Тема 3. Процес управління інвестиціями

4. Analysis of investment vehicles as a part of investment policy

Analysis and evaluation of investment vehicles. When the investment policy is set up, investor’s objectives defined and the potential categories of financial assets for inclusion in the investment portfolio identified, the available investment types can be analyzed. This step involves examining several relevant types of investment vehicles and the individual vehicles inside these groups. For example, if the common stock was identified as investment vehicle relevant for investor, the analysis will be concentrated to the common stock as an investment. The one purpose of such analysis and evaluation is to identify those investment vehicles that currently appear to be mispriced. There are many different approaches how to make such analysis. Most frequently two forms of analysis are used: technical analysis and fundamental analysis.

Technical analysis involves the analysis of market prices in an attempt to predict future price movements for the particular financial asset traded on the market. This analysis examines the trends of historical prices and is based on the assumption that these trends or patterns repeat themselves in the future.

Fundamental analysis in its simplest form is focused on the evaluation of intrinsic value of the financial asset.

This valuation is based on the assumption that intrinsic value is the present value of future flows from particular investment.

By comparison of the intrinsic value and market value of the financial assets those which are under priced or overpriced can be identified.

This step involves identifying those specific financial assets in which to invest and determining the proportions of these financial assets in the investment portfolio.

This step involves identifying those specific financial assets in which to invest and determining the proportions of these financial assets in the investment portfolio.

Formation of diversified investment portfolio is the next step in investment management process. Investment portfolio is the set of investment vehicles, formed by the investor seeking to realize its defined investment objectives. In the stage of portfolio formation the issues of selectivity, timing and diversification need to be addressed by the investor. Selectivity refers to micro forecasting and focuses on forecasting price movements of individual assets. Timing involves macro forecasting of price movements of particular type of financial asset relative to fixed-income securities in general. Diversification involves forming the investor’s portfolio for decreasing or limiting risk of investment. 2 techniques of diversification:

• random diversification, when several available financial assets are put to the portfolio at random;

• objective diversification when financial assets are selected to the portfolio following investment objectives and using appropriate techniques for analysis and evaluation of each financial asset.

Investment management theory is focused on issues of objective portfolio diversification and professional investors follow settled investment objectives then constructing and managing their portfolios.

Portfolio revision. This step of the investment management process concerns the periodic revision of the three previous stages. This is necessary, because over time investor with long-term investment horizon may change his / her investment objectives and this, in turn means that currently held investor’s portfolio may no longer be optimal and even contradict with the new settled investment objectives.

Measurement and evaluation of portfolio performance. This the last step in investment management process involves determining periodically how the portfolio performed, in terms of not only the return earned, but also the risk of the portfolio. For evaluation of portfolio performance appropriate measures of return and risk and benchmarks are needed.

A benchmark is the performance of predetermined set of assets, obtained for comparison purposes. The benchmark may be a popular index of appropriate assets – stock index, bond index. The benchmarks are widely used by institutional investors evaluating the performance of their portfolios.