A Complete Guide to Portfolio Management for 2020

It is usually advised that for a business to scale or grow, a portion of the profit has to be reinvested into the business.

But it is one thing to know that you have to reinvest into the business and it is another thing to know how to go about it.

One of the toughest choices businesses make is knowing the portion of their cash flow to invest in different segments of their company towards the growth and development of that organization.

This is where portfolio management comes in; it helps businesses understand how to go about making the right decision on what portion of the profit to reinvest into the business and what aspect of the business to invest in. This is not about treating certain departments or aspects of the business special from others but to look at their inter-relationship and how to share the company’s resources accordingly.

In this article, we will be looking into a complete guide on portfolio management for beginners, and even if you already have basic knowledge on it, there will be something more to learn on what portfolio management entails and the need for it in each company and every sector of an organization.

What is a Portfolio?

You have probably heard what portfolio means in layman language or should we say as a career or businessman? In the general term, most people know a portfolio as something that can be likened to a scrapbook reflecting on your best work experiences along with some real-life experiences, value, and achievements.

However, in finance, a portfolio means something different. According to Investopedia, a portfolio entails the formal grouping of financial assets such as stocks, bonds, commodities in both its currencies and cash equivalents. It also includes mutual funds, exchange-traded funds, and closed funds.

The portfolio can also comprise of tradable securities which are not laid publicly such as real estate, private investments, arts, and many others.

It is the understanding of a portfolio that gives the manager the wisdom on how to go about allotting different portions for private clients and to consider the futuristic risk of investments and the best approach the company needs to employ to make the most of every investment decision.

So, a portfolio is a guide, it will serve as a reference into the story of the company to know what pitfalls to avoid, the paths not to tread and the areas that need resources as well as those that don’t; how to determine what every aspect needs and why they need it will be reflected in those records. It provides the opportunity to diversify the risk involved in investing as the best approach is to run with a focus of getting minimum risk and maximum profit.

Now, that we understand portfolio, let’s now consider what portfolio management is like.

What is Portfolio Management?

Portfolio management, in its simplest form, is managing the investments the portfolio holds. This involves the buying, selling, and general trading of investments in the portfolio. It is the art and science on issues pertaining to the selection and the overseeing of a number of investments carried out by the manager after considering the long-term financial aims and objectives and risk management or risk tolerance, for organizations (both private and public) and individuals.

It is having a well-laid out, designed, and systematic process on the decision about where the company is going to make its investment to avoid the overall misuse of company resources, which could endanger the company or expose it to unnecessary risk.

Portfolio management cannot be done precisely and controlled in an organization if it’s not in line with the strategic objectives and the company’s capacity to deliver. So as this is done, they would not take any step that might affect the present so that these long-term investments do not destroy the present flow of business.

Therefore, the pursuit of every portfolio manager, their aims and objective is to maximize returns in the business at the end of the day by investing in marketable securities such as equity, cash, commodity, and even debt (funds and grants)

Despite all these changes in the specification of the portfolio, the portfolio doesn’t change except the changes when the overall, underlying investment plan is changed.

Types of Portfolio Management

• Active Portfolio Management: This is when a fund manager buys and sells the financial security in quick response to the rise and fall in the market. As we know, market conditions are not stable; therefore, the active portfolio manager seeks to do business when the odds are in his favor as the goal is actually to exceed the expectations of the market, to be able to predict when the profit margin is increased and to trade them.

So, the manager studies the market and keeps on changing the portfolio to suit what they need; that is why it may seem like the fees associated with the active portfolio is high because the expectation for the performance in the market is equally high. The fund manager has one goal and that is to provide “above normal returns”; it is simply unfortunate that when it comes to market, things are not so easily predictable and in recent times, it seems like the active portfolio has been falling short of a point on the benchmark.

Active portfolio works with an assumed competitive advantage in predicting returns and so investors may likely be willing to take that risk but that has not been the smartest of choices in some instances.

• Passive Portfolio Management: This is the other side of the active portfolio, which was mainly designed not really to go overboard but to perform as well as the benchmark of the industry. This portfolio does not change as frequently as the active portfolio and because of the relative stability, investors are likely to invest more in this aspect of portfolio management as it charges lesser fees too.

Another name for this is Index Fund Management which is designed to parallel the returns in the market index or the benchmark of a particular industry. This passive portfolio, unlike the active one, does not have a team of managers on it. For each portfolio, a manager is attached for the monitoring and for more accountability in reproducing the index mark.

This is a safer approach with less risk when one thinks of investing unlike the active portfolios but because of this, the fees the managers would be paid or can charge is always lower as they are not expected to outdo themselves per se, they give results based on the benchmark available in the market.

• Discretionary Portfolio Management: This type of investment is made based on the portfolio manager’s discretion, that is, they are entrusted with that responsibility of buying and selling securities, funds, grants on behalf of their investor after gaining the trust of the investor concerned.

This investment management can be offered to individuals who are vastly experienced in the market and have several qualifications. The investment manager must also have a track record of having done this kind of job and succeeding because this kind of investment is geared towards high net-worth individuals, people who are financially loaded and stable and institutional investors.

The manager can be trusted to do a good job and put in his best because he is paid by the percentage of whatever he can sell; this will serve as a motivation for him to get good deals at a very cost-effective price for his client. So it is a win-win situation for both parties.

• Non-Discretionary Portfolio Management: This is a confidential agreement or secrecy agreement because it involves at least two parties. They draw out a blueprint for their work, which is confidential. This can take the form of knowledge or information which both parties are not willing to disclose to a third party based on the confidential nature of the agreement. Examples of such an agreement are what can be found in the doctor-to-patient relationship where the doctor has to keep whatever goes on a secret except the clients exposes or decides to lift the ban, so it is with bankers and their clients. Information is not disclosed easily.

So this kind of agreement is an understanding by both members or parties to keep their business private and protect any type of confidential information.

This agreement comes in handy when there is to be a partnership between two companies, individuals or parties to better understand how the other party operates.

This agreement also covers what a company has with its employees. They get to agree not to disclose things peculiar to them to reduce the risk of their competitors stepping up their game. For some food industries, they don’t want their special recipe leaking and if anyone defaults, they are sanctioned and there has to be some form of settlement or compensation for such an offense.

This now makes it obvious, the reason many companies have different, multiple investment portfolios.

Who is a Portfolio Manager?

A portfolio manager is a person or a group of people or a team who is responsible for creating and managing investments a business should acquire or cover. They are one of the vital aspects to consider when there are thoughts of investments as it is their duty to coordinate and take care of the portfolio and how it is fairing in the industry or the market.

They are responsible for investing, buying and selling of funds’ assets with either an active or passive role in the management depending on the type of portfolio they are managing (active or passive portfolios). For most active portfolios, only a handful, selected few ever get to beat the forces of the market as predicted by them.

The portfolio manager is the fund guru, they control the funds of the company, it does not matter what type of funds it is, closed or open funds, venture capital fund, hedge fund, mutual fund, and all others.

The efficiency of this manager will determine a whole lot in the financial aspect of the company; that is why the manager has to be vast and rugged to beat the market forces. He must be an experienced broker, investor, or trader with a track record of great accomplishments in this field.

One attribute to look out for to determine a good manager is their activeness, if they are active, it will reflect it on the way they work and they are usually sharp and intelligent when it comes to predictability. They know there are thousands of companies to invest in and so they do a thorough job of picking out those with the highest profit potential and still allow the fund analyst to do their job of knowing what type of funds to be invested at that time. The passive managers do more research to be double sure they are in the right place using several market indices to best suit their needs.

Importance Of Portfolio Management

Every company, individual who has plans for investment needs portfolio management as it is key in determining the success of the organization because it eases off the responsibility to professionals and experts who understand the market and how it works and so they can spread the risk around effectively, getting maximum returns either on the benchmark or market index or above the market index mark as it relates to the type of portfolio manager and strategy employed.

There are several reasons, focus, aim for portfolio management and if these suits you and are part of your goals for your company, then you will see the need for a portfolio manager. Every organization has a goal and that is to make a profit. If having a portfolio manager will bring about the achievement of those goals then you need to have one or more, depending on the present need.

So, some key importance of this is that you get the best investment strategies from the handing over of investment decisions to the experts. This automatically minimizes the risk of incurring losses and liquidation and the customization of the operations to suit your objectives as an organization or individual.

Also, portfolio management would take into consideration the changes occurring in tax laws and other policies before making investments.

Objectives Of Portfolio Management

It is important to note these points before the manager begins to build the portfolio and also not forgetting to keep in mind the interest of his client as customization is very important, no one will pay when their needs have not been met, according to the specification they gave. Below is an outline of the objectives to be considered.

• Capital growth
• Liquidity
• Diversification of risk involved
• The security of the principal amount invested
• Consistent turnover or returns
• The marketability of the securities that have been invested in
• Tax planning

It is important to note all these as one prepares the portfolio, it will prepare the manager ahead of time to avoid major loopholes and pits that likely awaits him in the market.

Portfolio Management Process (How To Get Started)

The management process is the comprehensive compilation of all the steps involved from the planning to the execution stage of the portfolio management. This plan is consistent in creating and managing a suitable portfolio of assets and investments to meet the needs or fulfill the objectives of the clients involved

Steps To Portfolio Management

These steps are the core, the foundation every portfolio management should be laid on and they are as follows;

1. Identify the aims and objectives and also the limitations: It is important to first identify the aims, the needs, and objective of each client before starting the work and to know the boundaries, constraints on investment, to know how much fund they are willing to part with for the job at hand. When a portfolio is designed, it is customized to fit the client’s desire before any investment decisions can be made.
2. The investment policy statement: This is the next stage after knowing the aims and objectives of the clients you are working with.
3. Capital market expectations: This is the third step in the planning stage; it involves forming or having some expectations concerning the capital markets, to study the risk involved and the returns on assets. This is calculated in the long term forecast to determine the overall impact of the capital market on investments. It will also help in knowing how to plan as they have been able to predict what to expect in the long run.
4. The asset allocation strategy: This is the last phase of the planning stage and it involves two aspects. Strategic asset allocation where the investment policy statement and the capital market expectations are joined in collaboration to ascertain the effects on the long term weights of the target asset classes. The second aspect is the tactical asset allocation, which focuses more on the short term while the other one focuses on the long term. It deals majorly with any short term change that occurs to the investment or the market. It is controlled by the circumstances of the investor and market expectations.

If these circumstances do not change after a while, it may become the new strategic asset allocation as it will be dealing with the long term now.

After the planning stage, is the execution stage where everything goes from being documented to actualization. The first thing here is to select the kind of portfolio, using mostly the portfolio optimization technique while deciding the portfolio composition. Next is the implementation stage, after finalizing the portfolio composition, the portfolio is executed.

Then next is the feedback stage which is concerned with knowing if what has been done so far is in line with what has been specified as the long term goal of the portfolio and to see if they are meeting the client’s specification for business. It involves the monitoring and rebalancing stage; the manager monitors the circumstances, economic strength of the investor over a period and re-strategizes if there is a need to.

Conclusion

Portfolio management does not need to be hard. We take the hassle out of your portfolio management. Contact us today for more information or learn more about our portfolio management services

Frequently Asked Questions About Portfolio Management

Who can benefit from portfolio management services?

It is to be expected that people usually want to know if all that is being said applies to them. A lot has been said about businesses as it relates to portfolio management but portfolio management is not for businesses alone. Practically everybody, both individuals and entities (corporate or not) can benefit from portfolio management.

Are there risks associated with portfolio management?

While we will love to say no, we cannot because there is no investment without risk. Every investment involves a certain amount of risk and that is something you have to be willing to accept before going in. however, some measures can be taken in the form of security that can reduce risk and certain decisions can also determine how huge a risk it is. For instance, investing in larger and established companies are less risky than startups or mid-level companies but the latter could also be a huge gain if the company becomes successful. The role of the portfolio manager will be to study these trends and advise you accordingly.

Can I withdraw my funds at any time?

Yes, you can withdraw your profits based on your discretion. The contract you signed with your portfolio manager might determine the time and how the process of withdrawing will take place but the funds for investments are yours, so you have a right to the profit or to sell off your investment.

Can I set limits or boundaries on investments?

Yes, the funds used in investment belongs to you, so the portfolio manager only has influence as much as you release to them. If you are not comfortable with any investment, you can decide not to. Even if you run discretionary services whereby the portfolio manager takes the investment decisions on your behalf, you can communicate your values and mention or put in writing companies you don’t want to invest in. You have to make sure to discuss your expectations before going ahead with a portfolio manager if you have any reservations.