Portfolio Management

What Is Portfolio Management?

There is an aspiration common to all investors – you want to grow your wealth exponentially. But the returns you see depend on several factors such as the assets you choose to invest in, the overall market sentiments and most importantly the allocation decisions you make. To give you an example in the securities market there are people who earn good returns on their investments even on days when the market crashes while some see their investments being corroded on good days. This is where it becomes important to build a portfolio that spreads out the wealth into different avenues and helps you in averting unnecessary risks.

Building a good portfolio is a combination of art & science. It is science because lot of data analysis needs to be conducted in order to create an optimal portfolio out of a pool of selected investable asset classes. It is an art because portfolio management is done for people who are unlikely to act rationally in different scenarios. Investors are humans and tend to exhibit lot of behavioural biases. Managing those diverse emotions & biases and helping investors to achieve near optimal investment solution for themselves is certainly an art. Under professional portfolio management, investments are made with respect to the objectives, goals are set both short and long term, assets are allocated based on evaluation of risk appetite, return objectives and investment constraints. Portfolio Managers take into account investor’s long term interests when building appropriate portfolio for their clients. They help investors choose the right investment avenues in terms of equities, mutual funds, bonds etc. and create a portfolio that grows with time, beats inflation and is reasonably protected against all the risks associated with investments.

In this detailed guide we shall look at various aspects of portfolio management including the roles and responsibilities of Portfolio Managers.

Importance of Portfolio Management

Now that you have got a brief idea about Portfolio Management you’d surely be interested in knowing the importance of portfolio management. Here’s why this is important –  

• The most important foundation of Portfolio Management lies in the concept of diversification. Diversification derives its importance from the adage “Don’t keep all your eggs in one basket”. Diversification reduces the risk of overall portfolio depletion in case of a specific event that impacts any given asset or asset class.
• In the world of investment, one size doesn’t fit all and investment strategies have to be formulated based on the investor’s goals, time frame, risk appetite and expected capital market outlook. Portfolio Management lets the manager choose the investment strategy for the clients’ that is best suited to achieve their investment goals.
• Risk management is one of the focus areas for any Portfolio Manager. One of the primary objectives of Portfolio Management is to evaluate the portfolio for current risk exposure and take necessary steps in adverse market conditions to shield investments from such risks through hedging.
• Portfolio Management takes into account the ever-changing taxation laws and suggests a tax efficient investment strategy that reduces the tax burden on the investors and generates the best post-tax return given the investment goals & constraints.
• “There are no free lunches in this world”. Similarly, there is no excess return that comes without incremental risk. Return expectation on different portfolios is usually based on the level of inherent risks –
  1. High Risk – High Return Investments
  2. Moderate Risk – Moderate Return Investments
  3. Low Risk – Low Return Investments

Different kinds of Investment Portfolios:

Different investors have different levels of risk appetite and also have different goals to be achieved through their investments. Based on these risks and return objectives, Portfolio Managers may adopt one of these investment strategies –

1. Aggressive Portfolio – As the name suggests this is for investors who are looking to take high amounts of risk with the goal of earning exponential returns on their investments. From the Portfolio Manager’s point of view Aggressive Portfolio Management is all about choosing avenues that are expected to offer high returns to the investors above the broad index levels. But higher returns come with potential likelihood of higher losses. Most of the investment goes into alpha generation strategies including stocks, commodities, derivatives and other avenues that promise lucrative returns.
2. Defensive Portfolio – This is the antithesis of an Aggressive Portfolio. This is the more popular of the two and finds large number of takers. In a Defensive Portfolio the goal is to avoid losses even if that comes at the cost of dismal return to the portfolio. Investors who opt for this strategy are risk averse and conservative. This kind of investment is spread around T-Bills, money market securities and short-term government bonds. These safer avenues of investments yield low but steady returns.

Regular-Income generating Portfolio – There are investors who look for regular income from their investments. For instance, a retired person may want monthly pay-outs to fund his or her current lifestyle. Income Portfolio is targeted towards such investors. The area of focus for this investment strategy is to choose investment avenues with low volatility and regular income. This is done through a large allocation towards fixed income instruments like corporate bonds and a relatively small allocation to stable companies’ stocks that offer high dividend yields.

Roles and Responsibilities of a Portfolio Manager

Portfolio Managers help their clients make the right investment moves and help them achieve their investment goals and increase their wealth. But a Portfolio Manager wears multiple hats and their roles and responsibilities extend way beyond this primary objective. Here are the important roles and responsibilities of a Portfolio Manager –

• Portfolio Managers chalk out tailored investment strategies for their clients. These are based on the age of the client, income levels and surplus capital at hand and finally align them with the long term investment goals.
• Quick and informed decision making is one of the most important traits of a Portfolio Managers. They should be able to offer actionable advice to their clients.
• There are different avenues of investment in the market such as equities, commodities, mutual funds, bonds to name a few. Portfolio Managers need to educate their clients on these options explaining clearly risks and opportunities in each of these to help them take informed decisions.
• Portfolio Management incorporates risk management. A good manager would always inform his/her clients about the immediate and long-term risks associated with all their investments.
• Ethics is one of the main pillars of Portfolio Management. A Portfolio Managers needs to be unbiased while offering investment suggestions to their clients. There should be nothing that conflicts with their primary duty towards their clients and their objective of providing the best investment solution with client’s long-term benefit in mind.
• A portfolio manager should be accessible to the clients. While no client should expect a 24/7 Portfolio Manager, it is important to return a call or reply to an email within reasonable time. They should periodically enquire about any changes in clients’ circumstances like investment goals, constraints etc. and make modifications in the portfolio (if required) to incorporate the revised investment criterions.

Portfolio Managers and Clientele

Portfolio managers work at different levels with different kinds of clients. A Portfolio Manager who runs his/her own firm may choose to work with only one category of investor and specialize in their investments on work with different types of investors. Bigger firms often work with different types of investors. They can be broadly divided into three categories –

1. Individual Investors – They are mostly retail clients or high net worth individuals (better known as HNIs). Individual investors’ have diverse investment requirements based on factors such as their age, level of wealth vis-à-vis their investment goals, risk tolerance, income volatility or stability etc. Diversity in the behavioural aspects offer significant challenges and learning opportunities for portfolio managers.
2. Businesses – Businesses/Corporate/Institutional clients look at Portfolio Managers to help them optimize the investment strategy of their treasury management function. More often it is a support or an advisory role that the Portfolio Manager undertakes. For NBFCs, Insurance companies, Banks etc. role of portfolio manager increases significantly in importance due to larger stakes.

Use of Technology in Portfolio Management

Information Technology has made deep inroads into our lives. It has touched upon everything that we do in our lives and Portfolio Management is no different. As the saying goes technology has democratized investments. Whether it is buying or selling securities or investing in mutual funds people are making use of technology in every sphere of investments. Portfolio Managers in the modern world are technology savvy and use technology to the advantage of their clients. Through smart-phones and mobile applications, investors’ can keep a track of their investment portfolio, maintain risk limits and even execute transactions from anywhere anytime.

Let us now look at some of the areas where technology is being used for Portfolio Management and how it is helping the investors –

• Analytical Research – In the past Portfolio Managers had to scout for information physically to come up with the most rewarding investment advice for their clients. This wasn’t easy and often the location of the manager, his/her access to information and time required to source this information could make a lot of difference. Now information on global capital markets is available on a millisecond basis and the information is automatically filtered based on the criterions set in the analytical model.
• Agility in Investments – The biggest advantage of technology is the fact that it has brought agility in investments. With all the data and information freely available Portfolio Managers can take quick decisions. This allows them to capitalize on the opportunities that the market presents in a matter of seconds rather than hours or days.
• Transparency – Go back to a time when there was no Internet and most investors would have to rely on their Portfolio Managers to know the status of their investments and returns. There was virtually no way to get daily update on investments. Technology has made it possible for investors to keep track of their investments. This has made the process more transparent as compared to the past.
• Risk Management – Through the use of technology, risks can now be managed in a much more dynamic manner. Auto-execution limits can be set on portfolios which helps in keeping the losses in specified limits.
• Robo-advisory – Now advisory systems are also getting automated, which presents both opportunities and challenges for investment advisors and portfolio managers.

Tips to Become a Good Portfolio Manager

• Attain the Right Qualification – As a first step you need to attain the right qualification to become a Portfolio Manager. At the graduate level you need to choose a degree in economics, accounting, finance or statistics. This should be followed by a post-graduate degree in either of the streams or you can opt for a Master of Business Administration. MBA program offers you several incentives in this field
• Be Tech-Savvy – In the times to come, knowledge of AI, data analytics, Programming etc. will be paramount as technology becomes an integral part of portfolio management. Proficiency in latest technology will be a pre-requisite for these jobs.

• Opt for Certification – Portfolio Management market has become competitive and if you want to break into the top levels in this field earning a specialist qualification would be an advantage. You can opt for global certifications such as CFA® Charter (Chartered Financial Analyst – USA). A lot of Indian and global portfolio managers are CFA charter-holders. Equity research analysts, fixed-income research analysts who end up becoming Portfolio managers of different Mutual Funds, PMS firms, Pension Funds etc. work towards earning a CFA charter in order to have global career opportunities.
• Start As A Financial Analyst – Portfolio Management is an advanced level in this industry and you need to start your career as a Financial Analyst (Research Analyst). You can either opt for this during your internship program or take it as a full-time job. You will have to learn the tricks of the trade in Portfolio Management and working as an analyst would be the right stepping stone towards that dream.
• Always Be Analytical – There are many who end up remaining Financial Analysts and never graduate to becoming a Portfolio Manager due to their lack of enthusiasm in learning more than what is required at their job. Always be analytical in your research, focus on analysing companies not just part of one/two sectors, but in the overall market and continuously work towards sharpening your skills.
• Stay Updated – There is no end to updating your skills and knowledge as a Portfolio Manager and you need to attend seminars and conferences where you will be exposed to new knowledge in Portfolio Management and also become aware of the new tools and methods that are used to identify the right investment avenues.

To sum up Portfolio Management plays a very important role in the investment market. Here in this detailed guide we have covered most of the important things you’d like to know about Portfolio Management. If you wish to multiply your investments without having to go through the nitty-gritties of the markets and other concerning factors you need to hire a seasoned Portfolio Manager to look after your wealth. From helping you choose the right investment avenues based on your financial goals to capitalizing on the opportunities and risk management, they are your trusted partners when it comes to investments.