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Managing Investment Portfolios: A Dynamic Process, 3rd Edition

John L. Maginn (Editor), Donald L. Tuttle (Editor), Dennis W. McLeavey (Editor), Jerald E. Pinto (Editor)
ISBN: 978-0-470-63534-6
960 pages
March 2010
Managing Investment Portfolios: A Dynamic Process, 3rd Edition (0470635347) cover image
"A rare blend of a well-organized, comprehensive guide to portfolio management and a deep, cutting-edge treatment of the key topics by distinguished authors who have all practiced what they preach. The subtitle, A Dynamic Process, points to the fresh, modern ideas that sparkle throughout this new edition. Just reading Peter Bernstein's thoughtful Foreword can move you forward in your thinking about this critical subject."
—Martin L. Leibowitz, Morgan Stanley

"Managing Investment Portfolios remains the definitive volume in explaining investment management as a process, providing organization and structure to a complex, multipart set of concepts and procedures. Anyone involved in the management of portfolios will benefit from a careful reading of this new edition."
—Charles P. Jones, CFA, Edwin Gill Professor of Finance, College of Management, North Carolina State University

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Foreword xiii

Preface xvii

Acknowledgments xix

Introduction xxi

CHAPTER 1 The Portfolio Management Process and the Investment Policy Statement 1

1 Introduction 1

2 Investment Management 2

3 The Portfolio Perspective 4

4 Portfolio Management as a Process 4

5 The Portfolio Management Process Logic 5

6 Investment Objectives and Constraints 11

7 The Dynamics of the Process 17

8 The Future of Portfolio Management 18

9 The Ethical Responsibilities of Portfolio Managers 18

CHAPTER 2 Managing Individual Investor Portfolios 20

1 Introduction 20

2 CaseStudy 21

3 Investor Characteristics 24

4 Investment Policy Statement 34

5 An Introduction to Asset Allocation 50

CHAPTER 3 Managing Institutional Investor Portfolios 63

1 Overview 63

2 PensionFunds 64

3 Foundations and Endowments 85

4 The Insurance Industry 101

5 Banks and Other Institutional Investors 120

CHAPTER 4 Capital Market Expectations 128

1 Introduction 128

2 Organizing the Task: Framework and Challenges 129

3 Tools for Formulating Capital Market Expectations 146

4 Economic Analysis 174

CHAPTER 5 Asset Allocation 230

1 Introduction 230

2 What is Asset Allocation? 231

3 Asset Allocation and the Investor’s Risk and Return Objectives 236

4 The Selection of Asset Classes 248

5 The Steps in Asset Allocation 254

6 Optimization 257

7 Implementing the Strategic Asset Allocation 296

8 Strategic Asset Allocation for Individual Investors 299

9 Strategic Asset Allocation for Institutional Investors 307

10 Tactical Asset Allocation 320

CHAPTER 6 Fixed-Income Portfolio Management 328

1 Introduction 328

2 A Framework for Fixed-Income Portfolio Management 329

3 Managing Funds Against a Bond Market Index 331

4 Managing Funds Against Liabilities 346

5 Other Fixed-Income Strategies 369

6 International Bond Investing 390

7 Selecting a Fixed-Income Manager 402

CHAPTER 7 Equity Portfolio Management 407

1 Introduction 407

2 The Role of the Equity Portfolio 408

3 Approaches to Equity Investment 410

4 Passive Equity Investing 412

5 Active Equity Investing 429

6 Semiactive Equity Investing 455

7 Managing a Portfolio of Managers 458

8 Identifying, Selecting, and Contracting with Equity Portfolio Managers 466

9 Structuring Equity Research and Security Selection 474

CHAPTER 8 Alternative Investments Portfolio Management 477

1 Introduction 477

2 Alternative Investments: Definitions, Similarities, and Contrasts 478

3 Real Estate 485

4 Private Equity/Venture Capital 498

5 Commodity Investments 516

6 Hedge Funds 530

7 Managed Futures 557

8 Distressed Securities 568

CHAPTER 9 Risk Management 579

1 Introduction 579

2 Risk Management as a Process 580

3 Risk Governance 583

4 Identifying Risks 585

5 Measuring Risk 596

6 Managing Risk 624

CHAPTER 10 Execution of Portfolio Decisions 637

1 Introduction 637

2 The Context of Trading: Market Microstructure 638

3 The Costs of Trading 653

4 Types of Traders and Their Preferred Order Types 663

5 Trade Execution Decisions and Tactics 666

6 Serving the Client’s Interests 678

7 Concluding Remarks 681

CHAPTER 11 Monitoring And Rebalancing 682

1 Introduction 682

2 Monitoring 683

3 Rebalancing the Portfolio 701

4 Concluding Remarks 716

CHAPTER 12 Evaluating Portfolio Performance 717

1 Introduction 717

2 The Importance of Performance Evaluation 718

3 The Three Components of Performance Evaluation 719

4 Performance Measurement 720

5 Benchmarks 731

6 Performance Attribution 744

7 Performance Appraisal 766

8 The Practice of Performance Evaluation 775

CHAPTER 13 Global Investment Performance Standards 783

1 Introduction 783

2 Background of the GIPS Standards 784

3 Provisions of the GIPS Standards 792

4 Verification 840

5 GIPS Advertising Guidelines 845

6 Other Issues 847

Appendix: GIPS Glossary 856

Glossary 864

References 888

About the CFA Program 903

About the Authors 904

Index 913

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JOHN L. MAGINN, CFA, is President of Maginn Associates, Inc., a financial consulting firm. He is also an adjunct professor in the MBA program at Creighton University. He is retired from Mutual of Omaha, where he was the chief investment officer and treasurer, and is also a past chairman of the board of trustees of AIMR, the predecessor to CFA Institute.

DONALD L. TUTTLE, CFA, was vice president of CFA Institute in its Curriculum and Examinations Department from 1992 until his retirement in 2004. He received a BSBA and MBA from the University of Florida and a PhD from the University of North Carolina at Chapel Hill. Dr. Tuttle taught for 21 years at Indiana University, where he chaired the Finance Department from 1970 to 1980. He was Associate Professor of Finance at the University of North Carolina and was a visiting professor at the European Institute of Business Administration (INSEAD), the University Florida, Georgetown University, and the University of Virginia. He has authored numerous articles in leading finance journals and five books on security analysis and portfolio management. He is a member of the Advisory Board of The Journal of Portfolio Management and was a trustee of over 100 mutual funds from 1982 to mandatory retirement age in 2005.

JERALD E. PINTO, PHD, CFA, is Director in of Curriculum Development   at CFA Institute. Before coming to CFA Institute in 2002, he was a consultant to corporations, foundations, and partnerships in investment planning, portfolio analysis, and quantitative analysis. He has also worked in the investment and banking industries in New York City and taught finance at New York University's Stern School of Business. He holds an MBA from Baruch College and a PhD in finance from the Stern School. Pinto obtained his CFA charter in 1992.

DENNIS W. McLEAVEY, CFA, is Head of Professional Development Products at CFA Institute. During his twenty-five-year academic career, he taught at the University of Western Ontario, the University of Connecticut, the University of Rhode Island (where he founded a student-managed fund), and Babson College. McLeavey completed a doctorate in production management and industrial engineering at Indiana University in 1972, and earned his CFA charter in 1990.

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  • Part of Wiley's CFA Alliance, this book gives readers access to the best in professional quality information on managing their investment portfolios
  • Offers readers a rich text on the different levels of the complex world of investment management, a global growth industry
  • Maginn, Tuttle, McLeavey, and Pinto all carry the prestigious CFA distinction and use their expertise to update this authoritative text
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