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PORTFOLIO MANAGEMENT IN PRACTICE
Volume 3
Equity Portfolio Management


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CONTENTS
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7.

8.

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10.

11.

12.

Cover

Title Page
Copyright
PREFACE
ACKNOWLEDGMENTS
ABOUT THE CFA INSTITUTE INVESTMENT SERIES
CHAPTER 1 OVERVIEW OF EQUITY SECURITIES
1. LEARNING OUTCOMES
2. 1. INTRODUCTION
3. 2. EQUITY SECURITIES IN GLOBAL FINANCIAL MARKETS
4. 3. TYPES AND CHARACTERISTICS OF EQUITY SECURITIES
5. 4. PRIVATE VERSUS PUBLIC EQUITY SECURITIES
6. 5. INVESTING IN NON-DOMESTIC EQUITY SECURITIES
7. 6. RISK AND RETURN CHARACTERISTICS OF EQUITY SECURITIES
8. 7. EQUITY SECURITIES AND COMPANY VALUE
9. SUMMARY
10. REFERENCES
11. PRACTICE PROBLEMS
CHAPTER 2 MARKET EFFICIENCY
1. LEARNING OUTCOMES
2. 1. INTRODUCTION
3. 2. THE CONCEPT OF MARKET EFFICIENCY
4. 3. FORMS OF MARKET EFFICIENCY
5. 4. MARKET PRICING ANOMALIES
6. 5. BEHAVIORAL FINANCE
7. SUMMARY
8. REFERENCES
9. PRACTICE PROBLEMS
CHAPTER 3 OVERVIEW OF EQUITY PORTFOLIO MANAGEMENT
1. LEARNING OUTCOMES
2. 1. INTRODUCTION

3. 2. THE ROLES OF EQUITIES IN A PORTFOLIO
4. 3. EQUITY INVESTMENT UNIVERSE
5. 4. INCOME AND COSTS IN AN EQUITY PORTFOLIO
6. 5. SHAREHOLDER ENGAGEMENT
7. 6. EQUITY INVESTMENT ACROSS THE PASSIVE–ACTIVE SPECTRUM
8. SUMMARY
9. REFERENCES
10. PRACTICE PROBLEMS
CHAPTER 4 PASSIVE EQUITY INVESTING
1. LEARNING OUTCOMES
2. 1. INTRODUCTION
3. 2. CHOOSING A BENCHMARK
4. 3. APPROACHES TO PASSIVE EQUITY INVESTING
5. 4. PORTFOLIO CONSTRUCTION
6. 5. TRACKING ERROR MANAGEMENT
7. 6. SOURCES OF RETURN AND RISK IN PASSIVE EQUITY PORTFOLIOS
8. SUMMARY
9. REFERENCES
10. PRACTICE PROBLEMS
CHAPTER 5 ANALYSIS OF ACTIVE PORTFOLIO MANAGEMENT
1. LEARNING OUTCOMES
2. 1. INTRODUCTION
3. 2. ACTIVE MANAGEMENT AND VALUE ADDED
4. 3. COMPARING RISK AND RETURN
5. 4. THE FUNDAMENTAL LAW OF ACTIVE MANAGEMENT
6. 5. APPLICATIONS OF THE FUNDAMENTAL LAW
7. 6. PRACTICAL LIMITATIONS
8. SUMMARY
9. REFERENCES
10. PRACTICE PROBLEMS

CHAPTER 6 ACTIVE EQUITY INVESTING: STRATEGIES
1. LEARNING OUTCOMES
2. 1. INTRODUCTION
3. 2. APPROACHES TO ACTIVE MANAGEMENT
4. 3. TYPES OF ACTIVE MANAGEMENT STRATEGIES
5. 4. CREATING A FUNDAMENTAL ACTIVE INVESTMENT STRATEGY
6. 5. CREATING A QUANTITATIVE ACTIVE INVESTMENT STRATEGY
7. 6. EQUITY INVESTMENT STYLE CLASSIFICATION
8. SUMMARY
9. REFERENCES


10. PRACTICE PROBLEMS
13. CHAPTER 7 ACTIVE EQUITY INVESTING: PORTFOLIO CONSTRUCTION
1. LEARNING OUTCOMES
2. 1. INTRODUCTION
3. 2. BUILDING BLOCKS OF ACTIVE EQUITY PORTFOLIO CONSTRUCTION
4. 3. APPROACHES TO PORTFOLIO CONSTRUCTION
5. 4. ALLOCATING THE RISK BUDGET
6. 5. ADDITIONAL RISK MEASURES USED IN PORTFOLIO CONSTRUCTION AND MONITORING
7. 6. IMPLICIT COST-RELATED CONSIDERATIONS IN PORTFOLIO CONSTRUCTION
8. 7. THE WELL-CONSTRUCTED PORTFOLIO
9. 8. LONG/SHORT, LONG EXTENSION, AND MARKET-NEUTRAL PORTFOLIO CONSTRUCTION
10. SUMMARY
11. REFERENCES
12. PRACTICE PROBLEMS
14. CHAPTER 8 TECHNICAL ANALYSIS
1. LEARNING OUTCOMES
2. 1. INTRODUCTION
3. 2. TECHNICAL ANALYSIS: PRINCIPLES, ASSUMPTIONS, AND LINKS TO INVESTMENT ANALYSIS

4. 3. CHARTING
5. 4. TECHNICAL INDICATORS
6. 5. APPLICATIONS TO PORTFOLIO MANAGEMENT
7. SUMMARY
8. PRACTICE PROBLEMS
15. GLOSSARY
16. ABOUT THE AUTHORS
17. ABOUT THE CFA PROGRAM
18. INDEX
19. END USER LICENSE AGREEMENT

Guide
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Cover
Table of Contents
Series Page

Title Page
Copyright
Preface
Acknowledgments
About the CFA Institute Investment Series
Begin Reading
Glossary
About the Authors
About the CFA Program
Index
End User License Agreement

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PREFACE
We are pleased to bring you Equity Portfolio Management, Volume 3 of Portfolio Management in Practice. This series of three volumes serves as
a particularly important resource for investment professionals who recognize that portfolio management is an integrated set of activities. The topic
coverage in the three volumes is organized according to a well-articulated portfolio management decision-making process. This organizing
principle— in addition to the breadth of coverage, the currency and quality of content, and its meticulous pedagogy—distinguishes the three
volumes in Portfolio Management in Practice series of volumes from other investment texts that deal with portfolio management.
The content was developed in partnership by a team of distinguished academics and practitioners, chosen for their acknowledged expertise in
the field, and guided by CFA Institute. It is written specifically with the investment practitioner in mind and is replete with examples and practice
problems that reinforce the learning outcomes and demonstrate real-world applicability.
The CFA Program curriculum, from which the content of this book was drawn, is subjected to a rigorous review process to assure that it is:
faithful to the findings of our ongoing industry practice analysis
Valuable to members, employers, and investors
Globally relevant
Generalist (as opposed to specialist) in nature
replete with sufficient examples and practice opportunities
Pedagogically sound
The accompanying workbook is a useful reference that provides Learning Outcome Statements, which describe exactly what readers will learn
and be able to demonstrate after mastering the accompanying material. additionally, the workbook has summary overviews and practice
problems for each chapter.

We hope you will find this and other books in the CFA Institute Investment Series helpful in your efforts to grow your investment knowledge,
whether you are a relatively new entrant or an experienced veteran striving to keep up to date in the ever-changing market environment. CFA
Institute, as a long-term committed participant in the investment profession and a not- for-profit global membership association, is pleased to
provide you with this opportunity.


ACKNOWLEDGMENTS
Special thanks to all the reviewers, advisors, and question writers who helped to ensure high practical relevance, technical correctness, and
understandability of the material presented here.
We would like to thank the many others who played a role in the conception and production of this book: the Curriculum and Learning Experience
team at CFA Institute with special thanks to the curriculum directors, past and present, who worked with the authors and reviewers to produce the
chapters in this book, the Practice Analysis team at CFA Institute, and the Publishing and Technology team for bringing this book to production.


ABOUT THE CFA INSTITUTE INVESTMENT SERIES
CFA Institute is pleased to provide the CFA Institute Investment Series, which covers major areas in the field of investments. We provide this
best-in-class series for the same reason we have been chartering investment professionals for more than 45 years: to lead the investment
profession globally by setting the highest standards of ethics, education, and professional excellence.
The books in the CFA Institute Investment Series contain practical, globally relevant material. They are intended both for those contemplating entry
into the extremely competitive field of investment management as well as for those seeking a means of keeping their knowledge fresh and up to
date. This series was designed to be user friendly and highly relevant.
We hope you find this series helpful in your efforts to grow your investment knowledge, whether you are a relatively new entrant or an experienced
veteran ethically bound to keep up to date in the ever-changing market environment. As a long-term, committed participant in the investment
profession and a not-for-profit global membership association, CFA Institute is pleased to provide you with this opportunity.

THE TEXTS
Corporate Finance: A Practical Approach is a solid foundation for those looking to achieve lasting business growth. In today’s competitive
business environment, companies must find innovative ways to enable rapid and sustainable growth. This text equips readers with the
foundational knowledge and tools for making smart business decisions and formulating strategies to maximize company value. It covers
everything from managing relationships between stakeholders to evaluating merger and acquisition bids, as well as the companies behind them.

Through extensive use of real-world examples, readers will gain critical perspective into interpreting corporate financial data, evaluating projects,
and allocating funds in ways that increase corporate value. Readers will gain insights into the tools and strategies used in modern corporate
financial management.

Equity Asset Valuation is a particularly cogent and important resource for anyone involved in estimating the value of securities and understanding
security pricing. A well-informed professional knows that the common forms of equity valuation—dividend discount modeling, free cash flow
modeling, price/earnings modeling, and residual income modeling—can all be reconciled with one another under certain assumptions. With a
deep understanding of the underlying assumptions, the professional investor can better understand what other investors assume when calculating
their valuation estimates. This text has a global orientation, including emerging markets.

Fixed Income Analysis has been at the forefront of new concepts in recent years, and this particular text offers some of the most recent material
for the seasoned professional who is not a fixed-income specialist. The application of option and derivative technology to the once staid province
of fixed income has helped contribute to an explosion of thought in this area. Professionals have been challenged to stay up to speed with credit
derivatives, swaptions, collateralized mortgage securities, mortgage-backed securities, and other vehicles, and this explosion of products has
strained the world’s financial markets and tested central banks to provide sufficient oversight. Armed with a thorough grasp of the new exposures,
the professional investor is much better able to anticipate and understand the challenges our central bankers and markets face.

International Financial Statement Analysis is designed to address the ever-increasing need for investment professionals and students to think
about financial statement analysis from a global perspective. The text is a practically oriented introduction to financial statement analysis that is
distinguished by its combination of a true international orientation, a structured presentation style, and abundant illustrations and tools covering
concepts as they are introduced in the text. The authors cover this discipline comprehensively and with an eye to ensuring the reader’s success at
all levels in the complex world of financial statement analysis.

Investments: Principles of Portfolio and Equity Analysis provides an accessible yet rigorous introduction to portfolio and equity analysis.
Portfolio planning and portfolio management are presented within a context of up-to-date, global coverage of security markets, trading, and
market-related concepts and products. The essentials of equity analysis and valuation are explained in detail and profusely illustrated. The book
includes coverage of practitioner- important but often neglected topics, such as industry analysis. Throughout, the focus is on the practical
application of key concepts with examples drawn from both emerging and developed markets. Each chapter affords the reader many
opportunities to self-check his or her understanding of topics.
All books in the CFA Institute Investment Series are available through all major booksellers. And, all titles are available on the Wiley Custom

Select platform at where individual chapters for all the books may be mixed and matched to create custom
textbooks for the classroom.


CHAPTER 1
OVERVIEW OF EQUITY SECURITIES
Ryan C. Fuhrmann CFA
Asjeet S. Lamba PhD, CFA

LEARNING OUTCOMES
The candidate should be able to:
describe characteristics of types of equity securities;
describe differences in voting rights and other ownership characteristics among different equity classes;
distinguish between public and private equity securities;
describe methods for investing in non-domestic equity securities;
compare the risk and return characteristics of different types of equity securities;
explain the role of equity securities in the financing of a company’s assets;
distinguish between the market value and book value of equity securities;
compare a company’s cost of equity, its (accounting) return on equity, and investors’ required rates of return.

1. INTRODUCTION
Equity securities represent ownership claims on a company’s net assets. As an asset class, equity plays a fundamental role in investment
analysis and portfolio management because it represents a significant portion of many individual and institutional investment portfolios.
The study of equity securities is important for many reasons. First, the decision on how much of a client’s portfolio to allocate to equities affects
the risk and return characteristics of the entire portfolio. Second, different types of equity securities have different ownership claims on a
company’s net assets, which affect their risk and return characteristics in different ways. Finally, variations in the features of equity securities are
reflected in their market prices, so it is important to understand the valuation implications of these features.
This chapter provides an overview of equity securities and their different features and establishes the background required to analyze and value
equity securities in a global context. It addresses the following questions:
What distinguishes common shares from preference shares, and what purposes do these securities serve in financing a company’s

operations?
What are convertible preference shares, and why are they often used to raise equity for unseasoned or highly risky companies?
What are private equity securities, and how do they differ from public equity securities?
What are depository receipts and their various types, and what is the rationale for investing in them?
What are the risk factors involved in investing in equity securities?
How do equity securities create company value?
What is the relationship between a company’s cost of equity, its return on equity, and investors’ required rate of return?
The remainder of this chapter is organized as follows. Section 2 provides an overview of global equity markets and their historical performance.
Section 3 examines the different types and characteristics of equity securities, and Section 4 outlines the differences between public and private
equity securities. Section 5 provides an overview of the various types of equity securities listed and traded in global markets. Section 6 discusses
the risk and return characteristics of equity securities. Section 7 examines the role of equity securities in creating company value and the
relationship between a company’s cost of equity, its return on equity, and investors’ required rate of return. The final section summarizes the
chapter.

2. EQUITY SECURITIES IN GLOBAL FINANCIAL MARKETS
This section highlights the relative importance and performance of equity securities as an asset class. We examine the total market capitalization
and trading volume of global equity markets and the prevalence of equity ownership across various geographic regions. We also examine
historical returns on equities and compare them to the returns on government bonds and bills.
Exhibit 1 summarizes the contributions of selected countries and geographic regions to global gross domestic product (GDP) and global equity
market capitalization. Analysts may examine the relationship between equity market capitalization and GDP as a rough indicator of whether the
global equity market (or a specific country’s or region’s equity market) is under, over, or fairly valued, particularly compared to its long-run
average.
Exhibit 1 illustrates the significant value that investors attach to publicly traded equities relative to the sum of goods and services produced
globally every year. It shows the continued significance, and the potential over-representation, of US equity markets relative to their contribution to
global GDP. That is, while US equity markets contribute around 51 percent to the total capitalization of global equity markets, their contribution to
the global GDP is only around 25 percent. Following the stock market turmoil in 2008, however, the market capitalization to GDP ratio of the
United States fell to 59 percent, which is significantly lower than its long-run average of 79 percent.
As equity markets outside the United States develop and become increasingly global, their total capitalization levels are expected to grow closer
to their respective world GDP contributions. Therefore, it is important to understand and analyze equity securities from a global perspective.
EXHIBIT 1 Country and Regional Contributions to Global GDP and Equity Market Capitalization (2017)

Sources: The WorldBank Databank (2017), and Dimson, Marsh, and Staunton (2018).
Exhibit 2 lists the top 10 equity markets at the end of 2017 based on total market capitalization (in billions of US dollars), trading volume, and the
number of listed companies.1 Note that the rankings differ based on the criteria used. For example, the top three markets based on total market
capitalization are the NYSE Euronext (US), NASDAQ OMX, and the Japan Exchange Group; however, the top three markets based on total US
dollar trading volume are the Nasdaq OMX, NYSE Euronext (US), and the Shenzhen Stock Exchange, respectively.2
EXHIBIT 2 Equity Markets Ranked by Total Market Capitalization at the End of 2017 (Billions of US Dollars)

Rank Name of Market

Total US Dollar Market
Capitalization

Total US Dollar Trading
Volume

Number of Listed
Companies

1
2
3
4
5
6
7

$22,081.4
$10,039.4

$6,220.0
$5,084.4
$4,393.0
$4,350.5
$3,617.9

$16,140.1
$33,407.1
$6,612.1
$7,589.3
$1,981.6
$1,958.8
$9,219.7

2,286
2,949
3,604
1,396
1,255
2,118
2,089

$2,351.5

$1,013.3

1,897

$2,331.6
$2,262.2

$183.0
$1,497.9

5,616
499

8
9
10

NYSE Euronext (US)
NASDAQ OMX
Japan Exchange Groupa
Shanghai Stock Exchange
Euronextb
Hong Kong Exchanges
Shenzhen Stock Exchanges
National Stock Exchange of
India
BSE Limitedc
Deutsche Börse

Notes:
aJapan Exchange Group is the merged entity containing the Tokyo Stock Exchange and Osaka Securities Exchange.
bFrom 2001, includes Netherlands, France, England, Belgium, and Portugal.
cBombay Stock Exchange.

Source: Adapted from the World Federation of Exchanges 2017 Report (see ). Note that market capitalization
by company is calculated by multiplying its stock price by the number of shares outstanding. The market’s overall capitalization is the aggregate

of the market capitalizations of all companies traded on that market. The number of listed companies includes both domestic and foreign
companies whose shares trade on these markets.
Exhibit 3 compares the real (or inflation-adjusted) compounded returns on government bonds, government bills, and equity securities in 21
countries plus the world index (“Wld”), the world ex-US (“WxU”), and Europe (“Eur”) during the 118 years 1900–2017.3 In real terms, government
bonds and bills have essentially kept pace with the inflation rate, earning annualized real returns of less than 2 percent in most countries.4 By
comparison, real returns in equity markets have generally been around 3.5 percent per year in most markets—with a world average return of
around 5.2 percent and a world average return excluding the United States just under 5 percent. During this period, South Africa and Australia
were the best performing markets followed by the United States, New Zealand, and Sweden.
EXHIBIT 3 Real Returns on Global Equity Securities, Bonds, and Bills During 1900–2017


Source: Dimson, Marsh, and Staunton (2018).
Exhibit 4 shows the annualized real returns on major asset classes for the world index over 1900–2017.
EXHIBIT 4 Annualized Real Returns on Asset Classes for the World Index, 1900–2017

Source: Dimson, Marsh, and Staunton (2018).
The volatility in asset market returns is further highlighted in Exhibit 5, which shows the annualized risk premia for equity relative to bonds (EP
Bonds), and equity relative to treasury bills (EP Bills). Maturity premium for government bond returns relative to treasury bill returns (Mat Prem) is
also shown.
These observations and historical data are consistent with the concept that the return on securities is directly related to risk level. That is, equity
securities have higher risk levels when compared with government bonds and bills, they earn higher rates of return to compensate investors for
these higher risk levels, and they also tend to be more volatile over time.
EXHIBIT 5 Annualized Real Returns on Asset Classes and Risk Premiums for the World Index since 1900–2017

Notes: Equities are total returns, including reinvested dividend income. Bonds are total return, including reinvested coupons, on long-term
government bonds. Bills denotes the total return, including any income, from Treasury bills. All returns are adjusted for inflation and are expressed
as geometric mean returns. EP bonds denotes the equity risk premium relative to long-term government bonds. EP Bills denotes the equity
premium relative to Treasury bills. MatPrem denotes the maturity premium for government bond returns relative to bill returns. RealXRate denotes
the real (inflation-adjusted) change in the exchange rate against the US dollar.

Source: Dimson, Marsh, and Staunton (2018).
Given the high risk levels associated with equity securities, it is reasonable to expect that investors’ tolerance for risk will tend to differ across
equity markets. This is illustrated in Exhibit 6, which shows the results of a series of studies conducted by the Australian Securities Exchange on
international differences in equity ownership. During the 2004–2014 period, equity ownership as a percentage of the population was lowest in
South Korea (averaging 9.0 percent), followed by Germany (14.5 percent) and Sweden (17.7 percent). In contrast, Australia and New Zealand
had the highest equity ownership as a percentage of the population (averaging more than 20 percent). In addition, there has been a relative


decline in share ownership in several countries over recent years, which is not surprising given the recent overall uncertainty in global economies
and the volatility in equity markets that this uncertainty has created.
EXHIBIT 6 International Comparisons of Stock Ownership: 2004–20145

2004 2006 2008 2010 2012 2014
Australia – Direct/Indirect
55%
South Korea – Shares
8
Germany – Shares/Funds
16
Sweden – Shares
22
United Kingdom – Shares/Funds 22
New Zealand – Direct
23

46%
7
16
20
20

26

41%
10
14
18
18
N/A

43%
10
13
17
N/A
22

38%
10
15
15
17
23

36%
N/A
13
14
N/A
26

Source: Adapted from the 2014 Australian Share Ownership Study conducted by the Australian Securities Exchange (see
). For Australia and the United States, the data pertain to direct and indirect ownership in equity markets; for other
countries, the data pertain to direct ownership in shares and share funds. Data not available in specific years are shown as “N/A.”
An important implication from the above discussion is that equity securities represent a key asset class for global investors because of their
unique return and risk characteristics. We next examine the various types of equity securities traded on global markets and their salient
characteristics.

3. TYPES AND CHARACTERISTICS OF EQUITY SECURITIES
Companies finance their operations by issuing either debt or equity securities. A key difference between these securities is that debt is a liability
of the issuing company, whereas equity is not. This means that when a company issues debt, it is contractually obligated to repay the amount it
borrows (i.e., the principal or face value of the debt) at a specified future date. The cost of using these funds is called interest, which the company
is contractually obligated to pay until the debt matures or is retired.
When the company issues equity securities, it is not contractually obligated to repay the amount it receives from shareholders, nor is it
contractually obligated to make periodic payments to shareholders for the use of their funds. Instead, shareholders have a claim on the company’s
assets after all liabilities have been paid. Because of this residual claim, equity shareholders are considered to be owners of the company.
Investors who purchase equity securities are seeking total return (i.e., capital or price appreciation and dividend income), whereas investors who
purchase debt securities (and hold until maturity) are seeking interest income. As a result, equity investors expect the company’s management to
act in their best interest by making operating decisions that will maximize the market price of their shares (i.e., shareholder wealth).
In addition to common shares (also known as ordinary shares or common stock), companies may also issue preference shares (also known as
preferred stock), the other type of equity security. The following sections discuss the different types and characteristics of common and
preference securities.

3.1. Common Shares
Common shares represent an ownership interest in a company and are the predominant type of equity security. As a result, investors share in
the operating performance of the company, participate in the governance process through voting rights, and have a claim on the company’s net
assets in the case of liquidation. Companies may choose to pay out some, or all, of their net income in the form of cash dividends to common
shareholders, but they are not contractually obligated to do so.6
Voting rights provide shareholders with the opportunity to participate in major corporate governance decisions, including the election of its board
of directors, the decision to merge with or take over another company, and the selection of outside auditors. Shareholder voting generally takes
place during a company’s annual meeting. As a result of geographic limitations and the large number of shareholders, it is often not feasible for

shareholders to attend the annual meeting in person. For this reason, shareholders may vote by proxy, which allows a designated party—such
as another shareholder, a shareholder representative, or management—to vote on the shareholders’ behalf.
Regular shareholder voting, where each share represents one vote, is referred to as statutory voting. Although it is the common method of
voting, it is not always the most appropriate one to use to elect a board of directors. To better serve shareholders who own a small number of
shares, cumulative voting is often used. Cumulative voting allows shareholders to direct their total voting rights to specific candidates, as
opposed to having to allocate their voting rights evenly among all candidates. Total voting rights are based on the number of shares owned
multiplied by the number of board directors being elected. For example, under cumulative voting, if four board directors are to be elected, a
shareholder who owns 100 shares is entitled to 400 votes and can either cast all 400 votes in favor of a single candidate or spread them across
the candidates in any proportion. In contrast, under statutory voting, a shareholder would be able to cast only a maximum of 100 votes for each
candidate.
The key benefit to cumulative voting is that it allows shareholders with a small number of shares to apply all of their votes to one candidate, thus
providing the opportunity for a higher level of representation on the board than would be allowed under statutory voting.
Exhibit 7 describes the rights of Viacom Corporation’s shareholders. In this case, a dual-share arrangement allows the founding chairman and his
family to control more than 70 percent of the voting rights through the ownership of Class A shares. This arrangement gives them the ability to
exert control over the board of director election process, corporate decision-making, and other important aspects of managing the company. A
cumulative voting arrangement for any minority shareholders of Class A shares would improve their board representation.
EXHIBIT 7 Share Class Arrangements at Viacom Corporation7
Viacom has two classes of common stock: Class A, which is the voting stock, and Class B, which is the non-voting stock. There is no difference
between the two classes except for voting rights; they generally trade within a close price range of each other. There are, however, far more
shares of Class B outstanding, so most of the trading occurs in that class.