Everything you need to know about Portfolio Manager

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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 Portfolio Managers Do

Portfolio managers are responsible for the following:

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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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.

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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.