Q&A with CMMB Securities

Q. Financial people often talk about active and passive management of stock investing. What do they mean?

Robert, Port-of-Spain

A: Active and Passive strategies refer to two management styles of investing. A passive strategy invests in exactly the same securities, in the same proportions, as an index such as the TT Composite Index or the Dow Jones Industrial Average (DJIA). This strategy is also known as indexing. Sector indices, such as a banking index or a manufacturing index, can also be mimicked for a portfolio guided by a passive investment strategy. A portfolio manager does not make any decision to buy or sell a security that does not copy the market index. The return on an investment portfolio managed with a passive strategy should therefore be equal to the return on the particular index it copies. One benefit of such a strategy is that the portfolio does not incur a lot of transaction costs.

Active investment is when a portfolio manager dynamically trades a portfolio with the aim of beating a market index, such as the Trinidad and Tobago Composite Index or the S&P 500 Index. The portfolio manager decides on the various asset classes (such as bonds or equities) in which the portfolio is to be invested and the percentages assigned to each class. This decision is termed the Asset Allocation decision. Secondly, in each asset class, the manager will decide on the industry and thirdly, on the best performing companies in each industry. The portfolio would therefore be formed from these investment decisions. Once the portfolio is set up, the portfolio manager may rebalance the portfolio (shifting between asset classes or particular investments), depending on the economy, market trends and company specific factors, such as earnings. An active strategy incurs more transaction costs.

Q. What are T Bills and what role do they play on the local investment scene?

Ashram, Curepe

A: T-Bills is a short name for Treasury Bills and as the name implies are debt securities issued by the Treasury of a country. For example, in Trinidad and Tobago Government may choose to finance part of its short term needs by borrowing from the financial system by issuing T Bills. These securities are a direct obligation of the Consolidated Fund of Trinidad and Tobago and are considered to be a risk-free investment. Since T Bills are the safest investment in the local market they obviously pay the lowest interest rate.

Treasury Bills are also used by the Central Bank of Trinidad and Tobago (CBTT) as an instrument of monetary policy. When there is excess liquidity in the financial system the CBTT would issue T Bills which removes money from the system. Alternatively CBTT also may buy back T Bills from the commercial banks in order to provide liquidity when the system is short. Treasury Bills can be tendered for by the public on certain dates which are advertised in the newspapers. Or they can be bought from the Central Bank, which may have excess holdings from time to time. Another way of buying T Bills is through a Primary dealer such as a commercial bank.

Disclaimer for Articles: All information contained in this article has been obtained from sources that CMMB believes to be accurate and reliable. All opinions and estimates constitute the Author’s judgement as of the date of the article; however neither its accuracy and completeness nor the opinions based thereon are guaranteed. As such, no warranty, express or implied, as to the accuracy, timeliness or completeness of this article is given or made by CMMB in any form whatsoever.

CMMB and/or its employees or directors may, where applicable, make markets and effect transactions, or have positions in securities or companies mentioned herein. Neither the information nor any opinion expressed, shall be construed to be, or constitute an offer or a solicitation to buy or sell.