In the financial industry, a portfolio manager is a person who suggests investment strategies for individuals or institutional investors to achieve investment objectives. Many other terms are confused with portfolio managers like financial advisors, wealth managers, and investment manager but primarily they are more inclined towards the analytical side of the investment. These investment decisions are not just based on the judgment of portfolio managers but also analysts, market developers, investors, and financial institutions. However, they serve as critical thinkers of investment by mixing investment policies with the market demands to fulfill the desired objectives. The research financial markets and current events to analyze market developments. Here are some portfolio management steps that commonly practiced.
Determine the client’s objectives:
Individual clients typically have smaller investments with a shorter, more specific time horizon. In comparison, institutional clients invest larger amounts and typically have longer investment horizons. For this step, managers communicate with each client to determine their respective desired return or risk appetite or tolerance.
Choose optimal asset classes:
The next for the portfolio managers is to determine the most suitable asset classes (e.g. equities, bond, real estate, private equity, etc.) based on the client's investment goals.
Conduct Tactical Asset Allocation (TAA):
It refers to a method of adjusting the weights of assets within portfolios during an investment period. This approach makes changes based on capital market opportunities. TAA managers seek to identify and utilize predictor variables that are correlated with future stock returns and then convert the estimate of expected returns into a stock allocation.
Manage risks:
After selecting asset classes, portfolio managers gain control over security selection risks and style risks. The managers usually avoid these risks by holding a market index directly as it ensures that the manager's asset class returns are the same as that of the asset class benchmark.
Measure performance:
The portfolio manager uses CAMP Model to measure the performance of portfolios. These measures are adopted from a regression of excess portfolio return on excess market return. This yields the systematic risk, the portfolio's value-added expected return, and the residual risk.
