Nomura Investment Principles

Principles are the foundation for a system. The below mentioned investment principles are
from Nomura Asset Management and are core of any step in the investment process.(see
appendix 1 )
Five investment principles are:

Research
Global Perspective
Technology
Consistency and Transparency
Thorough Risk Management

1. Research: A good research leads to advanced accuracy. It enhances judgment and

helps to ensure the most appropriate ratings. Face to face meetings with company
management in the form of private meetings, seminars, results briefing or plant
visits allows an investor to achieve a better fundamental analysis. A good
fundamental analysis is the key to a good investment. Also, being in touch with the
companys management enables to identify investment opportunities at an early
stage.
2. Global Perspective: Economic and financial market trends are constantly
monitored to gather information and identify investment opportunities from a
global perspective. Being updated with the new laws and global innovations is an
added benefit in the stock selection and valuation process.
3. Technology: Nomura Asset Management tries to integrate Investment skills,
Information skills and Quantitative analysis through various investment
technologies they have developed over time. They use various information,
analysis and risk management tools to perform systematic investments.
(Appendix 2)
4. Consistency and Transparency: Consistency here refers to a consistent
investment style a company tries to follow over a range of investments.
Transparency is making the best use of insights and capabilities such that these
insights
are
reflected
in
our
investment
pattern.
(Appendix 3)
5. Thorough Risk Management: Risk management is one of the most important
principles of a good investment. With clear investment goals marked and
sophisticated risk management systems the amount of risk can be controlled. A
thorough risk management helps us make more appropriate and informed
decisions.
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Nomura Investment Process

Stock selection is done after four stages of analysis and evaluation. Nomura uses a top
down view combined with bottom up selection.
Four stages are:

Idea generation by proprietary model

Fundamental Analysis
Stock Rating
Portfolio Construction

1. Idea Generation by Proprietary Model: All the stocks in our universe are
grouped into "relative value"-based quartile rankings by our proprietary model.
When ranking this universe, the model uses an historic mean-reversion analysis to
identify opportunities. The mean-reversion concept suggests that the stocks trading
at the largest discount relative to their historical averages would offer the greatest
potential for outperformance, and hence the model ranks these stocks as the most
attractive. Mean reverting means how fast will the value go back to its original
value.
2. Fundamental Analysis: Research professionals put stocks through the proprietary
fundamental analysis. Analysts evaluate a company's management potential,
business plans, prospects, competition, and industry-related risk conditions.
Company contacts add value to our research and help to expand upon analysts'
initial findings. Each company is first compared to its industry constituents and
then to other similarly ranked stocks according to the model ranking.
3. Stock Rating: Based on the above, final decisions on stock ratings are then taken
by the weekly Stock Selection Committee meetings. In-house analysts make
proposals on whether to accept or change the quantitative model ranking based on
the results of the fundamental research. Committee members discuss the proposals
and the Chairman then decides final stock ratings. The output of the meeting is the
stock selection recommendations list from which each portfolio management team
will construct a portfolio.
4. Portfolio Construction: Stock candidates for portfolio construction are selected
from the updated stock recommendation list, according to the risk profile and
investment guidelines of the particular client.

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Various Ratios
1. Quick Ratio: An indicator of a companys short-term liquidity. The quick ratio
measures a companys ability to meet its short-term obligations with its most liquid
assets. (see appendix 1)
For this reason, the ratio excludes inventories from current assets, and is calculated
as follows:
Quick ratio = (current assets inventories) / current liabilities
or
= (Cash and equivalents + marketable securities + accounts
receivable) / current liabilities
2. Debt/Equity Ratio: The debt to equity ratio is a financial, liquidity ratio that
compares a company's total debt to total equity. The debt to equity ratio shows the
percentage of company financing that comes from creditors and investors. A higher
debt to equity ratio indicates that more creditor financing (bank loans) is used than
investor financing (shareholders).
3. Operating Profit Margin: The operating margin ratio, also known as the
operating profit margin, is a profitability ratio that measures what percentage of
total revenues is made up by operating income. In other words, the operating
margin ratio demonstrates how much revenues are left over after all the variable or
operating costs have been paid. Conversely, this ratio shows what proportion of
revenues is available to cover non-operating costs like interest expense.
4. Return on Equity: The return on equity ratio or ROE is a profitability ratio that
measures the ability of a firm to generate profits from its shareholders investments
in the company. In other words, the return on equity ratio shows how much profit
each dollar of common stockholders' equity generates.
5. Price to earnings ratio: The price-to-earnings ratio, or P/E ratio, is an equity
valuation multiple. It is defined as market price per share divided by annual
earnings per share.
6. Price to Book Value ratio: The price-to-book ratio, or P/B ratio, is a financial ratio
used to compare a company's current market price to its book value. It is also
sometimes known as a Market-to-Book ratio. The calculation can be performed in
two ways, but the result should be the same each way.
7. EPS Growth: Used to check EPS growth quarter over quarter. Used to determine
recent growth of company.
8. Return on Assets: Return on assets is the ratio of annual net income to average
total assets of a business during a financial year. It measures efficiency of the
business in using its assets to generate net income. It is a profitability ratio.
SAPM-STOCK SELECTION

JP MORGAN- THE ART AND SCIENCE OF STOCK SELECTION

One of the first things managers do is narrow the universe of choices. They conveniently
categorize stocks based on certain criteria. The first step to which is
1. Geography- weather you want to look at domestic stocks or international stocks.
2. Market capitalization or size- this is another screen used by managers. This helps them
evaluate the companies worth. It is calculated by multiplying the number of companys
outstanding shares with price per stock. According to this companies can be divided as
Large cap- industries tend to grow slower with lesser risks
Small cap-tend to have higher growth potentials but with higher risks
So investors can engage in evaluating appreciation vs risk potential by looking at market
cap.
Size also influences the amount of information available on them
Larger companies tend to have easily available information and are more closely followed
by
analysts. Stock
are
also
categorized
based
on
industries
One basic reason for that is that companies in the same industry face similar risks and
challenges weather its supply and demand labor issues or legal issues. Managers study
these companies in a peer-to-peer setting which helps them to pick out companies which
are
thriving
and
which
are
struggling.
Specialization helps them to drill down further within a particular industry to better
understand the mechanics and players in a given field. Each analyst covers 30-35
companies in a sector . in addition to meeting senior managers they reach out to suppliers,
competitors , customers to form a holistic view on the company. They test the business
philosophy, strategies and competitive landscape, measure the value and integrity and also
validate market news and forecast growth. They also identify risks exposures, explore
capital expenditures , track future cash flows, analyze earnings etc. A stocks price may not
be its real value. Truly knowing a stocks value is what drives good investors.
Qualitative analysis is more concerned with who is running the business ..what kind of
business
Another approach is which JPMorgan pioneered in Europe is behavioral strategy stems
from the theory that irrational investors create potential opportunities . managers look for
stocks which have been over priced or overlooked by these investors time bound processes
to research . It Relies on fundamental research carried out by analysts. This data is then fed
to the proprietary dividend discount model . the theory of this model is that the value of the
stock is worth all the future cash flows expected to be generated by the company
discounted at a risk adjusted rate. By this They create a rank if stocks in the same industry.
From the least attractive. To the most . then they would go deep in to the qualitative
management and find out which company has a better long term prospect. Lets look at
stock selection with the lens of our managerial driven Engine for our large cap growth
strategies. the team looks at growth stocks, companies which are growing faster then
average these are found in more dynamic sectors like health care, telecom etc
They can reserve capital to fuel growtg thus thy do not typically pay dividends. They look
for companies, which can give higher than expected results in three to 5 years

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BEHAVIORAL INVESTMENT STRATEGIES

The team starts with quantitative analysis that looks at both value and momentum factors.
Thy r looking to capitalize from inefficiencies created by irrational investors .
Want to buy value stocks and benefit from growing prices and sell when a stock us
overvalued.
Investors generally under react to good news as they are conservative when interpreting
new news. Then slowly as they accept the news it leads to upward rising momentum and
later over bidding in the prices as people over extrapolate or are over confident about
their evaluation of the stock . ( see appendix 2)
The Fundamental Score Indicator is an analysis technique created to analyze stocks strictly
based on certain financial ratios of the company. The score ranges between 0 and 100, with
a higher score signifying stronger fundamental data for a company and a lower score
signifying weaker fundamentals. The score takes into consideration eight different
financial ratios that look into the liquidity, solvency, and profitability strength of a
company.
Calculation
To calculate the fundamental score, They first calculate several financial statement ratios.
Each ratio is given a certain weight in order to calculate the total fundamental score. The
default weights for each ratio are provided below in Figure 1. However, the weights are
also inputs for the indicator, which will allow the client to place a higher or lower
weighting to a certain ratio according to their preference. If you feel the Debt to Equity
Ratio should have a higher weighting than the default 15%, you can adjust it higher and
adjust another ratio lower. In order for the indicator to calculate accurately, all the ratio
weights should add up to 100.

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CONCLUSION
After researching in depth about these equity research firm and their techniques of stock
selection, we conclude that there is scope for investors to understand and analyse the
stocks they are buying. Also to assess if it can give them he return they expect during the
period of investment. The bottom line is that there is no one way to pick stocks. Better to
think of every stock strategy as nothing more than an application of a theory - a "best
guess" of how to invest. And sometimes two seemingly opposed theories can be successful
at the same time. Perhaps just as important as considering theory, is determining how well
an investment strategy fits your personal outlook, time frame, risk tolerance and the
amount of time you want to devote to investing and picking stocks.
At this point, you may be asking yourself why stock-picking is so important. Why worry
so much about it? Why spend hours doing it? The answer is simple: wealth. If you become
a good stock-picker, you can increase your personal wealth exponentially. Take Microsoft,
for example. Had you invested in Bill Gates' brainchild at its IPO back in 1986 and simply
held that investment, your return would have been somewhere in the neighborhood of
35,000% by spring of 2004. In other words, over an 18-year period, a $10,000 investment
would have turned itself into a cool $3.5 million! (In fact, had you had this foresight in the
bull market of the late '90s, your return could have been even greater.) With returns like
this, it's no wonder that investors continue to hunt for "the next Microsoft".

SAPM-STOCK SELECTION

Appendix 1

How it works/Example:
The quick ratio is a more conservative version of another well-known liquidity metric -the current ratio. Although the two are similar, the quick ratio provides a more rigorous
assessment of a company's ability to pay its current liabilities.

It does this by eliminating all but the most liquid of current assets from
consideration. Inventory is the most notable exclusion, because it is not as rapidly

The quick ratio is a financial ratio used to gauge a company's liquidity. The
quick ratio is also known as the acid test ratio. The quick ratio differs from
the current ratio in that some current assets are excluded from the quick
ratio. The most significant current asset that is excluded is inventory.
Quick assets are often calculated as current assets (cash + marketable
securities + accounts receivable) minus inventories (since inventories are
often a firm's least-liquid current assets).

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convertible to cash and is often sold on credit. Some analysts include inventory in the
ratio, though, if it is more liquid than certain receivables.

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APPENDIX 2

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REFERENCES
1. Rank Stocks Based on Fundamental Score - Analysis Concepts - Labs Education - TradeStation. 2015. Rank Stocks Based on Fundamental Score Analysis Concepts - Labs - Education - TradeStation. [ONLINE] Available
at: https://www.tradestation.com/education/labs/analysis-concepts/rankstocks-based-on-fundamental-score. [Accessed 07 September 2015].
2. Search - J.P. Morgan Funds. 2015. Search - J.P. Morgan Funds.
[ONLINE]
Available
at: https://www.jpmorganfunds.com/cm/JPMFController?
formfilter=gsearchaction&num=10&filter=no&numgm=5&mtype
=File+Type&mvalue=Video&dateFilter=all&q=stock+selection+.
[Accessed 07 September 2015].
3. Asset Management - NOMURA. 2015. Asset Management NOMURA. [ONLINE] Available
at:http://www.nomuraholdings.com/services/asset.html. [Accessed
07 September 2015].
4. Disciplined Equity - J.P. Morgan Institutional Asset Management .
2015.Disciplined Equity - J.P. Morgan Institutional Asset
Management . [ONLINE] Available
at: https://am.jpmorgan.com/no/institutional/investmentstrategies-index/equity/us-core-equity/disciplined-equity.
[Accessed 07 September 2015].

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