Liability-Driven Investment

CHAPTER 4Building Investment Portfolios: Part 1: Security Selection

We move from Individual Security Selection, then approach Fund Selection before building up to Portfolio Construction

In Simple Steps

Aka Stock-picking

(FUNDAMENTAL, TECHNICAL AND QUANTITATIVE TECHNIQUES)

The basic building blocks of our asset allocation decision must be individual securities. They are the simplest units on which we must build our investment positions, express our investment views and look to hedge our future liabilities. In today's world a diverse, professionally managed portfolio could contain exposure to as many as ten thousand individual stocks, all of which will have only marginal effects on the total value of our positions.

Clearly, in practice, it will be difficult for all but the largest investors to gain exposure to so many assets individually, and investors will therefore engage with financial advisors, asset managers and professional investment teams to select individual securities such as stocks and corporate bonds on their behalf.

Although individual stock selection is not the primary focus of this book, in this chapter we will introduce the most widely known approaches including some of the more common techniques and methodologies that practitioners use. As well as introducing the seminal texts in the field for those interested in finding out more about single stock investing, as well as briefly discussing the history of financial thought.

In this section we will outline the ...