The Process of Portfolio Management

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Chapter 26

• The Process of Portfolio Management

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Determinants of Portfolio Policies
Objectives Constraints Policies Return
Requirements Liquidity Asset Allocation Risk
Tolerance Horizon Diversification Regulations
Risk Positioning Taxes Tax
Positioning Unique Needs Income Generation
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Matrix of Objectives
Type of Investor Return Requirement Risk
Tolerance Individual and Personal
Trusts Life Cycle Life Cycle Mutual
Funds Variable Variable Pension
Funds Assumed actuarial rate Depends on
payouts Endowment Funds Determined by
income Generally needs and asset growth to
conservative maintain real value
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Matrix of Objectives (contd)
Type of Investor Return Requirement Risk
Tolerance Life Insurance Spread over cost of
Conservative funds and actuarial rates
Nonlife Ins. Co. No minimum Conservative
Banks Interest Spread Variable
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Constraints on Investment Policies

• Liquidity
• Ease (speed) with which an asset can be sold and
  created into cash
• Investment horizon - planned liquidation date of
  the investment
• Regulations
• Prudent man law
• Tax considerations
• Unique needs

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Managing Portfolios of Individual Investors

• Overriding consideration is life cycle.
• Needs for current income
• Appropriate level of risk
• Appropriate level and type of life insurance
• Taxes and tax planning

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Tax Sheltering for Individual Investors

• Tax-deferral option - controlling the timing of
  gains on investments.
• Tax-deferred retirement plans
• IRAs
• Keogh plans
• Deferred annuities
• Fixed
• Variable

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Future Trends in Portfolio Management

• Increased use of inflation-indexed bonds.
• More direct management of funds by individuals.
• More companies offering structured financial
  products.
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