What is Portfolio Management?
The process of selecting and managing the investments of individuals or organizations to meet their long-term financial goals is called portfolio management. Portfolio managers play a key role in managing the investments and use different methodologies and strategies keeping in view the economic outlook, risk tolerance, and financial objectives of the client.
Portfolio
Management Strategies:
Broadly speaking,
portfolio managers typically follow a combination of the following portfolio
management strategies:
1- Asset Allocation
2- Diversification
3- Rebalancing
4- Active Portfolio
management
5- Passive Portfolio
management
Let’s discuss in
detail how portfolio managers implement the strategies to manage large
portfolios:
1- Asset
allocation:
Portfolio managers
invest funds in different asset classes such as stocks, bonds, commodities,
real estate, etc to keep the risk of the portfolio to a minimum. The key is to
invest the funds in different asset classes while increasing the weights of
such asset classes that have a chance of providing above-average returns based
on the forecasts of the portfolio manager.
2-
Diversification:
In the diversification
strategy, portfolio managers take the asset allocation strategy a step further
and spread the investments across different unrelated securities in the same
asset class to reduce the risk of the portfolio. For example, a portfolio
manager can invest in stocks of two companies operating in different industries
or sectors to reduce the total risk and improve the overall performance of the
portfolio.
3- Rebalancing:
Portfolio managers
employ a portfolio rebalancing strategy to realign the
weights of the individual assets in the portfolio to maintain the original or
desired risk-return objectives. The rebalancing strategy is typically done
every other month so that the portfolio does not deviate from the financial
objectives due to the price variations during the period.
4- Active
Portfolio Management:
Portfolio managers
adopt the active portfolio management strategy to buy and sell securities as
they deem fit keeping in view various factors affecting the company stock,
including the macroeconomic environment and company-specific factors. The
objective of the active portfolio management strategy is to generate excess
returns in comparison to the market returns. To successfully implement the
active portfolio management strategy, portfolio managers take the help of a portfolio
management platform like AdvisorEngine.
5- Passive Portfolio
Management:
The passive portfolio
management strategy entails replicating the returns of a benchmark portfolio,
typically a stock index in case of equity investment. Passive portfolio
management is less costly because it involves selecting the securities in the
same proportion as the benchmark index and tracking the return of the benchmark
portfolio. Unlike active portfolio management, passive portfolio management
strategy involves low costs and management fees as the strategy does not
involve frequent buying and selling of securities.
Importance of Portfolio Management
Software in Portfolio Management:
Portfolio managers
require reliable, efficient, and robust portfolio management software to
appropriately manage a wide range of investment portfolios with different
objectives. To successfully employ the portfolio management strategies,
portfolio management software is necessary to execute the strategies
successfully, amplifying the chances to achieve the above-average returns.
The use of portfolio
management software will help RIA’s in performing the following critical tasks
that are central to portfolio management:
1- Portfolio Modelling:
Portfolio managers
construct complex risk-reward models and conduct simulations to manage and
mitigate the risk while achieving the desired returns. To accurately run
simulations and create risk models, portfolio managers require state-of-the-art
portfolio management software such as AdvisorEngine that will aid the managers
to provide accurate results, enabling them to achieve the financial objectives
while keeping the risk within tolerable limits.
2- Portfolio Trading:
Modern-day portfolio
managers do automated trading using portfolio management software, which
enables them to trade securities based purely on the programmed algorithms,
removing human emotions and bias from the trading decisions. With the plethora
of tools available on the trading platforms, portfolio managers are better
informed and can trade with all the necessary information available on their
computers in one place.
3- Portfolio Rebalancing:
With efficient
portfolio management software, portfolio managers can easily rebalance their
portfolio, one of the most critical tasks every portfolio manager undertakes
periodically. The rebalancing is done automatically using the portfolio
management software, ensuring that the rebalancing costs remain low and an
optimal number of securities are traded to rebalance the portfolio.
4- Compliance:
To keep pace with the ever-growing number
of complex compliance and regulations, portfolio managers rely on wealth
management platforms. Not complying with the statutory regulations can attract
penalties and also lead to catastrophic consequences as portfolios of clients
can suffer a hefty decline. AdvisorEngine, a portfolio management platform, has
a compliance module to support portfolio managers to execute their strategies
while complying with the regulatory restrictions.
5- Cash Management:
Portfolio managers
need to have an optimal amount of cash available to adequately run their
day-to-day operations and meet the redemption requests as well. Too little cash
can result in disruption of smooth operations while excess cash can result in
opportunity costs, resulting in lost returns on idle cash. Portfolio management
software can facilitate portfolio managers in deciding the amount of cash to
maintain based on the past data and future forecasts.
6- Data
Integration:
Data integration
involves accumulating data from different sources to measure the latest and
accurate position of the portfolio. A portfolio management software can help
wealth managers to aggregate the data of clients from different financial
services institutions to track the real-time situation of the client and build
the wealth management strategy accordingly.
7-
Performance Evaluation:
Portfolio managers
usually evaluate their performance monthly to determine whether each portfolio
is achieving the desired results. Important metrics, such as Sharpe Ratio,
Jensen Measure, Treynor Measure, etc. The detailed reports and metrics allow
managers to tweak the portfolios accordingly to get the desired objectives.
Comments
Post a Comment