International Portfolio Management

Group	Teacher	Department	Language
Year 2	Constance Lutolf-Carroll	Dirección General y Estrategia	ENG

Previous Knowledge

Who should take this course?

The knowledge and skills gained from this course will help you learn not only about stock markets and how they function, but also will help you learn how professional investors combine different asset classes into diversified portfolios. By asset classes we mean investments in publicly listed equities (from both emerging markets and developed countries), and investments held in alternative assets (e.g., private equity limited partnerships, venture capital funds, hedge funds, real estate investment trusts, or direct investments in commodities, timberland, or infrastructure projects).

This foundation course in equities will give you a better preparation for an eventual career in asset management, private client advisory, investment banking or the securities brokerage industry among others. Even if you aren't planning on entering any of these fields, after taking this course you should be a more knowledgeable consumer of investment products or financial advisory services either for yourself or members of your family.

Finally, this course is well-liked by those students who, one day, will need to manage their own retirement savings or that of their parents or relatives but don't know how. In general, about 50 percent or more of the class have never bought or sold stocks or mutual funds or ETFs. Novices are welcome so long as they commit to reading the cases and discussing them in their teams.

COURSE CONTRIBUTION TO PROGRAM

The main aim of International Portfolio Management is to better equip participants to understand the global asset management industry from the point of view of a global equity investor. In this intensive two-week course, we will strive to understand how some of the world's leading equity fund managers pursue their different investment goals to meet the needs of their clients.

During the course, we will study these important institutional equity investors: mutual funds, index funds, exchange traded funds (ETFs), charitable foundations and university endowments. We shall examine how these equity investment funds pursue their different investment philosophies in public and private equity markets.

By taking this course, participants should be better able to undertake equity investments in publicly listed shares, either as principals directly investing their own capital, or by using collective investment funds (mutual funds or ETFs).

ADDITIONAL OBSERVATIONS

FACULTY PROFILES

CONSTANCE LUETOLF-CARROLL is an educator and entrepreneur. She is Senior Lecturer at ESADE Business School and a faculty member of the Strategy and General Management department. She joined ESADE in 1986. Connie teaches strategy, finance, and entrepreneurship courses for a wide variety of ESADE degree programs. For many years, has also been concurrently Visiting Professor at RSM Erasmus for the Executive MBA program (each year since 2001) and Senior Visiting Professor at SDA Bocconi for the Master in Corporate Finance program (each year since 2005).

Connie's work experience includes being a registered professional civil engineer in California, a refinery engineer for Exxon-Mobil, a fundamental equities research analyst and an investment banker (having worked for leading brokerages Ibercorp in Spain, and Barings Securities (now ING) in Mexico). She served on the board of Iberiancorp Gestion, B.V. in The Netherlands. More recently, she has founded her own consulting firm Luetolf-Carroll GmbH that advises start-ups.

Connie holds a BS (with honors) in civil engineering from UC Berkeley and earned her MBA from Stanford Graduate School of Business.

Faculty CV: http://www.esade.edu/faculty/constance.lutolfcarroll

ESADE's INVESTOR-IN-RESIDENCE

DR. RUDOLF STAEHELIN will join our class as our Investor-in-Residence (from his home in Geneva). He will share with us his depth of experience managing global equity portfolios and leading teams of highly skilled portfolio managers. For over 35 years, Rudolf was part of the senior management at the Capital Group, one of the world's largest global asset management firms, with $2.06 trillion in assets under management, as of December 2019.

Rudolf worked as a global equity portfolio manager at the Capital Group. He rose to become the Vice Chairman of Capital International Sàrl in Geneva, Switzerland. Early in his career, as an equity investment analyst at Capital, he covered European banking, pharmaceuticals, and chemicals companies. Before joining Capital, Rudolf was with Maus Frères S.A., a retail holding company in Geneva. He holds an MBA from Stanford University Graduate School of Business and earned both doctorate and master's degrees in law from the Universität Basel in Switzerland. He is currently a member of the CFA Institute and a former member of various Securities Analysts Societies in NY, Germany, and Switzerland.

CONTENT

1. Investing as a Process. Developing One's Own Investment Philosophy. In our opening session, we will discover the unique investment philosophies and investment processes of leading portfolio managers. We explore these equity styles: growth, value, momentum, and quantitative. We analyze these different styles using the example of Warren Buffett. We discuss in class how Buffett's investment philosophy was influenced by the value approach of Benjamin Graham, of Columbia University in New York, and by the growth approach of Phil Fisher based in Woodside, California. Buffett puts his investment ideas into practice in the stocks he picked for his company, Berkshire Hathaway.
2. Investor Contagion and Market Manias. The Evolution of Stock Markets and the Rise of Algorithmic Trading. During this session we will examine the typical life cycle of a market bubble and crash using the famous example of the Dutch Tulipmania. Market sentiment is strongly influenced by investor fear and greed and the phenomenon of social contagion. Our case this session explores the relatively new trend towards high frequency trading (HFT). HFT has dramatically increased stock exchange trading volumes and taken market share away from traditional floor trading and other types of electronic trading systems. We will also briefly discuss the rise of social media investing and the influence of WallStreetBets on Reddit.
3. Introduction to Mutual Funds: Active versus Passive Investing. Based on past student course enrollments, typically two-thirds to one-half of the class have no experience buying and selling a company stock, either as a direct share purchase (using a broker or exercising stock options) or via the purchase of shares in a mutual fund (e.g., an open-end fund). This session will be devoted to a topic of particular relevance to retail customers: the choice between selecting passive versus active mutual funds. Can skilled mutual fund managers beat their benchmarks even after all fees and expenses are included? What does the latest empirical evidence show? How can we choose the best approach?
4. How a mutual fund is structured, governed, and operated. Since mutual funds are by far the most popular means for retail customers to own shares, they merit further attention. We will peer into the inner workings of mutual funds to see how they are organized, governed, and operate. The case will also discuss the problem of client redemptions and its many effects on fund performance and strategy.
5. Exchange Traded Funds (ETFs). ETFs are the fastest growing segment of the asset management industry. We will examine the early beginnings of ETFs to see why they were created and how they differ from mutual funds and closed-end funds. We will then look at the potential threat ETFs pose to more traditional active and passive mutual funds and why well-structured ETFs might be attractive to pension funds, institutional investors, or high net wealth individuals and certain segments of the retail market.
6. Risk Adjusted Performance Measures and Industry Best Practices. Measures such as Alpha, Beta, Treynor, Sharpe, Tracking Error, and the Information Ratio are the most common tools for appraising the risk-adjusted performance of mutual fund managers. During this session, we shall learn about these measures and how they are used (and sometimes misused) in practice. We will also examine peer benchmarking, commonly used by pension funds and endowments, and its pitfalls. Finally, we will look at how indices are constructed and what makes for a good benchmark.
7. Investment Advisors and Asset Allocation. Charitable foundations, small- to mid-sized university endowments, and smaller family trusts often do not have the scale or expertise required to manage diversified portfolios in-house. Hence, they may decide to outsource the portfolio management role to outside asset managers, thereby gaining economies of scale, cost-efficiencies, and very importantly, access to top quartile fund managers, including private equity or venture capital funds. During this session, we will discuss the challenges of choosing investment advisors, deciding upon an appropriate asset allocation, and then implementing the decisions effectively.
8. ESG and Sustainability Investing. Global climate change is probably the most pressing issue facing society over the next ten years. In this last session, we will discuss what the broader investment community can do about climate change. Our case will take up the decision facing Harvard Endowment's Investment Office on whether to divest fossil fuel company stocks from the Harvard Endowment. This case also introduces some of the controversies surrounding ESG (Environment, Social, Governance) measurement methods.
9. Topics we will NOT cover in this course In this short, intensive module, we will NOT discuss fixed income securities or derivatives markets. We also will not be doing any actual stock trading, technical analysis, top-down country analysis, nor delve deeply into asset pricing theories or advanced multi-factor models or Value-at-Risk (VAR) models used in risk assessment. Finally, this is not a course about managing hedge funds, starting up a private equity or venture capital fund, or making capital budgeting or corporate capital expenditure decisions, subjects covered by other elective courses.

1. Investing as a Process. Developing One's Own Investment Philosophy.

In our opening session, we will discover the unique investment philosophies and investment processes of leading portfolio managers. We explore these equity styles: growth, value, momentum, and quantitative. We analyze these different styles using the example of Warren Buffett. We discuss in class how Buffett's investment philosophy was influenced by the value approach of Benjamin Graham, of Columbia University in New York, and by the growth approach of Phil Fisher based in Woodside, California. Buffett puts his investment ideas into practice in the stocks he picked for his company, Berkshire Hathaway.

2. Investor Contagion and Market Manias. The Evolution of Stock Markets and the Rise of Algorithmic Trading.

During this session we will examine the typical life cycle of a market bubble and crash using the famous example of the Dutch Tulipmania. Market sentiment is strongly influenced by investor fear and greed and the phenomenon of social contagion. Our case this session explores the relatively new trend towards high frequency trading (HFT). HFT has dramatically increased stock exchange trading volumes and taken market share away from traditional floor trading and other types of electronic trading systems. We will also briefly discuss the rise of social media investing and the influence of WallStreetBets on Reddit.

3. Introduction to Mutual Funds: Active versus Passive Investing.

Based on past student course enrollments, typically two-thirds to one-half of the class have no experience buying and selling a company stock, either as a direct share purchase (using a broker or exercising stock options) or via the purchase of shares in a mutual fund (e.g., an open-end fund).

This session will be devoted to a topic of particular relevance to retail customers: the choice between selecting passive versus active mutual funds. Can skilled mutual fund managers beat their benchmarks even after all fees and expenses are included? What does the latest empirical evidence show? How can we choose the best approach?

4. How a mutual fund is structured, governed, and operated.

Since mutual funds are by far the most popular means for retail customers to own shares, they merit further attention. We will peer into the inner workings of mutual funds to see how they are organized, governed, and operate. The case will also discuss the problem of client redemptions and its many effects on fund performance and strategy.

5. Exchange Traded Funds (ETFs).

ETFs are the fastest growing segment of the asset management industry. We will examine the early beginnings of ETFs to see why they were created and how they differ from mutual funds and closed-end funds. We will then look at the potential threat ETFs pose to more traditional active and passive mutual funds and why well-structured ETFs might be attractive to pension funds, institutional investors, or high net wealth individuals and certain segments of the retail market.

6. Risk Adjusted Performance Measures and Industry Best Practices.

Measures such as Alpha, Beta, Treynor, Sharpe, Tracking Error, and the Information Ratio are the most common tools for appraising the risk-adjusted performance of mutual fund managers. During this session, we shall learn about these measures and how they are used (and sometimes misused) in practice. We will also examine peer benchmarking, commonly used by pension funds and endowments, and its pitfalls. Finally, we will look at how indices are constructed and what makes for a good benchmark.

7. Investment Advisors and Asset Allocation.

Charitable foundations, small- to mid-sized university endowments, and smaller family trusts often do not have the scale or expertise required to manage diversified portfolios in-house. Hence, they may decide to outsource the portfolio management role to outside asset managers, thereby gaining economies of scale, cost-efficiencies, and very importantly, access to top quartile fund managers, including private equity or venture capital funds. During this session, we will discuss the challenges of choosing investment advisors, deciding upon an appropriate asset allocation, and then implementing the decisions effectively.

8. ESG and Sustainability Investing.

Global climate change is probably the most pressing issue facing society over the next ten years. In this last session, we will discuss what the broader investment community can do about climate change. Our case will take up the decision facing Harvard Endowment's Investment Office on whether to divest fossil fuel company stocks from the Harvard Endowment. This case also introduces some of the controversies surrounding ESG (Environment, Social, Governance) measurement methods.

9. Topics we will NOT cover in this course

In this short, intensive module, we will NOT discuss fixed income securities or derivatives markets. We also will not be doing any actual stock trading, technical analysis, top-down country analysis, nor delve deeply into asset pricing theories or advanced multi-factor models or Value-at-Risk (VAR) models used in risk assessment. Finally, this is not a course about managing hedge funds, starting up a private equity or venture capital fund, or making capital budgeting or corporate capital expenditure decisions, subjects covered by other elective courses.

Methodology

The course will be taught face-to-face on the Pedralbes campus. Your teacher will use using a variety of student-centered teaching methods including on-line case discussions, Socratic questioning, polls, role-plays, reviewing short problem sets in class, and student presentations. Outside of class, you will be working individually to study, read, and watch videos posted on Moodle covering the lecture materials or other topics relevant to the course. In your teams, you will be discussing the cases and preparing the team papers. The professors will be available after class for any questions.

As you all know by now, the case method requires careful preparation and active participation of each member of the class.

Regular participation is very important as each session builds upon the prior session. MBA students are expected to come to class on time. Punctuality is important.

As all of you are extremely busy, workload priority should be given to preparing the assigned cases. Even if pressed for time, judiciously skimming through the articles and required readings will help you pick up the industry knowledge and terminology needed to do the assignments. I expect you to have discussed the cases in your team BEFORE class begins.

Afterwards, I encourage you to reflect upon what you have learned during the session. In so doing, you will gain the maximum learning from each day's class.

Understanding investment management requires time, effort, and hands-on practice to try out the techniques presented in the cases, readings, and lectures. Those participants who dedicate the necessary time to the course, i.e., keep up with the reading, do the cases and exercises, attend class, and reflect upon what they are learning will derive the most benefit from the course.

Description	%
Class participation contributions	25
Two team assignments	30
Individual take-home final exam	45

Assessment criteria

A. Class Participation (25%)

Class participation contributions are evaluated based on the criteria of
(1) relevancy,
(2) advancement of the case discussion
(3) strength of supporting evidence or analysis,
(4) consistency of participation.

Are you prepared? Are you offering fresh insights and analysis or just repeating what was already said? Do the comments and analyses offer build upon previous comments made by your classmates? Are you willing to take a stand and express a view on what should be done in terms of implementing your strategy? Are your contributions succinct and to the point?

Note that it is impossible to award class participation marks if a student is absent. If you must miss a class, please have the courtesy to notify your teachers and teammates. Send the notice in writing by email, preferably in advance, and give the reason for your absence.

B. Team assignments (30%)

The teams will be asked to analyze and write up two cases for grading. The instructions for the team assignments and their assessment criteria will be fully explained in the final syllabus.

C. Individual Take-Home Final Exam (45%)

The final exam will consist of a take home case assignment that is to be written up and turned in to Moodle. The case will be of similar difficulty to those we have discussed in class. The hand-in deadline will be in the final syllabus.

Important clarifications:

To pass the course, a minimum grade of 50% is required on both the final exam and the weighted average of all three grade components listed above as A, B, and C. Specifically, if both the final exam mark and the weighted average course grade are above a passing grade of 50%, then the weighted average grade becomes the final grade for the course. Otherwise, the final grade for the course will be the lower of the two marks.

If the exam grade is less than 50% than a retake exam must be done in Second Convocation. If a student does not present for the First Convocation, then an NP (or not present) is recorded in the Registrar's records.

According to the Full-Time MBA Rules, an NP is converted to a 0 and averages as such in the GPA. Therefore, both the first and second attempt (first and second convocations) would weigh in the class ranking calculation.

If the exam grade is less than 50%, or if it was recorded as an NP, than a retake exam must be done in Second Convocation. For the second attempt, the same grading criteria that was used to calculate the first overall course grade will be used.

ESADE's MBA Rules & Regulations will be strictly adhered to. See especially the minimum attendance rules.

Bibliography

A Useful Free Web Resource

2021 Investment Company Fact Book. This free annual publication from the investment company institute, the trade association of the investment industry, gathers current statistics about the funds industry. The fact book explains the structure of various types of investment funds and helpfully compares mutual funds to closed-end investment companies and exchange-traded funds (ETF).

Recommended Classic Books on Investing

FISHER, PHILIP A. Common Stocks and Uncommon Profits, (1958) Business Classics, Woodside, California. ISBN: 0-931133-00-9. Since reprinted various times.

GRAHAM, Benjamin and DODD, David, Security Analysis, (buy the reprinted classic 1934 edition for your bookshelf.) McGraw Hill. ISBN: 0-07-024496-0.

GRAHAM, Benjamin, The Intelligent Investor?A Book of Practical Counsel, 4th revised edition. (1973) Harper & Row Publishers, New York. ISBN: 0-06-015547-7. (Reprinted numerous times).

Recommended Books for Personal Investing

DESAI, Mihir A. The Wisdom of Finance: Discovering Humanity in the World of Risk and Return. (2017) Houghton Mifflin Harcourt Publishing Company. New York: New York. ISBN 978-0-544-91113-0

ELLIS, Charles D., The Capital Group: The Story of Long-Term Investment Excellence. (2004) John Wiley & Sons, Inc. Hoboken, New Jersey. ISBN-13 978-0-471-73587-8 (paper).

JONES, Christopher L. (Foreword by William F. Sharpe). The Intelligent Portfolio: Practical Wisdom on Personal Investing from Financial Engines. (2008) John Wiley & Sons, Inc. ISBN: 978-0-470-22804-3.

MARKS, Howard. The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor (2013) Columbia Business School Publishing.

POZEN, Robert and HAMACHER, Teresa. The Fund Industry: How Your Money Is Managed. 2nd edition. (2015) John Wiley & Sons. ISBN: 978-1-118-92994-0

SWENSEN, David F. Unconventional Success - A Fundamental Approach to Personal Investment, (2005) Free Press, a division of Simon & Schuster, Inc., New York, NY. ISBN: 978-0-7432-2838-1.

Recommended Books on Endowment Fund Management and Portfolio Construction

SWENSEN, David F. Pioneering Portfolio Management - An Unconventional Approach to Institutional Investment, (2000) The Free Press, a division of Simon & Schuster, Inc., NY, NY.

Recommended Books on Corporate Finance, M&A, and Valuation

BRUNER, Robert F., Applied Mergers & Acquisitions. (2004) Hoboken, NJ: John Wiley & Sons.

KOLLER, Tim; Marc GOEDHART; WESSELS, David; and McKinsey & Company. Valuation - Measuring and Managing the Value of the Companies, 6th edition, (2015) Hoboken, NJ: John Wiley & Sons.

LUETOLF-CARROLL, Constance with the collaboration of PIRNES, Antti and Withers, LLP. From Innovation to Cash Flows: Value Creation by Structuring High-Technology Alliances, (2009) Wiley Finance Series. Hoboken, NJ: John Wiley & Sons. ISBN 978-0-470-11809-2

PEREIRO, Luis E., Valuation of Companies in Emerging Markets: A Practical Approach, (2002) John Wiley & Sons. ISBN 0-471-22078-7

ROSENBAUM, Joshua and Joshua PEARL. Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions. 2nd Edition, (2013) Hoboken, NJ: John Wiley & Sons.

TALMOR, Eli and VASVARI, Florin. Private Capital: Private Equity and Beyond, Vol 1. Private Equity, and Vol. 2 Private Capital Investments, (2019), London, UK: Private Capital Advisory, Ltd.

Textbooks on Asset Management, Investment Theory, and Portfolio Management

ANG, Andrew. Asset Management: A Systematic Approach to Factor investing, (2014). Oxford, UK: Oxford University Press. ISBN 9780199959327

BODIE, Zvi, KANE, Alex, and MARCUS, Alan J., Investments, 11th edition, (2018) McGraw-Hill Education. ISBN-13: 978-1259277177

FRANCIS, Jack C. and IBBOTSON, Roger, Investments?A Global Perspective, (2002) NY, New York : Prentice-Hall.

HAUGEN, Robert A., Modern Investment Theory. 5th edition. (2001). Prentice Hall.

KRITZMAN, Mark P. The Portable Financial Analyst?What Practitioners Need to Know, 2nd edition, (2003). Hoboken, NJ: John Wiley & Sons. ISBN 9780471267607.

MAGINN, John L. and TUTTLE, Donald L., and PINTO, Jerald E. and McLeavey, Dennis W., Managing Investment Portfolios?A Dynamic Process, 3rd edition, (2007) CFA Institute Investment Series, John Wiley & Sons, Inc. Hoboken, New Jersey.

REILLY, Frank and BROWN, Keith C., Analysis of Investments and Management of Portfolios, Cengage Learning. Reilly & Brown is the standard textbook used for the CFA (Chartered Financial Analyst) exams. It is frequently updated.

SHARPE, William F.; ALEXANDER, Gordon J. and BAILEY, Jeffrey V. Investments, 6th edition, (1999) Prentice-Hall.

SOLNIK, Bruno and Dennis McLeavey, Global Investments, 6th edition, (2009) Prentice Hall Series in Finance, Pearson Group. International Student Edition (pbk). ISBN-13: 978-0-321-55212-9.

STRONG, Robert A., Portfolio Construction, Management & Protection, 5th edition, (2009) South-Western, a part of Cengage Learning. International Student Edition (pbk). ISBN-13: 978-0-324-59389-1.

Type:	OPT	Curs:	2	Period:	S semester
ECTS Credits:	3 ECTS

International Portfolio Management (2225.YR.005418.1)

General information

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Prerequisites