 Hey guys, it's MJ and what we're gonna be doing in this video is going through portfolio management So NASA has given us some slides and what I'm gonna be doing is I'm gonna be talking through the slides So this is the agenda. You can see we actually have quite a lot to get through So feel free to pause the video at any time take a break But I would advise maybe you know after each topic Maybe taking a five-minute break or or if you've got the stamina to go the whole way through then fantastic But job on the agenda, we're gonna be talking about portfolio management We're gonna be looking at investment styles index tracking active management core satellite approach and anomaly and policy switching so like I said, there is a lot of theory in this and Yeah, let's let's just jump straight into it So this first slide that they've got you is they're saying what is it, you know, what is portfolio management and Essentially portfolio management comes after the investment strategy So the investment strategy will be saying as simple as saying, you know, we want to put 30% in stocks And we want to put 70% in bonds, you know that that is that's the overview That is your your investment strategy Then your portfolio Management is well, okay, how are we gonna go about getting those 30% of equity? how are we gonna go about getting the 70% of bonds and There's various ways that you can do it. There's there's the whole active and passive investment style There's growth in value. That's specifically a round of stocks. I mean momentum and contrarian and rotational those are all Around stocks and shares but top-down and bottom-up These are two approaches that you can apply to to the various other asset classes such as property and bonds and and so forth Okay, so let's look at investment styles. It's starting us off with active managers So says active managers seek to actively Identify mis-price securities which can then be curated to generate excess returns It requires an inefficient market makes sense if investor believes that there are mis-price things to be exploited And if a manager who has the necessary skills to exploit such opportunities can be identified Now it's very interesting when you come to this whole active manager versus passive manager In the sense that if everyone was passive there would be Inefficiencies would crop up in the market But if everyone was an active manager then those inefficiencies would close out, you know, that's that is the one way of seeing it But it's got this thing yet saying, you know an inefficient market I'm not I'm not a hundred percent convinced by the statement requires an inefficient market What we're gonna actually be showing you I guess we can actually talk about it now is a lot of this notes Or a lot of this theory is built around, you know, America and England and in countries that are very well developed And they have a very sophisticated stock exchange and they've got various industries But as soon as you come to to Africa and I guess South Africa, you know falls under this this bracket as well is We're a country that doesn't have as many industries as America and England, you know Our stock exchange is pretty much dominated by, you know, mining and resources and financial Services, I mean if you look at some countries like Nigeria and Angola, they're dominated by the resource industry Which means that if you had to go passively and just passively invest You're gonna be really concentrating your assets into certain you know sectors Whereas it would be wiser from a diversification point of view and a risk management point of view to actually take an Active approach in these countries that have got, you know a domination of a certain industry So in the sense it doesn't matter if the market is inefficient or not Sometimes you want the active manager to actually give you the diversification and risk spread that is, you know applicable to your investment Goals so I'm gonna I'm gonna disagree with these slides that they have here saying that it requires an inefficient market That is not always the case, especially in, you know, a South African context One interesting thing to note though is that there is this belief that the more third world the country is or the less Developed it is the more inefficient the market is It's it's a dangerous assumption to make and it's maybe one that if you do want to state that in the exam Maybe do a little bit of research behind it see if you can find a paper that can back up that statement I mean it it could be true But it could also could not be true and that's also a big lesson to to learn when it comes to these these F Subjects is to question the notes because it requires an inefficient market Not not always true when talking about South Africa and those type of things Okay, so passive managers What it's saying here involves selecting securities that best meet investors objectives or make up investors benchmark Portfolio these securities are held passively and only change in reaction to a change in objectives or benchmarks Appropriate and investor believes that market is efficient This implies that one cannot generate returns in excess of market returns without taking on extra risk I mean the one thing about say the passive manager Which does get like a little bit awkward is let's say we want to go 30% in shares 70% in bonds and then the stock market does really really well, you know, and I'll value let's say doubles now we have You know as our total portfolio. We have a much heavier concentration and equity than we did with bonds Then do you rebalance? You know to keep it in the 3070 ratio or do you break away from your investment strategy? You know what what do you do? Because from a passive point of view you buy onto these assets and saying that you only change them If there's changes in the objectives or the benchmarks Also, I mean involve selecting securities that best meet investors objectives I mean passive manager. It's more like buying into the index So South Africa we have this thing called satrix that tracks the top 40 shares So passive manager will say okay. Let's buy all this put all our money in the satrix top 40 Whereas the active manager will say well in that top 40 There are some shares that I don't think are going to be performing well and there are some shares that I think are going to be performed Even better so the active manager will say only choose 20 of the top 40 and invest his money that way So that that is one key key thing to note about passive and active managers Now okay now there's now they're talking about you know around the stock So let's say 30% we're going into equities. Okay, which equities do we choose? Growth stocks or stocks that are expected to experience rapid growth of earnings dividends and hence price So growth stocks are normally your technology shares You know if a new app comes out or a new type of social media like Facebook or Twitter Or even like say bio medical You know a new drug company that does experimental stuff anything that Has got doesn't really have a history. So growth stocks are normally your your young companies They are very capital and R&D Intensive, but they they're expected to make you know massive amounts of money If they you know unlock or they solve what they're trying to do So they're very exciting very risky and they're either going to be great or they're going to bomb out Whereas your value stocks are more of your boring stocks. They're more like your utilities They're more like your companies that have been established for a long time companies that have you know, they've got a product they make their product well and Every year they've got a certain amount of sales and they get their money and they don't spend a lot of R&D they pay high dividends and They're they're not gonna you don't buy the stock and then sell it a week later and double your money You know, there's not going to be be that excitement or that possibility But they're more of a stock that you buy and it may be five or ten years time You might see a little bit of growth in their value, but you would have got quite a lot of money in return With the dividend yield. So this is kind of like the mature or the safer stock to buy in this is more the crazy speculative stock to buy in and Certain managers will try and take a different philosophy on either one of these Okay, now they're talking about momentum contrarian and rotational Let's start off with rotational just because it Kind of follows on a little bit more logically from the previous slide and rotational is when sometimes you're buying value stocks and Other times you're buying growth stocks depending on where the market is in its big cycle of life So let's say we're going through a little bit of a recession Then you might want to put all your money into value stocks Because it's safe, but let's say the the economy is booming and you know Everybody's coming rich quickly or then it might make sense to take advantage of the situation and put your money into the growth stocks Then there's these two things called momentum and contrarian and this is that they complete contradictions of each other Which is very Interesting, you know, it shows that finance That's what I do enjoy by finances the fact that you can have these two situations Where the one is going to be You know saying we must go this way and the other one saying we should go that way So what momentum says is that if we if a share starts going up, okay? If a share starts going up ooh, I have gone one slide foot if a share starts going up Then momentum says that because the shares going up all the other investors are going to be like wow the share is so great We also already buy into it and that's going to further push the stock up even more than even more It's gonna be like wow the stock's doing so well They're gonna put even more money in and there's just gonna be momentum and it's just gonna keep keep rising Contrarian view is that the market overreacts. So let's say there's a good news story and the share goes up Contrarian view is that well that the market has overreacted and that this value the Intrinsic value of the share is now overpriced and therefore it's actually quite good to short the share Whereas the momentum Investor will say oh look good news. The price has gone up. This is a bar sign Contrarian will say this is a sell sign and The thing about the momentum investor is that he believes That everyone will start buying a share if its value goes up But if there's a lot of contrarians in the market, then his belief is gonna fail But now what's interesting is the contrarian investor He believes that a lot of the investors are momentum buyers in the sense that if a lot of the investors are Contrarian then the prices are not actually going to overreact. So Where this gets very interesting is which one is better depends on who are the other investors and If you look at like if you read some of the the history of finance and hedge funds and all of these type of things There's some traders who wouldn't play the market. They would play the other traders So if every and I think Warren Buffett also talks a little bit about this You know be greedy when other people are fearful and be fearful when other people are greedy and the idea with that is You know, if there are a lot of momentum buyers in the market Then it's actually quite weird because if there's a lot of momentum buyers, then it means both methods will work If there's a lot of contrarian investors in the market It means both of these won't work or when I mean they both will work Momentum will work in the short term and contrarian will work in the long term But if there's a lot of contrarian then neither of them will work in the short term or the long term and If that is confusing well, welcome to finance. This is the great contradiction between momentum and contrarian investors Okay, let's look at investment styles. There's something called the top-down approach So top-down approach is when you think of it think of it as a bird coming down to land So bird says well, you know what? Let me first choose which city I want to land in Okay, I've decided on Cape Town. Okay, now I'm landing in okay, which Which area of Cape Town do I want to land in? Oh, I want to land in the waterfront then it comes down to the waterfront Okay, which building do I want to land on? Okay, I want to land on you know The F&B big building there and then it says, okay, which part of the roof do I want to land on? You know, that is the top-down approach you start at the top and you slowly come down so from an investment point of view you would say, okay, I want to invest in Securities what type of securities? Equity securities I want to invest therefore in the stock market the top four t-shirts. I want to invest in the financial Sector out of the financial sector. I want to invest in the banks out of the banks I want to invest in F&B so you can see how we we start off very general and we come become more and more specific as we go down whereas bottom up is Basically think of you running around the street saying hmm the F&B share actually looks great That's a great value. I want to buy that. Oh, look at this telecoms look trading at a great price Let me buy that and then what what you start doing is you start buying shares at the ground level And then when you go up you say okay, look We've actually got a lot of influence on finance and we have a lot of influence in the telecommunication Sector So the one use you know coming down like the bird and the other one is you're running around on the ground making your choices Interestingly a lot of the time an active investor will go bottom up You know looking around for what what share has been misprice and then building up their investment portfolio that way Whereas the passive investor will generally look at the top-down approach say okay We need so much of this. Let's get so much of that and I mean a passive investor might even stop it Say the financial sector and buy an instrument that covers all of the the shares in the financial sector Rather than even going all the way down to the granular level and Joe what let's see what the next slide is index tracking So they say this is a form of passive investment. It doesn't have to be passive It could be could be an active investment. I mean if you're tracking say You know the volatility index or some of these more crazy indexes It could actually be a form of active management. So it doesn't have to be a form of passive investment There's three main ways to do it. There's full replication Which is you know holding all the securities in proportion to index weightings So yeah, the idea is that let's say you've got the top 40 shares and You you go in and you actually physically buy all 40 of the shares Depending on their weight. So if F&B is the biggest company You're gonna buy the most of F&B with regards to weight. There's a lot of calculations you need to do Or what you can do is you can do a sampling Or replication Where what you do is you just hold certain like a little sample You know very much like statistics you hold the very little sample that acts similarly to the full Replication This is going to be a much cheaper way because you're not going to have you know such high dealing costs But you're not going to get the perfect match with index tracking which does leave room for you know, additional risk So that is one thing that as an investor you'd want to you'd want to consider and that would very much depend on Your clients. I mean if you're a massive Investment Bank full replication is saying that you can do whereas if you're a small boutique hedge fund Asampling Would be you know make more sense Then there's also this whole thing that you can do is synthetically, you know replicating index using derivatives and cash That does open up a lot of other problems though. I mean derivatives. Do the derivatives exist? What is their liquidity? What is the marketability? Can you get them and what are their dealing costs actually might be more expensive? They might be even additional operational costs and people that you implement to put them forward stuff up and you know You lose a lot of money So they there are there's pros and cons to to each of these types of index tracking techniques What is the next the next slide? Okay next slide we're talking about the advantages of index tracking Reduces risk of underperforming the index You're lower dealing and research costs. Okay. This this is important is the the research cost We'll think about it as a passive investor You just say I want to buy the top 40 shares. Okay, you just go and you say I want to buy the top 40 shares You're basically your only research is saying what shares on the top 40 and you either buy them or you buy You know a synthetic instrument to give you that Whereas if you the active manager you say well, I think 20 shares are going to you know I perform the other 20 shares. That's a lot of research that that's a lot of late nights, you know coffee drinking trying to figure out What's going on? Oh like like is the shea gonna go up or is that shea gonna go down? Let me do my PE analysis There's all this you're gonna have to imply Employee, you know some graduates to help you with the business analysis There's all these these costs that come into it Like I said if you're a big massive investment bank these costs will be quite small But if you're a boutique hedge fund again, these costs can be quite substantial So I think that's one of the biggest advantages of index tracking They say it's appropriate of markers believed to be efficient Tracking world diversified indices ensure fund is well diversified thus reducing specific risk and volatility of returns Remember this isn't true all the time like we said before if your Country that you're dealing in is you know an African country, South Africa The indices will not necessarily be well diversified There has been times in South Africa's history where the indices have been dominated by the mining companies which means you've got a overexposure to the commodities and If you went and you you know did your passive index tracking thinking oh look at me I'm not gonna be taking on that much risk. You were actually increasing your specific risk and you could have decreased that Sorry about that. You could have decreased your specific risks if you had gone the active approach so Be careful. This is this is a big warning Don't just learn your book work off by heart because if they're talking about you know The question context is that you're in an African country doing investment there and you say oh We're gonna reduce the specific risks by just you know going into the index that would be seen as Incorrect, okay, so don't don't make that that silly mistake and always think about you know, what is the market that you're in? Propriet if markets believe to be efficient I mean well we can have a huge conversation over market efficiency is the efficient isn't the efficient I think yeah, there's a there's a lot of literature on that topic There's a lot of intellectual debate pro and against you know that that belief so Let's look at the disadvantages chance of outperforming the index is reduced well Yeah, that's kind of like obvious full replication involves forced buying selling When index constitutes change and fragmented portfolio Yeah, I mean like if a share falls out of the top 40 you have to go and then sell it Which is probably not the best time to be selling that share Specifically if it's you know, there's that whole momentum approach going where a share falls out of the top 40 It's been performing a little bit badly Everyone goes oh my gosh the shares terrible We're also gonna sell it all the other passive managers say well it's not in the top 40 anymore We have to sell it as well and then you have to go and say oh flip We also have to sell it so what you're basically doing is you're depleting the price of that poor share You know it falls out of the top 40 space and a chair. Just get value gets wiped out So what what could actually be quite interesting? This is for you for you guys who want to maybe become hedge fund managers It could be quite interesting to look at the shares that are you know in the 39th 40th position on the index and watch them And maybe short them You look okay, I'm talking speculation talking to be going a little bit off topic but there's a little bit of speculation here and that is You you short these shares because if they fall out of the index Their price is going to be smashed If the market is made up a lot of passive investors so again You need to understand the other players in the financial market in order to really profit off of it If there are a lot of passive managers and a share falls out of the top 40 Its price is going to be obliterated and if you have a short on that You're going to make a lot of money in that situation And then what you can do if you want to be really clever is after it's dropped out of the top 40 Its price will be smashed. Its price will be incredibly low below its intrinsic value That's a great time to buy it And even if it never comes back into the top 40, you've got to share at a very good price Which should give you quite a nice dividend yield Then also if it does get back into the top 40 everybody has to buy it again And a share value is going to you know shoot up again Now see when you start thinking of things like this It's very difficult to say oh the market is efficient Because if a share falls out of the top 40 or not It shouldn't have such a massive impact if a share goes from 40th to 41st It should not experience such a massive drop that we do see But anyway, we're going a little bit off topic So yeah, let's let's check it out Full replication involves forced buying selling or an index We spoke about that Resulting strategy may pay insufficient regard to investors objectives Yeah, like that's the thing is that because index tracking is seen as to the less risky less risky less reward You may not get your objectives Not that hot on that that point But I don't know let's see what the other one may prove difficult to find an appropriate Index to track Yeah, so there are different indexes. There's say the top 40 um, but then there's also something called the SWIX which is Based on you know the social Responsible or is the others that type of Yeah, there's different indices. So it's difficult to choose. Which one do you want to actually track? And I guess that does make the strategy of when one falls off, you know Does this value deplete doesn't fall off all of the indices or just which one? but I mean, I guess a big thing here or a big a good example is say in america They've got something called the dow Jones And what is there the new york one called the nasdaq? So the nasdaq from a Theoretical point of view is better than the dow Jones But we do see that the dow Jones is very popular and is quoted a lot So it's actually quite interesting, you know, which is the appropriate index to track in that sense Um, but that's more of like an american I guess japan also has that they have the nickeye And they have the topics Indices which also gained two competing ones South africa And I mean the other african countries. I don't think that would be too much of a problem Um, because like I said, our indices are kind of the same. They were built a little bit later. They are more efficient um And then this last one may be difficult to accurately track chosen index That that's a weird thing that they've put there Because I mean say in south africa, we've got say the satrix instrument Which makes it very easy to track your chosen index in america and japan and england They will have products as well. They can accurately track the index So I guess this is maybe more for, you know, african and other third world countries Where their financial market might not be as sophisticated um So, yeah, I guess or I guess if you want to have like quite a Like you want to track the index of financial Companies, it might be a little bit difficult, but but this is more a third world problem Which is interesting. Why are they putting third world problems? And then but they yeah, yeah these slides. Okay. Anyway, let's let's rather move on Active management pros and cons Okay, active management pros and cons offers the possibility of higher returns than market Limitations of peer group risk difficulties related to selecting outperforming investment managers timing change to lineup of active managers Okay, so what what this slide is basically saying is that if you go with an active manager Remember as as an actually what you're basically doing is you would be saying we need put say 30 percent in the stock market 70 percent in bonds and then you need to decide You know, should we take that 30 percent and just invest it in a lovely little index? Or should we hand it over to some active managers and let them invest our money for us? The active managers can you know, we'll be able to get around the diversification problems of the passive strategy in a third world country but They will have you know, their expenses their salaries their nice fancy officers their beautiful car that they have to pay for So they are quite expensive But they do offer the possibility of higher returns, you know, they could be really intelligent I mean imagine if you chose Warren Buffett as your active manager, you know You'd be laughing all the way to the bank. You'd be making a lot of money But there is the possibility that you choose the wrong investment manager you choose some guy who You know, maybe it's just woke up one morning. It's like, hey, I want to be a hedge fund manager And then you give the money to him. He doesn't know what he's doing and you actually, you know lose money You know, and there's this Yeah, you lose money compared to everybody else. That's peer group risk. Everybody else does better than you Um, which it's a weird risk this one I mean You can have you can underperform the group but overperform the market or you can underperform the market but overperform your group and this is where it gets quite interesting because It might actually be better to Outperform your group and underperform the market in the other way around Because it means that the money that's going to those other people then comes towards you This is if you're an active manager You can then get that that more more money to do that stuff But the biggest problem as an actually choosing, you know, doing the investment strategy is trying to choose Well, which investment managers are the best and there's all these different little Performance ratios that we look at and you know, but they they all have their own problems as well Um, I wonder if we're going to be looking at those um No, I don't think we're looking at those. Okay. So let's just move on to the next slide active investment mandate okay Active investment mandates. This is a multi asset or balanced mandate Managed funds invest across a variety of different asset categories and will take decisions on waiting across asset categories and stocks within each asset category um specialist mandate specializing particular asset categories and employed to manage funds invested in that asset category only Okay, so what basically this is is when you go to An active manager. So think of either actually deciding investment strategy or you decided, okay, we're going to go active manager We've decided Warren Buffett is the best active manager that we want to go to so we knock on his door We now sit down with old Warren Buffett and now we need to tell Warren Buffett what we want him to do We can tell Warren Buffett. Look Warren Buffett. We only want you to invest in financial stocks um, or we might say to him we only want you to invest in Growth stocks or we only want you to take a contrarian outlook so this is where it becomes quite interesting because You know, I mean you could go to the active manager and be like, you know, he has a hundred million You know make me rich but For your overall strategy and for your portfolio construction You might want to give them a specific mandate or specific set of rules and instructions on what they should do and what they can't do And this becomes very interesting because this kind of stuffs up the whole portfolio You know Those little indicators like is this active manager good or is he bad and you might look at his You know return on investments and all these other things and say this guy's you know, just terrible But it could be unfair because his mandate might have might has limited him or might have restricted him from purchasing Say this new stock that was going to do absolutely amazing But it was against his mandate to purchase it so he couldn't purchase it But all the other active managers purchased it. So he loses out on the group risk and his performance measures are bad Meanwhile, he actually did nothing wrong. It was just the silly mandate that was passed on to him Or actually that mandate might not have been silly at all. It just perfectly, you know Coincided with this portfolio strategy. So this is where finance does get blurry It does get difficult to try and determine, you know, which manager is the best And this is quite interesting Some active managers might actually say no to your money If you give them a mandate that they're not comfortable with because they know how important it is That their performance measures are correct and are looking healthy But you could job There will be some active managers who will specialize in a certain mandate who will specialize In just a group of shares and then, you know, like, okay, if we need insurance companies on our portfolio, you know Bob over here, he's dedicated his entire life to just studying insurance companies Let's go to him. Give him a specialist mandate to say only invest in insurance companies You know, Bob will be like, that's great If you go to Bob and say, I only want you to invest in mining companies Bob's going to be like, dude, you know Go go somewhere else. So it is very interesting once you, you know And this does make passive investing a lot more attractive from an actual point of view Because you just have to say, okay, I want to track that index Whereas if you're going to active manager, you have to choose Which active manager to go with and then you have to sit down and talk to him about the mandate And there's all these other things that you actually have to go on with So it's more expensive. It's more time consuming and it does require more judgment So it is important to keep that that in mind There's something called the core satellite approach Basically what this approach is it's saying Instead of me going to say a hedge fund manager and saying, here's a hundred million I want you to put 90 million into safe stocks or track the index And I only want you to go aggressive with the 10 million You know, that's quite a silly thing to say because what you're doing is you're paying the hedge fund manager commission or management fees on that full 100 million Whereas it would be much better to go to the hedge fund manager and say Here's 10 million go crazy with it and then you go and you put the 90 million yourself Into the you know the stock market Index tracking passive passive approach So that 90 million would be your call and then the satellite would be the 10 million And then you might actually say to the 10 million 1 million I want you to go into high growth stocks another million I want you to go into crazy technology stocks 1 million I want you to go in, you know, contrarian approach, you know, you can then have this whole satellite approach and You can then give these small amounts to guys who are specialists and let's see if they Yeah, majority manage on a low cost. Yeah, so they do mention the big benefit is that it's it is low cost Active managers employed to provide increased performance in respect of balance fund But now there is there is a disadvantage and that is if you go to like say the best hedge fund manager And you tell them you're only going to give him 10 million He might say well that that's not enough. You're not worth my time Whereas if you go to him with say the 100 million he's going to be like, oh come in come inside You know have a cup of coffee. Welcome to my office. You know, he's going to do like a whole song and dance for you So there is a disadvantage to going the core satellite approach in that you might not be able to attract the best Active managers and I don't think they have included that as a point in one of these slides Okay. Anyway, I think we've got five five more slides to go. So well done. If you guys are still hanging in there Remember, you can take a break whenever you want Um, you know, maybe have a little quick cup of coffee and then come back to this video Um, next we are talking about anomaly switching. Okay. This this is quite crazy Anomaly switching is switching generally involves buying one stock and selling the other So bonds are held to match liabilities Switches are done to enhance returns through active trading anomaly switching involves moving between stocks with some of Volatilities six advantages of temporary anomalies and price Relatively low risk strategy profits likely to be small. Okay. So what this basically is is You would actually write a computer program to do this for you. So what you would do is you'd say Okay, when this measure goes above this or when this falls below that Um, that creates a little bit of an anomaly We want you to then sell and then buy straight away back into this other company And then when these small little variations change, we want to continuously doing this buying and selling Taking advantage of these small anomalies The more people who do it the less these anomalies will last for and it will slowly start to close up To the point where the amounts of money that you're spending in the transaction cost of selling and buying You know the tax and the broker fees and all of that that has to go through it Actually starts eliminating the the extra return that you get From this exercise. So that's why profits are likely to be small and they're likely to decrease with time Um risk is also quite a low risk strategy because you're kind of still in the same asset clause You're just flicking between these these two things like yeah It it is more of like an obscure thing in finance But it is something that you would you would leave to the machines to do Um, otherwise you'd be spending your whole life at the computer, you know clicking clicking clicking clicking It is something that yeah a machine can do better than a human But the whole trick then is to give it the right set of rules and instructions to you know to perform Um, okay. Yeah, they're talking more about anomaly switching three techniques of identifying anomaly switches Compare current yield differences between two similar bonds to recent average values to determine if one of the bonds seems cheap Or dearer to the other Compare price ratios in similar fashion to yield differences allowing for any difference in coupon levels Use price and yield models if actual price or yield differs from model prediction then a mispricing exists So you can see very mathematical Very like technical and all that type of stuff. So it is something that you would have a machine um That would continuously calculate these various averages and ratios and then perform the trade for you Um on its behalf. I think in like in wall street They the people actually fight to be as close as possible as they can to the actual stock exchange Just so that the wires connecting to the two buildings is just a fraction smaller Which saves them a microsecond which can give them a slight advantage in performing these these trades before everybody else does Because remember this is a machine doing it at light speed And yeah, so they try and get the officers as close as possible to the stock exchange in order to take advantage Of this. I mean this is something Yeah, like I said the machines are kind of doing it It's very much finance financial mathematics and quant and and all that type of crazy crazy stuff um Okay, now they've got something more policy switching Involves taking a view on future changes in shape or level of the yield curve and moving it to bond With different volatilities if you're expected to fall switch into longer dated more volatile stocks potentially high risk high return approach Need to consider matching. Okay, so policy switching is more of the long-term game Whereas anomaly switching was very much a short-term game policy switching is you think Okay, this country that we're invested in they're actually, you know, they're going to elect the government That's going to be completely inefficient or they're going to go into a war or something terrible is going to happen Which means the yield of their bonds is going to skyrocket and the price of the bonds are going to You know fall flat. So what we're going to do is we're going to get out of long-term dated bonds And while we're going to short-term date bonds With uh, and then there's also the flip strategy. Oh, no, this country's got a great new government They're going to go through, you know, they've laxed quite a lot of regulations. There's going to be a big economic boost Let's go into the long-term bonds So this is very much an active investment approach to the bond market Um, so not only can you do active investing around shares and equity But you can also do it on your debt instrument. It is quite a different ball game It is a little bit more difficult. You do have to take a more of an economic Outlook you do need to understand politics and world history and current affairs and all the latest trends going into it Um, but what we are seeing here in the notes is that it is a high risk high return approach. So it is quite interesting because Normally like they said the investment strategy is we want to put 30 percent in equity 70 percent in bonds The one way to think, you know, people might say, okay regulation might say we have to put, you know So much in bonds because that is considered, you know safe One way to beat that regulation is and say, okay, we'll put 70 percent into bonds But we're going to go into this high risk trading policy switching strategy So our bonds portfolio is actually a little bit more aggressive than the equity Which kind of defeats the whole purpose of the regulation saying, you know, so much has to go into bonds To to, you know, give a little bit of security or stability to the the total investment So it is quite crazy. And and that's what they are saying Yeah, you need to consider matching because by doing this you will be mismatching from your liabilities Which does introduce the high risk but does give you the opportunity To get the high return Okay, we have two more slides to go Um, let's just see what they are risk management and anomaly and policy switching Okay, so they just want to talk a little bit more about it three factors That can be used to identify policy switching opportunities Volatility duration calculations together with forecasts for changes in yields can be used to estimate percentage changes in value And so to determine the area of the market that will give the best returns Examination of reinvestment rates between two bonds of different terms may indicate areas of yield curves That seem cheap or dear suggesting future possibility yield movements Examination of forward rate spot rates may reveal apparent oddities in term structure that give rise to policy switching opportunities whoo, okay, I think the big things to to look here are reinvestment rates spot rates and volatility and like I said, this is very technical very numerical lot of calculations best left to the machines, but it's it's important because as an actuary Or someone in financial engineering you will develop that algorithm or that formula to give to the the machine in order to implement And I mean, this is possibly where we are going to see a little bit of a rise in artificial intelligence artificial intelligence is basically machine trading with a bit of a Bayesian approach saying do this if that's not working Change it and what will be quite interesting is a machine will be able to learn What is the optimal? You know way to trade and stuff like that. So this is actually It's exciting but from a technical point of view And it is something where I think actuaries have a bit of an advantage of other financial You know like the cfa and the accountants and stuff like that is because we do have an appreciation of statistics And we do have an appreciation of mathematics, which is going to be applying quite drastically in this area So that is a it's an exciting area It is a scary area, but it is an exciting area is if you can make a machine That not only just trades on a set algorithm But actually starts to learn and changes How it you know trades you might you might be in for for a bit of a win But job that isn't normally in policy switching and then basically The slide ends. Why is the slide ended? But basically they're talking about risk management saying bond portfolios often help to match specific liabilities And that's the whole thing that normally policy switching kind of breaks that That whole matching philosophy The following techniques can be used to control bond portfolio risk Immunization you should remember that from ct1 Stochastic acid liability modeling that's like ct8 failure at risk calculations again ct8 multi factor modeling again ct8 And that's yeah, the slide actually finishes here But job these are just like the mathematical And I mean this is f1 of 5 so they will or there's a possibility of there being mathematical questions They're not normally that difficult though So bitch up it is important that you go through some numerical Examples on your own checking out, you know, can I do immunization? Can I do these these various things? And and you should be fine But that is the end of the slide So I think uh, yeah, I think the video is done Well then for for hanging in for the whole whole duration And I'll see you again for for the other videos that we we make around this and remember study hard and your best of luck for the exams Thanks guys. Cheers