PIGGY has noted that there is a general misunderstanding and misconceptions about the roles and responsibilities of investment analysts and that of portfolio managers.
According to Jones, Charles P. (2010), portfolio management is the art and science of selecting and overseeing a group of investments that meet the long-term financial objectives and risk tolerance of a client, a company, or an institution.
Portfolio management involves building and overseeing a selection of investments that will meet the long-term financial goals and risk tolerance of an investor.
For example, Old Mutual Investment Group is primarily responsible for managing investments on behalf of its retail and institutional clients. The segment offers a variety of investment options that covers fixed income, listed equities, Exchange Traded Funds (ETFs) and alternative investments.
Piggy notes that portfolio management may be either passive or active in nature. Passive management is a set-it-and-forget-it long-term strategy.
It may involve investing in one or more exchange-traded (ETF) index funds like the Old Mutual ZSE Top Ten Index. Exchange Traded Funds (ETFs) are passively managed, fully funded (unleveraged) open-ended funds, which track the performance of a specified security that include but are not limited to indices, commodities, currencies, or any other asset.
On the other hand, portfolio management can also be active. This involves attempting to beat the performance of an index (Zimbabwe Stock Exchange All Share Index) by actively buying and selling individual stocks and other assets.
Closed-end funds are generally actively managed. Active managers may use any of a wide range of quantitative or qualitative models to aid in their evaluations of potential investments. Investors who implement an active management approach use fund managers or brokers to buy and sell stocks to outperform a specific index.
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Overall, portfolio management largely involves asset allocation, diversification, and rebalancing.
Asset allocation
The key to effective portfolio management is the long-term mix of assets. Generally, that means stocks, bonds, and "cash" such as certificates of deposit or treasury bills. There are others, often referred to as alternative investments, such as real estate, commodities, and derivatives. Asset allocation is based on the understanding that different types of assets do not move in concert, and some are more volatile than others.
A mix of assets provides balance and protects against risk. Investors with a more aggressive profile weight their portfolios toward more volatile investments such as growth stocks.
Investors with a conservative profile weight their portfolios toward stabler investments, such as bonds and blue-chip stocks. Rebalancing captures gains and opens new opportunities while keeping the portfolio in line with its original risk and return profile.
Diversification
The only certainty in investing is that it is impossible to consistently predict winners and losers. A prudent approach is to create a basket of investments that provides broad exposure within an asset class. Diversification is spreading risk and reward within an asset class.
Because it is difficult to know which subset of an asset class or sector is likely to outperform another, diversification seeks to capture the returns of all the sectors over time while reducing volatility at any given time. Real diversification is made across various classes of securities, sectors of the economy and geographical regions.
Rebalancing
Rebalancing is used to return a portfolio to its original target allocation at regular intervals, usually annually. This is done to reinstate the original asset mix when the movements of the markets force it out of kilter.
For example, a portfolio that starts out with a 70% equity and 30% fixed-income allocation could, after an extended market rally, shift to an 80/20 allocation.
The investor has made a good profit, but the portfolio now has more risk than the investor can tolerate. Rebalancing generally involves selling high-priced securities and putting that money to work in lower-priced and out-of-favour securities. The annual exercise of rebalancing allows the investor to capture gains and expand the opportunity for growth in high potential sectors while keeping the portfolio aligned with the original risk and return profile.
Duties
Portfolio management is related to the efficient and effective management of any particular asset. A portfolio manager in an asset management business like Old Mutual Investment Group plays a pivotal role in designing customized investment solutions for the clients.
No two individuals can have the same financial needs. It is essential for the portfolio manager to first analyse the background of his client. Each portfolio manager is an expert in that sector or security, and the portfolio is managed towards a specific goal (appreciation of capital, growth and income, total return for bonds), and assessed against a well-recognised and accepted benchmark.
A portfolio manager must keep himself abreast with the latest changes in the financial market. To give an example, high-performing investment management companies use rigorous quantitative frameworks to choose high-growth stocks.
Below are some of the broad roles and responsibilities of portfolio managers:
Extensive communication with clients and their advisors;
Discuss investment performance, economic and market trends;
Presentations to clients on financial and tax planning options and opportunities;
Direct consultation with attorneys, accountants, and other advisors on financial, tax and estate planning;
Client meeting planning, facilitation, and presentation;
Develop and/or deliver private wealth education sessions to clients;
Develop a knowledge of the client’s entire financial situation and be able to structure a goals-based investment and financial plan;
Ability to discuss estate planning and work with internal and external resources to meet estate planning goals of the client;
Understand and coordinate income tax planning and work closely with client tax advisors;
Evaluate and discuss options to meet client philanthropic goals;
Seek to establish a level of trust and confidence with the client so that any financial issue can be addressed, and solutions offered;
Ability to establish client investment objectives including risk tolerance, asset allocation, and cash requirements;
Develops an investment policy statement (IPS) with each client based on their goals, objectives, and risk tolerance;
Implementation of investment plans;
Translate investment policy to individual investment objectives;
Monitor manager performance versus benchmarks and develops insights for clients regarding key contributors and detractors;
Monitor asset allocation on a quarterly basis relative to policy and goals; evaluates need to rebalance;
Review portfolio issues (i.e., taxes, liquidity events, capital calls, etc.) quarterly;
Present alternative investment ideas to clients;
Manage investment transition for new clients; and
Provide recommendations to individuals and family foundations enabling them to fulfil their goals related to mission/impact investing.
In conclusion, while investment analysis and portfolio management may seem to be one and the same, the functions are different. Investment analysis focuses on analysing specific asset classes and the related industries while portfolio management is essentially wealth management.
It is the management of the clients' wealth, usually around an asset allocation and the selection and monitoring of individual portfolios of investments with the goal of achieving the client's investment objectives (saving for retirement, children's education, philanthropy).
Portfolio managers are also managers of managers as they can set an asset allocation and pick individual portfolio managers and then monitor individual manager performance to make sure they are adhering to the client's objectives.
That said, it is essential to note that the roles are complementary given that investment analysis is key to a sound portfolio management strategy. Also, certain functions and responsibilities of investment analysts and portfolio managers overlap.
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- Matsika is the managing partner at Mark & Associates Consulting Group and founder of piggybankadvisor.com. — +263 78 358 4745 or [email protected] / [email protected].
