Portfolio Manager - Meaning, What It Does and Types

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Key Takeaways:

Many investors believe in hiring portfolio managers to create and manage portfolios on their behalf. Portfolio managers help people and institutions plan their investments intelligently and help them enhance the value of their investments over time. Should you be reaching out to a portfolio manager? Read on to find out.

Definition of Portfolio Manager

Portfolio managers build and manage investment allocations for their clients. - They may also work as per predetermined investment strategies that they devise to achieve the client's financial objectives.

What Does a Portfolio Manager Do

The role of portfolio manager entails a number of things:

1. Determine the Client's Objectives

   Individuals usually make smaller investments and have shorter, more specific time horizons. On the other hand, institutions make larger investments and have a longer time horizon to remain invested. The portfolio manager's job is to communicate with each client to understand their investment horizon, desired returns and appetite to take risks.

2. Select the Right Mix of Asset Classes

   A portfolio manager interacts with clients before deciding the most most suitable asset classes for them. For instance: equities, bonds, real estate, private equity, etc. They try to create a portfolio with a good balance of securities that can yield good returns while mitigating investment risks.

3. Perform Strategic Asset Allocation (SAA)

   A portfolio manager strategically allocates assets depending on the customer’s risk appetite. For instance: A portfolio can be 60% equities and 40% bonds, for investors who wish to create a balance between risks and returns. Another portfolio may comprise 80% assets allocated in equites, and 20% ind debt, if the investor wants aggressive returns and is comfortable risking the investment. Yet another investor may invest 80% in debt instruments generating steady returns, with only 20% assets allocated towards equities. There may be situations in which the portfolio manager may need to rebalance the asset ratios to achieve their client’s financial objectives.

4. Conduct Tactical Asset Allocation (TAA) or Insured Asset Allocation (IAA)

   Portfolio managers may opt to apply both strategies in a single portfolio. However, it cannot be at the same time as both approaches are contrasting investment philosophies.

5. Manage Risk

   Assigning weights to asset classes also allows the Portfolio Manager to bring under control the following:

   • Security selection risk – This risk arises from the manager's SAA-related decisions. The only way for a portfolio manager to avoid this risk is to directly map against a market-index so that the asset class' returns are the same as the benchmark index's returns.
   • Investing style – The style risk arises out of the manager's style. A "growth" manager will outperform the benchmark indices during bull markets but would underperform the benchmark indices in bear markets. In contrast, "value" managers will find it challenging to beat benchmark indices during bull markets but will easily exceed market returns during the bear phase.
   • TAA risk of the portfolio – The only way for a portfolio manager to avoid TAA risk is to choose the same systematic risk – Beta (β) – as the benchmark index. By abdicating that path and opting to bet on TAA, the manager makes the portfolio more vulnerable to volatility, while also allowing for higher returns.

6. Measure Performance

   The performance of a portfolio is measured using what is called the CAPM (Capital Asset Pricing Model) model. The CAPM performance measures can be derived using a regression of excess portfolio return on excess market return. This will help arrive at the systematic risk (β), the value-added expected return of the portfolio (α)and the residual risk. In simpler terms, the returns on the portfolio are measured against the returns of the market in the same time period.

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Who Uses Portfolio Management?

A wide spectrum of investors wanting professional advice and experience in managing their assets are served by portfolio management services. The following are the two primary client types that gain from portfolio management:

Individual Investors

People with hectic schedules or little experience with investing can benefit from portfolio management services. Portfolio managers are able to create a personalized investment strategy based on your risk tolerance, investment horizon, and financial objectives. They take care of choosing securities, allocating assets, and continuously keeping an eye on your portfolio.

Institutional Investors

Large and intricate portfolios are frequently managed by organizations like insurance companies, pension funds, and endowments. Portfolio managers create complex investment strategies and oversee risk across several asset classes to help investors achieve their financial goals.

Objectives of Portfolio Management

A variety of financial goals, catered to the requirements and risk tolerance of individual investors, is the aim of portfolio management. Typical goals include:

• Money Preservation: Guarding your current money against changes in the market and inflation.
• Wealth Growth: Making wise investment choices over time to gradually increase your wealth.
• Income Generation: Bringing in a consistent flow of money from your investments to augment your income or take care of particular financial requirements.
• Risk management: Reducing the risks connected to your assets and safeguarding your portfolio against unfavorable market circumstances.
• Tax optimization: Aligning your assets to reduce your taxable income and increase your post-tax gains.
• Retirement Planning: Saving enough money to reach your retirement objectives and sustain the lifestyle you've always wanted.

Types of Portfolio Management 

Portfolio management strategies can be broadly categorized into active and passive approaches. Each strategy has its own advantages and disadvantages, and the best choice for you depends on your individual financial goals and risk tolerance.

Active Portfolio Management

Active portfolio management involves a manager making active decisions to outperform the market by selecting specific securities and adjusting the portfolio's allocation based on market conditions and analysis. Active managers aim to identify undervalued securities or market trends to generate returns that exceed the benchmark index.

Passive Portfolio Management

Passive portfolio management, also known as index investing, involves tracking a market index such as the Nifty 50 or Sensex. This approach aims to replicate the performance of the index by investing in all the securities that make up the index. Passive strategies typically have lower fees than active management due to their less intensive approach.

Furthermore, depending on investment goals and risk tolerance, many other methodologies can be used for portfolio management. These are a few typical kinds:

• Growth-Oriented: The goal of this strategy is to achieve long-term capital appreciation by investing in equities and other growth-oriented assets.
• Income-Oriented: This approach places a strong emphasis on bringing in a consistent income from assets like bonds, equities that pay dividends, or real estate.
• Balanced: The goal of this strategy is to establish a balance between regular income and capital appreciation by combining aspects of growth and income-oriented approaches.
• Value Investing: This tactic entails finding cheap stocks and making investments in them with the hope that their values would eventually increase to reflect their true worth.
• Growth Investing: This tactic concentrates on making investments in businesses with substantial earnings and stock price growth anticipated.

How to Become a Portfolio Manager?

Ø  Education and Training

To become a successful portfolio manager, one needs to possess a strong foundation in financial knowledge and investment principles. This can be achieved with a degree in finance, economics, accounting, or a similar discipline. Furthermore, earning pertinent certifications like the AIMR, CFP, or CFA can improve your credentials and raise your prospects of success in this cutthroat industry.

Ø  Licenses

While not mandatory in India, obtaining relevant licenses can enhance your credibility and demonstrate your commitment to the profession. Some common licenses include:

• Chartered Financial Analyst (CFA): The CFA designation is highly respected in the financial industry and requires passing three rigorous exams.
• Certified Financial Planner (CFP): CFP certification focuses on comprehensive financial planning, including investment management, retirement planning, and risk management.
• Association for Investment Management and Research (AIMR): AIMR offers various certifications related to investment management, including the Chartered Investment Analyst (CIA) designation.

Ø  Certifications

In addition to licenses, obtaining relevant certifications can demonstrate your expertise in specific areas of portfolio management. Some popular certifications include:

• Certified Investment Manager (CIM): The CIM certification is offered by the CFA Institute and focuses on investment management principles and practices.
• Certified Portfolio Manager (CPM): The CPM designation is offered by the Investment Management Consultants Association (IMCA) and focuses on portfolio management techniques and risk management.
• Chartered Alternative Investment Analyst (CAIA): The CAIA designation is specifically for professionals working in alternative investments, such as hedge funds and private equity.

Skillsets Needed for Portfolio Management

Portfolio managers specialise in different areas of investing. They are:

1. Size of the Investment

   Portfolio managers typically make investments based on the amount of assets or funds clients can allocate. They typically aim to allocate assets in a way that diversifies the investment, while generating maximum returns and mitigating risks.

2. Types of Investment Vehicles

   All portfolio managers are responsible for managing assets like mutual funds, institutional funds, hedge funds, pension and trust funds, commodity and high net worth investment pools, etc.

3. Styles of Investing

   Portfolio managers can also specialise in different investing styles or hedging techniques, growth or value management, management by market capitalisation (large-cap, small-cap, etc.), domestic and international fund investing, etc.

Skills to Look For in a Portfolio Manager

Portfolio managers are required to take important decisions and analyse several reports every day. There are many skills that they must have:

• Innovation: All portfolio managers keep track of the index and news flow. They should be able to do exceptional research and know where to find information on potential investments that others may not know. There may be a tremendous potential value for investors who can find a good asset that others failed to spot.
• Critical Thinking: Analysing research reports generated by financial analysts requires the portfolio manager to be a critical thinker. They must calculate strengths and weaknesses and predict opportunities and threats for each potential investment asset.
• Decisiveness: Portfolio managers should be adept at assessing the different options available and make decisions with confidence.

Portfolio Management Services - Benefits for Customers

Portfolio managers have exceptional data interpretation skills coupled with an ability to conduct and understand high-quality financial research. They use their remarkable communication skills -to deliver strong portfolio performance for their customers. If you are looking for ways to grow your wealth over time, a portfolio manager could offer a proven and reliable way to do so.

Frequently Asked Question

1. What does a portfolio manager earn?

   A portfolio manager's pay can vary greatly based on a number of criteria, including their job, experience, education, and the size and complexity of the portfolios they oversee. Nonetheless, compensation for portfolio managers is typically competitive, particularly for those with advanced degrees and qualifications.

2. Do you need an MBA to be a portfolio manager?

   Becoming a portfolio manager does not technically require an MBA, however it might be helpful. You may also be eligible for this position if you have a degree in finance, economics, or a similar discipline and hold pertinent certifications like the CFP or CFA.

3. What does a portfolio manager do?

   Managing investment portfolios on behalf of individual or institutional clients are some of the many portfolio manager responsibilities. To help their clients reach their financial objectives, they oversee portfolio performance, manage assets, choose securities, and assess market trends. Additionally, offering counsel and direction on risk management and investing tactics are also among the functions of portfolio manager.

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*Disclaimer: This article is published purely from an information perspective and it should not be deduced that the offering is available from DBS Bank India Limited or in partnership with any of its channel partners.

The purpose of this blog is not to provide advice but to provide information. Sound professional advice should be taken before making any investment decisions. The bank will not be responsible for any tax loss/other loss suffered by a person acting on the above.