The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

INTEGRATING THE EQUITY PORTFOLIO MANAGEMENT PROCESS

In Chapter 1, the investment management process was described as a series of five distinct tasks. In practice, portfolio management requires an integrated approach. There must be recognition that superior investment performance results when valuable ideas are implemented in a cost-efficient manner. The process of investing—as opposed to the process of investment—includes innovative stock selection and portfolio strategies as well as efficient cost structures for the implementation of any portfolio strategy.¹⁷¹ Exhibit 9.1 highlights the importance of an integrated approach to managing equity portfolios. It recognizes that the value added by the manager is the result of information value less the implementation cost of trading. This difference in value is referred to as captured value, a term coined by Wayne Wagner and Mark Edwards.¹⁷²

EXHIBIT 9.1 The Investing Process

Source: See Wayne H. Wagner and Mark Edwards, “Implementing Investment Strategies: The Art and Science of Investing,” Chapter 11 in Active Equity Portfolio Management, ed. Frank J. Fabozzi (Hoboken, N.J.: John Wiley & Sons, 1998).

This view that an investing process requires an integrated approach to portfolio management is reinforced by MSCI BARRA, a vendor of analytical systems used by portfolio managers. This service provider emphasizes that superior investment ...