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This part consists of six chapters (Chapter 15–20) focusing on equity investments strategies including factor investing, smart beta versus alpha, activist and impact investing, and socially responsible investing. The final chapter in this section deals with pooled investment vehicles: open-end mutual funds, closed-end mutual funds, exchange-traded funds, and unit investment trusts.

Chapter 15 Equity Investing Strategies (Nicholas Biasi, Andrew C. Spieler, and Raisa Varejao) This chapter provides a discussion of popular and emerging trends in equity strategies. An entire spectrum of equity investing strategies is available, ranging from passive indexing to active management, stable income to growth, and everything in between. Value investing can trace its roots back to Benjamin Graham and seeks to identify companies that are trading a substantial discount to their intrinsic values. Conversely, growth investing involves identifying firms that have expected high earnings growth. Still other strategies are designed to provide stable income. A variety of exchange-traded fund (ETF) structures allow investors to design diversified equity portfolios to meet their desired risk and return characteristics. Quantitative strategies exploit computing power to identify trends or mispricings and thus remove human emotion from the trade. Options allow investors to increase, decrease, and tailor their exposure based on their view of the underlying equity position.

Chapter 16 Factor Investing (Aaron Filbeck) This chapter reviews factor investing as an equity investment strategy. Factors are measurements of systematic risk used to explain returns for diversified portfolios. The chapter begins by providing a brief history of factor investing, starting with the capital asset pricing model. This single-factor model assumes that the market (beta) is the only factor affecting returns. Next, the chapter examines some other prominent factors, including value, size, momentum, low volatility, and quality/profitability. Finally, the chapter introduces some portfolio management considerations in practice, which include multi-factor portfolio construction and active management benchmarking.

Chapter 17 Smart Beta Strategies versus Alpha Strategies (Timothy A. Krause) This chapter reviews the academic literature and articles in the financial press on the performance of this relatively new investment paradigm and provides an analysis of the empirical performance of these smart beta exchange-traded funds (ETFs). Smart beta investing strategies have gained increased attention from both academics and practitioners in recent decades. Between 2014 and 2018, growth in smart beta ETFs averaged almost 30 percent annually. These strategies are based on the concept of “factor” investing, which has existed for decades. Now, however, ETF providers use the term smart beta to indicate various factor-based strategies. The empirical evidence on smart beta performance is generally positive, but it does have its detractors. The empirical analysis in this chapter indicates that, in recent years, smart beta strategies outperform alpha-seeking strategies on both absolute and risk-adjusted-performance measures, but not passive capitalization- or equal-weighted indices.

Chapter 18 Activist and Impact Investing (Michael Sinodinos, Andrew Siwo, and Andrew C. Spieler) This chapter examines activist investing and impact investing. Activist investing is when an investor seeks to make changes to corporate strategies or policies by owning shares of a public company. Activists can be wealthy individuals, pension funds, hedge funds, or even gadflies. Activists may engage management privately, submit proposals via the proxy statement, engage in proxy fights, or seek board representation. Recent trends include increased hedge fund activism and coordinated efforts. Impact investing is when an investor seeks to make investments that have the objective of obtaining a social or environmental benefit alongside a financial return. The integration of environmental, social, and governance (ESG) factors into investing is an approach that has captured the attention of institutional investors globally and brings nonfinancial factors, such as diversity, carbon emissions, and board structure, to the fore.

Chapter 19 Socially Responsible Investing (Randolph D. Nordby) Earning money while doing good for society is the typical goal for socially responsible investing (SRI). However, does achieving this goal require compromising financial returns? Can investors achieve their financial goals while still being true to their values and principles? SRI has become part of mainstream investing and is being integrated into the investment decision-making process at many firms. Yet, no single agreed-upon definition of SRI – or even a consensus on what constitutes best practices for using these factors to make informed investment decisions – exists. This chapter discusses the evolution of SRI investing into today's more traditional environmental, social, and governance (ESG) investing. It also explores the best practices being promoted by top global associations of investment professionals using ESG factors for equity valuation. From a practitioner's perspective, a critical challenge of using ESG data for asset valuation is properly integrating these nonstandardized factors into an asset's valuation process. This area has attracted much attention, but little clarity. Thus, this chapter focuses on providing both a better understanding of the multiple methods of SRI investing and an overview of the best practices for integrating ESG metrics into the equity valuation process.

Chapter 20 Pooled Investment Vehicles (Joseph McBride, Michael Pain, and Andrew C. Spieler) This chapter discusses the four major pooled investment vehicles (PIVs) that dominate the market today: open-end mutual funds (MFs), closed-end mutual funds (CEFs), exchange-traded funds (ETFs), and unit investment trusts (UITs). It also discusses the overall structure and related benefits, drawbacks, and risks of each structure. Additional discussion focuses on the creation and redemption process, net asset value (NAV), premium/discount, tradability, liquidity attributes, tax efficiency, and leverage, as well as indirect and direct costs. The chapter also provides a brief history and general trends involving PIVs and the need to follow a disciplined investment process when evaluating these types of investments.