d. A managereans his whoisnl really should sivemanager p€rformance portfolio tracks the of a specified equily a thatclosely or her fee by constructing If the index(refenedto as the ,enchnm* indat) rharn\eetsthe client'sneedsandobj€ctives. passive pfemise she violates the ofthe the indexselected, he or manager attempts to outperform portfolio. severalreasonsfor investingin a passiveequity ponfolio. Strong In Chapter6. we presen@d thecoslsof thatthestockmarketis fairlyeflicient.Formoslactivemanagers. €vidence indicates aredifiicultto overcome. activelymanaging a porlfolio(l to 2 percentof theportfolio'sassets) moslequitymutualfundson an As we sawearlier,the S&P 500 indextypicallyoutp€rforms annualbasis.Notetha! althoughthe S&P 500 is the mostpopularindexto track.a clientcan chooselrcm amongaboulJ0 d,fferenrrnderes.' DomesticU-S. of nany differenlmarketindexes. Chapter5 contained a summaryd€scription and 100:the Major Marketindex:theNasdaq equilyindexesincludethe S&P 50O.Industrials. the daily valuesof indexiandtheWilshire5000.TheWaUStrcetJo rnal publishes composite exisl €xchanges. theOTCmarket,andvariousindustrygroups.Indexes indexesfor theorganized stocks(Russell stocks(Russell2000)lfor valu€-or growth-orienled for smallcapitalization worldregions(suchasth€EAFE GrowthindexandtheRussellValueindex);andfor numerous index);as well as for smallerregions.individualcountries,and typesof counlri€s(emerging havecreatedan index markets). As passive investinghasgrownin popularity.moneymanagers fund for vinually everybroadmarkelcalegory.r

'The SimFde ro l.der Fu.ds. Altxerr s@ins populdty of index lnnds n dncussd in JefrEy M. Lldemm, w?.1,I April 196.78 79. rse. ioi exanple, Roben Femholz.Roben Gdt, rnd Joh. Hannon,_Dive6n, weighted Inde\io9. J.lnltl oJPon. J.Tt\tel Tte Eme. lolioManasen?"t21.no.2(Wintr19981:7+82:andAjly Khormo,EdwadNellins.andJefrEr genceofCountrylndexFu.ds, JounnloJPorlolioManaqenenr24.no..l(Sunner1998):?88.1 'Tne

AN ovERvrEw oF P^ssrvE Eourry PoRrFoLro MANAaEMENT SrRArEarEs655 portfoliois to matchtheretumsto theindexascloselyaspossibleibut, Thegoalofa passive securities mustbe because ofcashinflowsandoutflowsandcompanymergersandbankruptcies. betweenponfolioand boughtand sold,which meansthat lher€inevilablywill be ditrerences benchmark retumsovertime.In addition,eventhoughindexfundsgenerallyattemptto mini' mize tumoverand the resultanttransactionsfe€s,they necessarilyhaveto do somerebalancing, which meansthat the long-runretum performan'Je of index fundswill lag the benchmarkindex. prolonged ponfolio's retumsfrom the index's retums subslantial or deviations of the Cenainly, wouldb€ a causefor concem. indexponfolio:full rcplication, lndex Portfolio Therear€threebasictechniques for constructing a passive sampling. quadratic programming. and optimization or The mostobvioustechnique is lull replicaConst.uction Techniques lion, whereinall the securities in the ind€xarepurchased in propoftionto theirweightsin the index-This techniquehelpsensureclosetracking,but it may be suboptimalfor two r€asons. will increase transaction coststhatwill detractfrom perFirst,the ne€dto buy manysecurities of dividendswill also resultin high commissions when formance.S€cond,the reinvestment manyfirms pay small dividendsat differenl timesin the year. samplingaddresses Statistical Thesecondlechnique, thepmblemofnumerousslockissu€s. in theUniledSlalesfor his or heropinion rheoryteaches us thatwe don'tne€dto askeveryone qu€ryonly a smallsampleof the who maywin an election.Thus.opinionpollsters lo determine portpopulationto gaugepublicsentiment. alsocrn be appliedro passive Samplingtechniques folio rnanagement. With sampling,a ponfolio managerwould only needto buy a representative sampleof slocksthatcompriselhe b€nchmark index.Stockswith largerindexweightsarepurso their aggregate chasedaccording10their weightin th€ indexismallerissuesare purchased (e.9.,beta,indusirydislribution, anddividendyield)approximale the underlying characteristics benchmark.With fewer stocksto purchase,largerposiiionscan be taken in the issuesacquired, Funher,thereinleslment ofdividend whichshouldleadto proponionately lowercommissions. needto be purchased cashflowswill be lessproblematic because fewersecunties to rebalance the ponfolio.The disadvaniage of samplingis that ponfolioretumswill almostcertainlynot indexascloselyas with full replication. rack theretumsfor thebenchmark quadraticopti. Ratherthanobtaininga samplebasedon industryor securitycharacteristics. portfolio.Withqua&atic a passive miralionor programming techniques canb€ usedtoconstruct programming, betweens€curities are historicalinformationon pricechangesandcomelalions of a ponfoliothatwill minimize inputto a computerprogramthatdetermines the composirion is thalil relleson historical lrackingenor with the benchmark. A problemwith thh techniqu€ pricechanges andcorrelations, and.if thesefactorschangeoverrime,theponfoliomayexperi' encevery large tracking errors. passive portfoliosarenot basedon a publishedindex.Sometimes customized Somepassive ponfolios,call€dcompleteness funds,areconstructed to complement activeponfoliosthatdo not coverthe entire market.For example,a largepensionfund may allocatesomeof its holdings to activemanagersexpectedto outperformlhe market.Many limes, theseactive ponfolios are may overweighted in cenainmarketsectors or stocktypes.Inthiscase,ihep€nsionfundsponsor wantthe remainingfundsto be investedpassively to "fill th€ holes left vacantby the active managers.The p€rformanceof the 'Jompleteness fund will be compared1oa customizedbenchmark that incorporatesthe characteristicsof the stocksnot coveredby fie activemanagers. For example,supposea pensionfund hires threeactiv€managersto investpart of the fund\ money.One manageremphasiz€ssmall-capitalizationU.S. sto{ks. the secondinvestsonly in PacificRim countri€s.andthe third investsin U.S. stockswiih low P/E ralios.To ensureadequate diversification.the pensionfund may want to passivelyinvestthe rcmainingass€rsin a complete' nessfund that will havea customizedbenchmarkthat includeslarge-and mid-capitalizationU.S. stocks.U.S.stockswith normalto high P/E ratios.andintemationalstocksoutsidethePacificRim.

656

CHAPTER 17

STRATEGIES Eeulry PoRrFoLIoMANAaEMENT

Still otherpassiveponfolios andbenchmarksexist for investorswith certainuniqueneedsand preferences.lSomeinvestorsmay want their firnds to be investedonly in stocksthat pay dividendsor in a companythat prrducesa productor servicethat the inveslordeemssocially respon' sible. Benchmarkscan b€ producedthat reflect thesedesiredattributes,and passivepordolios canbe constructedto track theperformanceof the customizedbenchinarkovertime so investors specialneedscan be satisfied.5

TrackingErroaand If the goal of forning a passiveportfolio is to replicatethe essenceof a panicular equity index, lndex Pordolio the successof constructingsuchan investnent fund lies not in the absoluteretumsit Prcduces Conslruction bur. ratber,in how closely its retumsmatchthoseof the benchmark(e.g.,the Standard& Poor's 500 index).That is, the goal of the passivemanagersbouldbe to minimize fte portfolio's r€tum volatility relativeto the b€nchmark.Saiddifferendy,the managershouldFy to minimize tr.ck_ ing error. Tracking error can be definedas the exlent to which retum fluctuationsin the managedpontolio arc not corrclated with retum fluctuationsin the bencbmark.A flexible andstraightforward way of measuringtrackingenor canbe develop€dasfollows. Recallingthe notation{iom Chap' ter?.let w, = investmentweichrof assett in lhe nam8ed pordolio i, = fttum to rss€tt in p€riodr i' = r€tum to the benchmtrkportfolioiD period, With thesedefinitions,we candefine the Periodt renrm b managedportfolio as

^.=in.R..

N = numbe.oI assetsin lhe mmged portrolio With thesedefinitions,we can then sp€cifythe Periodt rctum diferential betwee the maF agedponfolio and the benchmarkas >l7l

a, = >,,R" - ^, = n,,- R!

Nolice that, giventhe retumsto the ly' assetsin the managedponfolio andthe b€nchmark,A is a function of the idvestmentw€ightsthat the managerselectsand that not all of the assetsin the benchmarkneedbe includedin the managedpodolio (i.e.. lt = 0 for someassets).

'Recrll onr disession in Chaprd 2 on inv.slos objdtivs ed consEain$:tqo of rhc coNdinls *eE legal dd egu_ latory r.qniEnents dd lnique n@dsod pEieEnces. 5Se Shmin Mossavr-Rahndi, Custonized Benchmks in Sfructut€dMsag.heft, Jocml ol Ponfolio MaMq. "Ihe Acdvc D.cisions i. the Stlection of Psiv. M8nflr 13. no. 4 (suntrr 1988):65-68i and Chris P. Dialyn$, agemnt andPerfmce Bogeys:'iTh. Eon lbook oJ Fir.d lrcon Sc.lttiet 5$ ed , .d FEnk Fatbzi (Chicago.Ill : Iflio kolessionalPublhhing.1997).

AN OvERvrEw oF PassrvE EQUTTYPoRrFoLlo MANAGEMENTSTRATEGIES657

For a sampleof Z retum observations.the vananc€of A canbe calculatedas followsl S,r -i,:

>17.2

(r- t)

Finally, the standarddeviationof the retum differential is o^ = JA = periodictrackingerror sa lh^t annualizedtracking ?trol (?E) can b€ calculatedas > 175 whereP is lhe numberof retum periodsin a year(e.9.,P = 12 for monthly retums,P = 252 for daily retums). Supposean inv€storhas formed a portfolio designedto track a panicular benchmark.Over the lasteight quaners,the reaumsto this ponfolio, aswell asthe index retumsandthe retum differcnceb€tweenthe two. werc:

I 2 l 5 6 '| I

2.3% -3.6 tt.2 t.2 1.5 3.2 8.9 -o.8

2.1% l0.l 2.2 0.4 2.4 8.1 0.6

4.4% 1.0 l l _1.0 t,t 0.5 0.8 -t.6

rerumdifferential(i.e.,'delta') The periodic averageand standad deviationof the manager's relativeto the trenchmarkare ,), =0.2% f d = I-0.4+ 1.0+...+0.8-t.61+).6 Avense - t ) = t.o% (P ( {.4 0.2)'+ (l 0 0.2):+...+ (-1.6 0.2)'+ Thus,the manager'sannualizedtsackingerror for this two-y€arPeriodis 2.0 percenl(= 1.0percenerally speaking,there is an inverserelationshipbetwe€na passiv€portfolio's tracking error relativeto its index andthe time andexpensenecessaryto createand maintainthe po{folio. For example,full replication of the S&P 500 would have virtually no tra€king error but would necessilalepositiodsin 500 different stocksandrequirefrequentrebalancingAs smaller samplesare usedto replicatethe S&P index's retum performan€e,the expenseof forming the managedportfolio would declinebut the potentialtracking error is likely to increaseThus, the an of being a managerof a passiveequity ponfolio lies in balancingthe costs(larger tracking error) and the benefits(easiermanagement,lower trading commissions)of using smaller samples. Exhibit 17.2estimatesthe tracking error that occursfrom suchsampling.

\

658 CHAPTER 17

Eourry PoRrFoLro MANAGEMENTSTRATEGTES

TMCKINC ERROR EXPECIED BE|WEENTHES&P5OOINDEXAND PORTFOLIOS COMPRISEDOF SAMPLESOF FEWERTHAN5OO STOCKS

4,0

3.0 ll

2.0 1.0 \l l

portfoliosthatmimica panicular investment Methodsol lnder Althoughinv€slorscanconstruct theirownpassive waysofaccomplishing Portfoliolnvesting equilyindex,th€reareat l€asttwo "pre-packaged" thisgoalthataretypically moreconvenient andlessexpensive for fte smallinvestorTheseare(l) buyingsharesin ^1 inde! nutualfund ot (2) buyingsharesin an ercnanqe-traded fund (E'tF). lndex Funds As we discussin Chapter25.mutualfundsrepresent established securitypon(e.9.,Fidelity,Vanguard, foliosmanaged by professional investmenr companies Putnan,AIM) in whichinvestors canpanicipate. Theinvestmenl companyis responsible for decidinghow the fundis managed. For an indexedportfolio,the fundmanagerwill typicallyattemptto replicate thecomposition of thepanicularindexexactly.meaningthathe or shewill buy theexactsecuritiescomprising theindexin theirexactweight!andthenalterthosepositionsanydmethecom' positionof the indexitselfis changed. Sincechanges to mostequityindexesoccurinfrequendy, indexfunds tendto generatelow rading and managem€nt expenseralios.A prominentexample of an index tund is Vanguard's 500 IndexFund (VFINX). which is designedto mimic the S&P 500index.Exhibit 17.3providesa descnpdve overviewof thisfundandindicares rharits historical retum performanceis vinually indistinguishablefrom that of rhe benchmark. The advanlageof index mutualfundsis that they provide an inexpensiveway for investorsto acquirea diversifiedportfolio that emphasizesthe desiredmarketor industry within rhe conl€xl product.As with anymutualfund. thedisadvantages of a rradilionalmoneymanagement areihat investors canonly liquidatetheirpositionsat the endof rhetradingday (i.e.,no intra&y lrading). usually cannot short sell. and may have unwantedta,\ rep€r€ussionsif rhe fund has an unforeseenneedto sell a ponion of its holdings.therebyrealizing capital gains.

&

Exchange-Traded Funds ETFSarc a morerecentdevelopmenr in the world of indexed inveshenl productsthanindex mutual firnds.Essentially,ETFSare depositoryreceiptsthat give investorsa pro mta claim on the capital gains and cashflows of the s€curitiesthat are held in d€positby thefinancialinstitutionthatissuedthecertificates. Thatis, a poffolio ofsecuritiesis placedon depositat a financialinstitulion or into a unit rus! which then issuesa singleryp€of certificaterepresentingownershipof the underlying portfolio. ln that way. ETFSare similar to the Americandepositoryreceipts(ADR' describedin Chapter3.

t

AN OvERvIEw oF PAssrvEEQUnY PoRrFoLIo MaNAaEMENTSTRATEGIES659

MUTUALFUND 5OOINDEXTRUST OF THEUANGUARD DETAILS f UI{D-I.ATGECAP OB'EC'IVE-INDEX

'OOINDEI FUND-IW VANGUASO

vangudd500lndexFundisanopen_endfundincorporatedintheUnitedSratesTheFund\objectiveist'matchfte perf;rmanceof rh€ Sbndard & poor's 500 Index, which is dominaledby the stocksof lmge U.s. companies.The Fund inves$ all or subsrantallyall of its assetsin the slsks that makeup the IndexCUf,lENT/OPEIAIIOXAT DATA

BtooMaElGcLas9ltlcatlol{DATA

I) GP NAV

Equity

t2t3v0t u3tn6

Style LargeCap U,S.

$ 105_85 s 86.000.m

1 Y. Pertomanc€!€. Benchma* Indexes

IANI(ING PERFOTMANCE

0

B oF3/24/02 I Month 3) TRA YTD

3.74 .24 .69 9.64 -t2.02

2001

72 E6 86 9l 86

5l 50 39 8l 31

-10 -20 -20 29MAB 28SEP 3ONOV 31JANO2 3IJUL 3OMAROl31MAY

sPx

a ot 3/2A/O2

3) TRA

4) COMP

PERCENTIIE

RETURN

CURREN]

3 Month YTD

3.74 .88 .69 -2.47 9.64

9) HRH

2001 2000 1999 1998 t997 1996 t995 t994 1993 t992

-12.02 -9.06 2t.07 28.61 33.21 22.86 37.45 Ll8 9.89 7.45

O l0O2 Blonbere L.P AU ngh$ Esened. Repnntenwi$ p€mnsion

3.16 -E4 .27 .87 -2.43 9-68 5Pr .E9 9.10 21.04 28.58 13.38 22.96 37.62 l.l3 10.06 1.62

-.01 .02

24

.u

3l 50 39 l9 EI

-.03 _.18 -.04 -.04 -.l3 '04 .03 .03 -.t7 _.10 -17 -.tl -.t7

34 27 68 92 95 89 94 86 33 46

59 12 E4 E6 86 84 9l E6 87 92 EI E8 89 89 82

660 CHAPTER 17

SrRArEarEs Eourry PoRrFoLroMANAaEMENT

Thereareseveralnotabl€€xampl€of ETF|, including(l) Standard & Poor's500 Depository called).whicharebas€don a basketof all Receipts(SPDRS or "spid€r"asthey ar€som€lim€s indexedpositionsin s€veralglobal lhe s€curities heldin thatindex;(2) ishries,whi€hre€reate developedand emergingequity markets,includingcounries such as Australi.t,M€xico, Malaysia,theUnitedKingdom,France. Germany. Japan,andChinarand(3) sectorETFS.which in baskets of slocks from specifiir industry sectors.includingconsunerservices, indusinvest servic€s. energy, utiliii€s. and cycli€alylransponaiion. Exhibil 17.4 lrial, technology. financial retum for the Trust cenificales. Notice once again how showrd€scriptive and data SPDR closely theretumsto theseshares tracktheoverallinde^. A significantadvantage of ETFSoverindexmutualfundsis thattheycanbe boughtandsold (andshon sold)like commonstockthroughan organized exchange or in an oveFthe-counter (e.g..for SPDRS. organization the sponsoris market.Funher,theyarebackedby a sponsoring PDR ServicesLLC, a limited liabilily companywhosesole memberis the AmericanStock whereSPDRshares trade)who canalterthecomposition ofthe underlyingportfolio Exchange relarive(o index funds to reflectchangesin $e composilionof fte index.Oth€radvanlages payment fee,rheability for conlinuous tradingwhilemarkersare includ€no of a management ETF disadlanugesincludethe broop€n,and the ability to time capitalgaintax realizations. keragecommission andtheinabilityto r€investdividendsexcepton a quanerlybasis.

tt it

c!

It

-.1 q

is to earna ponfolioretumtharexceeds the retumof a The goal of activeequitymanagemenr passivebenchmark portfolio,net of rransaction cosrs,on a risk-adjusled basis.The job of an acliveequitymanager is noteary.If transaction costsandfeestotal L5 percentof thepoftfolio's pointsabov€thepassive annually, th€ponfoliohasto eama return1.5percentage benchassets strategyinvolvesoverweighting spe€ific markjustto keeppacewilh it. Funher.if themanager's of priceincreases. theriskofthe activeportfbliomaywell exc€ed marketsecbrsin anticipation thatof thepassive benchmark, sotheacriveponfolios retumwill haveto exceedthebenchmark by an evenwidermarginto compensate for ils higherrisk. Exhibil 17.5providesa broadoverviewof thedifferentstrltegiesthatinvesrmenl managers mightadoptin formingtheirportfblios,as w€ll as the investmentphilosophy'thatunderlies wejust considered Notic€,firstofall, thallhe passiv€ strategies arebased(al least eachstrategy. implicitly)on the notionthatcapitalmark€care el'ficientand so equityportfoliosshouldbe howinvested to mimicbroadindexesandnotlrad€dactively.Ther€almofactivemanagement. areeffectivelybeuing"againstmarketsb€ingp€rfecllyefficienl. ever.is onein whichmanagers rhes€betsas falling into lhreegeneralcategories: For convenience. Exhibit 17.5characrerizes (l) fundamental. (2) technical, andsecurityaltribules. and(3) marketanomalies

a

I,

process Funda|nental As we sawin ChaplerI I, thethree-step investment beginsat thelop with an analysisof downlhroughseclorallocaliondeciStrategies broadcountryandassetclassallocationsandprogresses

The allemarileto rhis "topsionsro $e bortomlevelwhereindividualsecurilesare sele€t€d. "bonom-up process thaisimplyemphasized theseledionof down"approach to investingwasir In similartashion.acti!eequitymanagesecurities withoulanyinitialmarketorsectoranalysis. m€ntbasedon fundamental analysiscanstartfrom eitherdirection,depending on whatexaclly manager thinks is mispriced relative to his or her valuation models. Generally. actile manthe generic in add value to theirponfolios relalive 1o th€benchagersusethree themes anatlemptto funds inlo mark.First,theycantry to tim€theequitymarketby shifring andoutofstocks,bonds. on broadmarkelforecasis and€stimated risk premiums. Second. theycan andT-billsdepending shifi fundsamongdifferentequity sectorsand industries(e.9..financialslocks,technology

{

rr

AN OvERvIEw oF AcrrvE EQUITYPoRrFoLlo MANAGEMENTSTRATEGTES661

FUND DEIAILSOF THESPDREXCHANAE"TRADED IUI{D-I.ATGE