Global Portfolio Management

Global Portfolio Management GM5273 Summer 2003 . Thunderbird Archamps Campus

Professor John Dunn [email protected] Geneva, Switzerland 0041.22.786.2951

Office hours: Can arrange to meet participants anytime on campus during days on which my courses are scheduled.

This course provides a working understanding of the themes and concepts of modern portfolio management in a global context. With the ongoing globalization of the world’s financial markets, there are a variety of extremely intellectually challenging, lucrative and fascinating career opportunities in the field of professional money management, hedge funds, investment banks, institutional sales and trading and global pension investment open to smart, intellectual challenged job candidates.

Course Educational This course is primarily concerned with the investment decision-making perspective as it relates to the formation objectives: Theory as of global investment portfolios. Focusing principally on well as practice the equity markets with some work on the bond and derivative markets, a significant part of the course will be focused on the asset allocation decision and risk and return characteristic of a portfolio. We will do some work on stockpicking in international markets, and hedge funds, as well as running an institutional portfolio. We will also explore who’s who in the world of international asset management, and take a look at some of the world’s hedge funds and alternative and private equity investments and reasons why institutional investors should hold these assets, emerging markets, the Japanese market, as well as Swiss Private Client asset management. We will briefly review work on the CAPM and modern portfolio management theory, and spend more time on multi factor portfolio models and some of the course work will be done on professional portfolio management software, such as Ibbotson or Barra. In the past, I have quite a few guest speakers who are professional portfolio or hedge fund managers, and this “practical, industry knowledge” emphasis is a common thread throughout the course.

______Thunderbird Global Portfolio Management Syllabus, Summer term 2003 John E. Dunn, III © all rights reserved. - 1 - Course topics: The course is organized around a variety of global portfolio management topics:

Global Portfolio Investment History: Market history is important….

Portfolio Theory: (Please note that this course is significantly more than theoretical, but a lot of theory is used.)

Global Portfolio Investment Strategy Advisors: Substantial reading from Morgan Stanley asset allocation department.

Valuation: portfolios, mutual funds, international financial instruments, their terminology, operation, and performance. What makes stocks go up.

Techniques: Value vs. Growth: Warren Buffett as a hedge fund manager.

Market Efficiency theories and inefficient markets: Private vs. Public.

International Asset Allocation techniques:

Quantitative Portfolio Management Tools:

Current themes in Institutional Money management: Indexing vs. the hard days work of adding alpha: Performance measurement Portfolio Manager compensation and regulation

Global Fund Marketing: The “business model” of global asset managers.

Hedge Fund and private equity investment allocations: becoming institutionalized

Course Materials Required : Fabozzi, Frank J and Harry M. Markowitz, Eds, The Theory and Practice of Investment and coursepack Management, New York: John Wiley, 2002 This text is an excellent all around guide to the theory and somewhat the practice of investment management, and makes an excellent desk reference guide that you can keep forever. Please buy your own copy as I have only one copy and lots of the readings will come from this source. There are two additional books that are required reading for the course. They are:

Pioneering Portfolio Management, David Swensen, Yale University Press, 1999

______Thunderbird Global Portfolio Management Syllabus, Summer term 2003 John E. Dunn, III © all rights reserved. - 2 - Swensen manages Yale’s endowment with a heavy emphasis on private equity, hedge funds and other less efficient investment tools.

Irrational Exuberance: Robert Shiller, New York, Broadway Books, 2000

A behavior finance, psychological approach to understanding the financial markets. I have quite a few copies of these texts and can pass them around but buy a copy if you want, as both are extremely interesting.

Coursepack contents:

Cases Book selections Harvard Business School Publications: “Connections to Monitor” from Victor Niederhoffer, The Education of a Long Term Capital Management Speculator, Wiley, 1997. Jupiter Management Company Measuring Mutual Fund Performance “Hedge Fund Selection” from Smith Breeden Associates: The equity plus Francois L’Habitant, Hedge Funds: fund Myths and Limits, Wiley, 2002 Yale University Investment Office: July 2000 Reuters Greenhouse Fund “Portfolio Risk: Analytical Methods”, Grantham, Mayo, Van Otterloo from Phillip Jorion, Value at Risk, Harvard Management Company, 2001 McGraw Hill, 2001.

Darden Cases: “The Ongoing Revolution in Asset Management” from Ingo Walter and The Dynamis Fund Roy Smith, High Finance in the GMO: Value vs. Growth Dilemma Eurozone, Pearson Financial Times Zeus Asset Management Publications, 2000.

My course vision The course will introduce you to theoretical aspects of portfolio management, but it will primarily be practical statement: and hands on. I usually start the day with having course Theoretical as well as participants follow the equity or bond markets, and quite practical quickly participants began following individual investment opportunities and commenting on them in our in-house investment meeting. I will arrange meetings and guest speakers from Global asset managers and International banks such as Citibank, HSBC, and Swiss private banks. Some of the course reading material will be based on professional Wall Street brokerage economic, market strategy, and equity investment research on the global markets, so the emphasis is more on the practical than the theoretical.

______Thunderbird Global Portfolio Management Syllabus, Summer term 2003 John E. Dunn, III © all rights reserved. - 3 - In addition to teaching two advanced finance classes at Who I am: Thunderbird, this current class and Investment Banking, I work on investment banking projects and advise some European institutions on asset and country allocation. I have a variety of international institutional asset management and financial markets experience, having started my career in the heydays of the Japanese equity market book of the 1980s in Tokyo and worked in the field for a variety of firms such as Citibank, Barclays and Nomura in New York, Asia, and Geneva. In the late 1980s, I opened the first investment banking, global asset advisory office in Geneva for Union Bank of Switzerland, which became the predecessor of UBS Warburg Dillon Read, and more recently, I had a representation for a variety of New York based investment banks, including Dominick and Dominick, the oldest surviving member of the New York Stock Exchange. I have lived in Geneva 17 years, and enjoy tennis and sailing on the lake with my young teenagers and helping our Thunderbird participants find the “right thing that they want to do in life”. I am relatively new to the academic world, having taught MBA and executive MBA classes three years in Europe, of which one year at has been at Thunderbird.

Course Structure: A typical course day usually starts with a power point presentation covering some of the theoretical aspects of subject, a discussion of the reading material covered, a A typical day stockpicking discussion where participants discuss what happened with the investments instruments followed, and a case study discussion. As I believe strongly in the necessity of presentation skills, I usually have participants “present” case studies during the course, and usually most participants make one or two investment committee presentations on specific topics during the course. Participants follow the international financial markets on a daily basis, through Bloomberg and other sources and should stay abreast of the financial news like everyone else in the industry, either through reading the Financial Times, the Wall Street Journal, The Nikkei or the Agefi for those fluent in Japanese or French. Please bring your internet email enabled laptop if you have one available to class as we will do a lot of web based research on our portfolio and stock selections.

Our class project this term will be based on giving global asset and alternative investment allocation advice to a small university endowment.

Since we are a relatively small group for all practical Our Educational purposes we will organize ourselves much as would any contract: global investment manager analysts group looking after Learning together asset allocation of global investment portfolios. Once most of the theory is out of the way, usually by week four or five, our class will start with an investment strategy meeting going over our portfolio and discussing and adopting portfolio recommendations for our course project, just as we would a professional portfolio managers in the real world. I would expect that it would take at least and hour and a half to two hours for preparation for every course hour, in addition to some extra time to follow our class project.

______Thunderbird Global Portfolio Management Syllabus, Summer term 2003 John E. Dunn, III © all rights reserved. - 4 - Grades and evaluations : Quantitative grading factors: Class participation, case presentations circa. 35 per cent Final project 20 per cent Final presentation 20 percent Midterm exam 25 percent Qualitative grading factors include: Participation: Significant Understanding and application of theory: Significant Presentation skill set: high marks if participants show good level of progress. Quantitative knowledge: somewhat important but should not keep potential interested participants out of the class. Investment performance: Significantly less important

One of the requirement of this course is participation. Classes in Archamps are usually small in number compared to Glendale. Because we are a small group we have to participate like a team, and this will take preparedness and participation from all. Remember in the real world an investment manager is recompensed on both how well he manages assets, and on how well he explains his investment style or niche to potential investors in order to gather assets, and how well he fits in the “Team”. The beauty of such small classes however, is there are some really neat “teambuilding” opportunities, and my experience at Thunderbird with “Small teams” has been very satisfactory.

Also, in general, I am not easily available for makeup or missed courses, as I have outside activities, so please keep absences to a strict minimum.

Fieldtrip to London? I may try to organize a one day fieldtrip to London toward the end of the course to meet with a few investment banks and institutional investors, provided there is sufficient interest. This will be a non-required part of the course due to the extra cost involved.

There are a variety of useful texts, data services, as well Other Useful as a variety of useful financial journals available via Resources: IBIC, which include such as the Journal of Financial Personal and Economics, Financial Analyst Journal, The Journal of Thunderbird Portfolio Management, and The Journal of Financial Economics. I put a lot of readings on the course page, and typically, the include quite a lot of mutual fund prospectus, brokerage strategy reports, country reports, sell side research, buy side research, and newspaper and articles from industry publications, such as Institutional Investor and Euromoney which we also have from IBIC. Participants should also get to know how to use the investext database, Thompson Financial database for securities screening, and the Edgar database, all available from IBIC. I can show you how to access these sources in about 15 minutes. We also have access to professional portfolio

______Thunderbird Global Portfolio Management Syllabus, Summer term 2003 John E. Dunn, III © all rights reserved. - 5 - management software and databases, e.g. Compustat, Ibbotson, and possibly Barra and we may have a Comstock (www.comstock.com) terminal during the course.

: Books I recommend Global Asset Allocation: Techniques for for those interested in Optimizing Portfolio Management, Jess Lederman the subject include and Robert A. Klein, editors, John Wiley and Sons, 1994.

Portfolio Management: Theory and Application: Second Edition, James L Farrell, Jr. Irwin McGraw Hill, 1993.

Wealth Management: The Financial Advisors guide to Investing and Managing Your Client Assets, Irwin IAFP series in financial planning, by Harold R. Evensky. 2002

Value at Risk: The new benchmark for controlling market risk. Philippe Jorion, McGraw Hill, 1999. See also, Jorion’s Risk Managers Handbook, 2002, which costs more than 200 dollars from Amazon.

Fabozzi, Frank J, editor, A voracious writer and editor of financial writings: some of his best texts for which I have personal copies include:

The Handbook of Fixed Income Securities Active Equity Portfolio Management Derivatives and Equity Portfolio Management The Handbook of Corporate Debt Instruments Pension Fund Management

All of Fabozzi’s titles are published by Wiley. www.frankfabozzi.com

There are some excellent recent writings on Behavioral Finance:

The Edge of Chaos, Financial Booms, Bubbles, Crashes and Chaos, Bernice Cohen, Wiley, 2002

Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing. Hersh Shefrin, Boston: Harvard Business School Publications, 2000

Inefficient Markets: An introduction to Behavioral Finance, Andrei Shleifer, Oxford: Oxford University Press, 2000.

______Thunderbird Global Portfolio Management Syllabus, Summer term 2003 John E. Dunn, III © all rights reserved. - 6 - Alternative and In addition to the recent book by my colleague Francois L’habitant, Hedge Funds, Myth and Limits, Wiley, private equity 2002 (Francois is also professor at Thunderbird, interest. Archamps), there is a very readable title by Alexander Ineichen, Absolute Returns, the Risk and Opportunities of Hedge Fund Investing, Wiley, 2003. Ineichen’s title is used as a text in Yale’s graduate class on hedge funds this year. For those interested in private equity portfolio management I usually direct them to my investment banking class, and to texts and cases from HBS.

In addition to the following texts, I recommend that participants read some of the literature by market commentary and practitioners in the financial markets: My favorites are:

John Kenneth Galbraith, 1929 . out of print I believe but I have a copy….

Bernstein, Peter L., Against the Gods: The Remarkable Story of Risk. John Wiley and sons, 1998.

Fridson, Martin S. It Was A Very Good Year, Extraordinary Moments in Stock Market History. John Wiley and Sons, 1998, market history…great book.

Niederhoffer, Victor, The Education of a Spectator. John Wiley, 1997. an extremely interesting chap, previous academic turned hedge fund manager turned retiree, I imagine. …...

Brenner, Robert, The Boom and The Bubble, London and New York, Verso, 2002 (economic history, the business cycle and the financial markets).

Swensen, David, Pioneering Portfolio Management, Yale University Press, 1999 Yale’s endowment manager with 36 percent return ten years till 2001…

Reminiscences of a Stock Operator, Edwin Le Fevre, 1923. Fascinating fiction.

Manias, Panics, and Crashes, A History of Financial Crises, Kindleberger, Charles P. 1978

Berkshire Hathaway/Warren Buffet’s web site. www.berkshirehathaway.com

Bernstein, Peter, Capital Ideas: The Improbable Origins of Modern Wall Street, 1994

Charles MacKay, Extraordinary Popular Delusions and the Madness of Crowds, 1841. about the South Sea Bubble and Tulipomania.

______Thunderbird Global Portfolio Management Syllabus, Summer term 2003 John E. Dunn, III © all rights reserved. - 7 - Web resources: www.ibbotson.com/research/internet_tips.htm (excellent) These above is just a small selection from my personal library which I can lend them to interested participants for further reference, and we do have a library also in Archamps campus with quite some good financial titles.

Closing Honesty is the best policy but insanity is a better defense. Thoughts: Anonymous

Faced with having to change our views or prove that there Some good and is no need to do so, most of us get busy on the proof. interesting John K. Galbraith. pearls of When a business proposition sound too good to be true it wisdom: usually is:

John E. Dunn, III

Q. What is the definition of a stock that goes down 90 percent? A. A stock that goes down 80 percent and then halves. Q. This stock has high recovery potential?

Anonymous

“When circumstances change, I change my view. What do you do?”

John Maynard Keynes

In a crowd every sentiment and act is contagious. And contagious to such a degree that an individual readily sacrifices his personal interest to the collective interest.

Gustave Le Bon, The Crowd: A Study of the Popular Mind.

A group of lemmings looks like a pack of individualists compared with Wall Street when it gets a concept in its teeth. Warren Buffett

Stock markets seesaw between greed and fear. They always have, and they always will because the people whose decisions drive the markets seesaw between greed and fear themselves.

Robert Menschel

Your truly conservative banker cannot be stampeded into unwary speculations by the hysteria of a boom. He sits tight through 1926, 1927, and 1928. Unfortunately, he begins to come into the market in 1929.

“For these investors (those who do not rely on professional advisers), stocks are usually more than just the abstract “bundles of returns” of our economic models. Behind each holding may be a story of family business, family quarrels, legacies received, and divorce settlements… almost totally irrelevant to our theories of portfolio selection. That we abstract from all these stories in building our models is not because the stories are uninteresting but because they may be too interesting and thereby distract us from the pervasive market forces that should be our principal concern.” Merton Miller, Nobel Laureate at University of Chicago.

“ In a strict sense, there wasn’t any risk- if the world had behaved as it did in the past.”

Merton Miller, LTCM partner writing about LTCM

The result was a downward spiral which fed upon itself driving market positions to unanticipated extremes well beyond the levels incorporated in risk management and stress loss discipline.

LTCM Confidential Memorandum, 1999

“… so to speak, a game of Snap, of Old Maid, of Musical Chairs—a pastime in which he is victor who says Snap neither too soon nor too late, who passes the old Maid to his neighbor before the game is over, who secures a chair for himself when the music stops.”

John Maynard Keynes, The General Theory… 1936 (describing the stockmarket)

“There are many things hat will catch my eye, but there are only a few things that will catch my heart.”

Tim Redmond.

“Most people, one hopes, know that their stocks can fall, but if asked to specify the odds, they would most likely blink in puzzlement. Indeed Long term’s letter betrayed a different way of thinking about the world. Imagine for a moment, that a student at your child’s school showed symptoms of a contagious and potentially dangerous disease. You would expect a warning, perhaps some advice on what precautions to take. But if a letter arrived from the principal stating that your child had a 19 per cent chance of catching the sickness, a 12 per cent chance of missing at least a week of school, and a 2 per cent chance of fatality, would wind it a trifle odd, not to mention presumptuous. You would want to know more about the school’s doctor and, in particular, about the kind of medicine he practiced.”

Roger Lowenstein, writing about LTCM.

Markets can remain irrational longer than you can remain solvent.

John Maynard Keynes

Is variation and volatility a good measure of risk in the financial markets?