Portfolio Manager

The Portfolio Management Procedure in Six Steps

Portfolio managers are experts that oversee investment portfolios with the intention of helping their clients meet their financial goals. Portfolio management has emerged as one of the most sought-after professions in the financial services sector in recent years. What a portfolio manager performs will be addressed in this article. Individual and institutional portfolio managers are the two categories that can be distinguished based on the clients they handle. Both kinds of portfolio managers help their clients achieve their financial objectives.

The Portfolio Management Procedure in Six Steps

• Identify the Client's Goal:  Typically, individual clients have smaller investments with more definite, shorter time horizons. Institutional clients, in contrast, make greater investments and frequently have longer time horizons. Managers consult with each client to ascertain their individual desired return and risk appetite or tolerance for this step.
• Pick the Best Asset Classes: Based on the client's investment objectives, managers then choose the best asset classes (such as stocks, bonds, real estate, private equity, etc.).
• Carry out strategic asset allocation (SAA): Strategic Asset Allocation (SAA) is the process of determining weights for each asset class in the client's portfolio at the beginning of investment periods so that the portfolio's risk and return trade-off is in line with the client's preferences. For example, 60% of the portfolio might be made up of equities and 40% of it might be made up of bonds. Because unexpected returns from diverse assets can cause asset weights to considerably diverge from the original allocations over the course of an investment horizon, portfolios need to be rebalanced on a regular basis.
• Carry out insured asset allocation (IAA) or tactical asset allocation (TAA) (IAA): Insured Asset Allocation (IAA) and Tactical Asset Allocation (TAA) are two terms used to describe various methods of modifying the weights of assets within portfolios over the course of an investing period. While the IAA strategy modifies asset weights depending on the client's current wealth at a particular point in time, the TAA approach makes changes based on capital market opportunities. Because the two methodologies reflect different investment philosophies, a portfolio manager may choose to undertake either TAA or IAA, but not both at the same time.
• Control Risk:  The degree of risk can be managed by portfolio managers by choosing weights for each asset class:

• Because of the manager's SAA actions, there is a security selection risk. Holding a market index directly is the only method a portfolio manager can completely eliminate the risk of security selection, as doing so guarantees that their asset class returns will match those of the asset class benchmark.
• The manager's approach to investing creates style risk. As an illustration, "growth" managers usually outperform benchmark returns in bull markets but underperform in comparison to market indices in down markets. Value managers, on the other hand, usually outperform the market average in bad markets but frequently fail to outperform benchmark index returns in bull markets.
• Only by selecting the same systematic risk, beta (), as the benchmark index can the manager completely eliminate TAA risk. The manager is subjecting the portfolio to higher levels of volatility by forgoing that option and betting instead on TAA.

• Monitoring Performance: The CAPM model can be used to assess portfolio performance. Excess portfolio return can be regressed on excess market return to derive the CAPM performance metrics. This results in the systematic risk (β), value-added expected return on the portfolio (α), and residual risk .

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