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.

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.

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) / currentliabilities

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.

JP MORGAN- THE ART AND SCIENCE OF STOCK SELECTIONOne 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 themLarger companies tend to have easily available information and are more closely followed by analysts.Stock are also categorized based on industriesOne 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 businessAnother 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 etcThey 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

BEHAVIORAL INVESTMENT STRATEGIESThe 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 momentumand 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.CalculationTo 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.

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 toleranceand 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 itsIPOback 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".

Appendix 1

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 thecurrent ratioin that some current assets are excluded from the quick ratio. The most significant current asset that is excluded is inventory. Quick assetsare often calculated as currentassets(cash + marketable securities + accounts receivable) minusinventories(sinceinventories are often a firm's least-liquid currentassets). How it works/Example: Thequick ratiois a more conservative version of another well-knownliquiditymetric -- thecurrent ratio. Although the two are similar, the quick ratio provides a more rigorous assessment of a company'sability to payitscurrent liabilities. It does this by eliminating all but the mostliquidofcurrent assetsfrom consideration.Inventoryis the most notable exclusion, because it is not as rapidly convertible tocashand is often sold oncredit. Some analystsincludeinventoryin the ratio, though, if it is more liquid than certainreceivables.

APPENDIX 2

REFERENCES1. 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/rank-stocks-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/investment-strategies-index/equity/us-core-equity/disciplined-equity. [Accessed 07 September 2015].

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SAPM-STOCK SELECTION 1