19-EquityPort Page 551 Friday, March 12, 2004 12:40 PM

I

CHAPTER

19

Equity Portfolio Management

n this chapter we review strategies for equity portfolios, taking a close

look at active and passive management, the decision as to whether or not

to pursue an active or passive management, style investing, and the differ-

ent types of active strategies that can be employed. We stress the role of

multifactor risk models in the portfolio construction process. We begin the

chapter with a discussion of the equity portfolio management process.

INTEGRATING THE EQUITY PORTFOLIO MANAGEMENT PROCESS

In Chapter 1, the investment management process was described as a

series of five distinct steps. In practice, portfolio management requires

an integrated approach. There must be recognition that superior invest-

ment performance results when valuable ideas are implemented in a

cost-efficient manner. The process of investing—as opposed to the pro-

cess of investment—includes innovative stock selection and portfolio

strategies as well as efficient cost structures for the implementation of

any portfolio strategy.^1 The integrated approach to managing equity

portfolios recognizes that the value added by the manager is the result

of information value less the implementation cost of trading. This dif-

ference in value is referred to as “captured value,” a term coined by

Wayne Wagner and Mark Edwards.^2

(^1) Wayne H. Wagner and Mark Edwards, “Implementing Investment Strategies: The
Art and Science of Investing,” Chapter 11 in Frank J. Fabozzi (ed.), Active Equity
Portfolio Management (New Hope, PA: Frank J. Fabozzi Associates, 1998).
(^2) Wagner and Edwards, “Implementing Investment Strategies: The Art and Science
of Investing.”
551