CHAPTER7EQUITY L. Consultants , New JerseyAndrew R. Olma, Global Francisco, CaliforniaRobert G. Zielinski, , Japan1. constitute a significant part of many investment portfolios’ value. For , the decision of how to invest the equity allocation among competing ranks second in importance only to the decision of how much of the portfolio to equities in the first placeThis chapter presents a broad overview of equity portfolio management organized : Section 2 summarizes the role of equities in investors’ portfolios. Sections 3 introduce and discuss three broad approaches to equity investing and their subdisciplinesSection 7 discusses managing a portfolio of managers so that the overall equity the investor’s purposes. Section 8 presents the important subject of identifying, Investment Portfoliosselecting, and contracting with equity portfolio managers. Section 9 discusses research and security . THE ROLE OF THE EQUITY represent a significant source of wealth in the world today. As of September 30,.2004, the aggregate market value of the equities in the Morgan Stanley Capital Country World Index (MSCI ACWI) was more than $19 trillion, of which represented markets outside the United Furthermore, nearly 5 percent of the.$19 trillion total, equal to a market value of nearly $950 billion, represented vast pool of equity assets is held in both individual and institutional portfoliosExhibit 7-1 shows the equity allocation weighting for institutional clients in various domestic and international equities play a large role in these portfolios— are in the investor’s home markets; international equities are outside those marketsExhibit 7-1 makes clear that international equities constitute differing proportions of 7-1 Equity Allocations for Institutional : Greenwich Associates, 20031 This index covers 49 developed and emerging markets and is intended to represent approximately of each country’s equity market to a 2003 survey by the Pension Fund Association in Japan, covering 1,316 plans, the average allocations to domestic and international equities were percent percent, respectively ( percent in total). Although focusing on corporate pension plans all institutional investors as in Exhibit 7-1, this survey suggests that Japanese equity allocations be smaller than those in North American and . markets, but larger than those in . The survey is available at 7 Equity Portfolio Management409average equity portfolio in different countries. These differences probably reflect, at least , differences in the market capitalizations (values) of investors’ home equity markets to a global portfolio of equities: The larger the domestic market’s global weight, we might expect investors to emphasize that market. Different attitudes and may also affect these international differencesInvesting across multiple markets also offers diversification benefits, because no fully captures all global economic factors. Furthermore, many companies of an investor’s home market have no exact home-market equivalent, regardless the domestic market is small or as large and diverse as in the United StatesMost investors worry about inflation, and inflation hedging ability is a . Informal
