Wikipedia of Finance - e-learning course Asset Management Wikipedia Chapter - Portfolio Management? Definition, Process, Theory, Techniques, Types, Examples

Portfolio Management? Definition, Process, Theory, Techniques, Types, Examples


Portfolio Management Definition:

Professional management of securities and other assets entailed in portfolio is known as portfolio management. Often portfolio management is overloaded terminologies. A cost effective system designed to account for managing assets of value to an individual’s portfolio. This includes both tangible and non-tangible assets.

Including wide array of proficient services to administer an individual’s and/or company’s securities, such as stocks, funds and bonds, and other financial assets, at times including real estate and other physical assets, portfolio management is the need of the hour.  The management is performed with respect to specific investment goals and investment profile and also it takes the level of risk involved, diversification, phase of investment and maturity that any typical investor seeks.

Research, financial analysis, and asset valuation, monitoring and reporting are some of the fundamental services entailed in a sophisticated portfolio management.

Different company charge differently for their portfolio management services and it varies depending on the quality of services, brand value of the company, also among different management companies it can widely vary. Asset based management fee is included in the fee structure and it is calculated based on the valuation of assets at the commencement of the service and how well they’ve performed.  Sowing to its guaranteeing nature, the manager is basically paid a lesser amount. The alternative is to link the fee with the percentage of assets’ performance. See, the fee may be based onto profits generated by the portfolio manager for the clientele and generally in such cases risk based fee is comparatively higher.

Portfolio Management Process:

In layman language an act of maximizing the return on a portfolio is called portfolio management. The team involved in portfolio management guides the client while trading decisions made for the marketable securities in that portfolio.  As it happens, at times, the client is the collective owners of a mutual fund.  Not only a giant corporation but a wealthy individual who owns a tremendous amount of marketable securities can be served as a client.

Portfolio Management Theory and Techniques:

Portfolio management is subjected various theory and each technique has its own way to describe how to manage a portfolio.  The technique chosen will serve as tool that will determine if the portfolio manager invests in high growth companies, companies with large cash flows, international vs. domestic companies, stocks vs. bonds, etc.  The only factor that influences the mix of these types of investments or that decides the balanced proportion is the client’s investment needs, his goals and his level of risk tolerance.  For instance, a manager supervising a portfolio for a client who has tolerance to relatively lower risk and long term investment horizon will infuse in blue chip stocks and low risk bonds such as U. S. Treasury bonds.  It shouldn’t take a rocket scientist to know that he will most certainly avoid stocks of companies in developing nations and tech start-ups at any point of time, until the level of risk involved is compensated with higher expected return.

Types of Portfolio Management:

With reference to mutual funds, there are two types of portfolio management, namely– active management and passive management.  Trading of securities and attempting to generate better returns than market, and simultaneously considering the fund’s objectives and asset class limitations is known as active management.  Generally most of the closed-end funds are actively managed. On the other hand passive management refers to buying and selling securities so that the fund assets track an index such as the S&P 500 or the NYSE.

1. Active – Type of Portfolio Management:

The Active portfolio type depends on the way that specific style of strategy and analysis. It includes little higher than expenses occurred normally on market strategies. It is generally examining and analyzing market for the nearness of inefficiencies.

Active Portfolio Management Strategy:

i) Top-down Approach: In this methodology, analyst examine the overall business sector and choose the sector expected to perform well in near future. Once choice is made on the industrial sector, then particular stocks are chosen on the premise of organizations that are can be perform well in current economic and financial world.

ii) Base up: In this approach, world’s economic situations and expected patterns are analyzed and then analyzing organizations depending upon strength, financial statements, etc. This strategy focuses on the strength of organizations perform without considering market conditions.

2. Passive – Type of Portfolio Management:

Passive portfolio type depends on the way that sectors are efficient and it is unrealistic to beat the sector returns frequently and best returns are often achieved from minimal investment kept for the long term.

Passive Portfolio Management Strategy:

i) Effective Sector Hypothesis: This strategy depends on the way that data that influences sectors are easily and quickly accessible and evaluated by all experts and specialists. The portfolio experts or specialist who can evaluate and understand this strategy believes that it is inconsistent to beat sector average performance.

ii) Patient Investors Portfolio: Here investors purchase and hold stocks for long term. In this portfolio, most of the stocks historical data shows decent growth and predict to achieve higher profit all the time independent of market conditions.

iii) Aggressive Investors Portfolio: Investor’s portfolio showing more interests in “High value stocks / expensive stocks” that belongs from high risk upon high returns. This portfolio is a mix portfolio of organizations and anticipated to achieve great returns in following couple of years.

Why Portfolio Management Matters?

The answer to this question is pretty obvious. Although there are several risks and complications involved in the process of securities’ investments. But if left in the hands of a portfolio manager or a team of experts can help you build an empire. They won’t move a single dime without your knowledge but trusting them with their experience is also essential.  Professional management services, in fact, can be a worthwhile investment to make sure that investment goals are within reach and levels of risk are within the tolerance levels of the investors.

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