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

EQUITY INVESTMENT MANAGEMENT

Equities represent a significant asset class comprising a major proportion of investors’ investment portfolios. The asset allocation for investor spans across equity markets in terms of domestic and international, based on capitalization, style, and investment approach.

There are two basic approaches to equity investment management: passive and active. Common stock portfolio management strategies are discussed in Chapter 9.²⁶⁰ Passive management involves gaining broad exposure to equities as defined by a tracking index such as the S&P 500 stock index.²⁶¹ Equity indexing is an approach to equity investing that seeks to replicate the performance of a benchmark. Equity derivatives can be used to as an important investment vehicle for implementing passive strategies. As an alternative to an investment in a replicating portfolio of stocks designed to track the index, investors can use a combination of a long cash investment and stock index futures or an equity swap.²⁶²

Recall from a previous chapter that active equity investment strategies are designed to outperform a passive equity benchmark. These strategies might use superior stock selection techniques or quantitative techniques to produce superior returns to the benchmark. The specific approach to active management is often categorized according to some concept of style. The most common two styles include growth and value investing. It might also involve a capitalization filter or the use of technical ...