What is Portfolio Management?

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What is Portfolio Management?

• By AdvisorEngine.com

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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.

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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

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• Lets 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.

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• 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.

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• 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.

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• 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.

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• 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.

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• 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 RIAs in performing the following critical
  tasks that are central to portfolio management

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• 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.

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• 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.

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• 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.

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• 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.

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• 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.

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• 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.

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• 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.

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• Conclusion
• The critical processes of portfolio management
  that we discussed above require an efficient and
  capable portfolio management platform. With the
  technological revolution, wealth management firms
  are also advancing their portfolio management
  systems to achieve efficiencies and increase the
  quality of service delivery to their clients. Any
  financial advisor firm should also consider
  investing in a CRM for financial advisors so that
  they can manage their clients effectively. A
  portfolio management platform will help financial
  advisory firms to complete all the tasks from
  portfolio creation, portfolio rebalancing,
  compliance and integration.

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