Security Screening
Objective: Build and maintain an efficient
portfolio
How? Analysis of individual securities
very time consuming (can’t analyze everything)
highly redundant (someone else has done it)
Problem: How can I narrow a list of potential
investments to a level where I can
perform detailed analysis
incorporate these investments into a portfolio
Types of Screens
Positive: “Mailbox”; Used to add firms to
an existing set
eg: only utilities; only dividend paying firms
want firms with specific attributes to fill a
need; want to build a set
Negative: “Drain”; Used to delete firms
from an existing set
eg: no EPS25% in
past 5 years
Only bonds rated “A” or better
Only firms with div. yield > 5%
No firms with ROE < 20%
No firms incorporated in past 10 years
Other reasons to screen
We’ve focused on ex-ante screening
locating candidates for inclusion/exclusion
Also need to screen on an ex-post basis
need to clear out the deadwood
window dressing
Window Dressing
Objective: To report a quarter end portfolio
that has “good” performers and omits “bad”
performers
How: buy winners from prior period
sell losers from prior period
Appropriate?
expected returns change based on past perf.
assumes trend, market inefficiency
avoids criticism
Other reasons to screen
Can build specialty products
Sector funds
Country specific funds
SR funds
Can use to manage systematic risk
Constant Beta strategy
Tracking error