What are price-based indicators?
What are the fundamentals of the portfolio process?
The portfolio management process’s fundamentals are broken into three main steps: planning, execution, and feedback. During the planning phase, a manager gains knowledge of the client’s (e.g., individual, institution) needs. Subsequently, the manager captures critical information on managing the client’s portfolio in the Investment Policy Statement. Once a documented plan is in place, the manager executes the program by first setting an asset allocation. The client’s initial asset allocation is the amount placed in each broad asset class (e.g., equity, fixed income) that matches the client’s risk and return profile.
After knowing the amount in each asset class, the manager selects specific securities after careful due diligence (i.e., thorough review). These actions create the portfolio. As part of the feedback step, the manager monitors changes in the portfolio and determines whether changes (e.g., rebalancing the portfolio to its original allocation) is necessary. The manager also will produce timely performance reports and communicate findings to the client. Over time, the client’s needs may change, and the process repeats itself.
How does the concept of risk vs. return factor into understanding portfolio management?
What is an investment policy statement?
An investment policy statement (IPS) is a client-specific written document prepared by the manager with direct input from the client. It is used to document the underpinnings for why the portfolio is invested in a certain way and dictate how the manager strives to achieve the investment objectives. While there is no steadfast rule on what is included within an IPS, the following is an example of frequently included components.
How does the process of portfolio management differ in its application to individuals versus institutions?
Managing clients’ assets differs based on each client’s investment objective, time horizon, risk tolerance, income requirements, and liquidity needs. While the portfolio management process is consistent, each client may have different inputs to the process, which results in a varied portfolio and different output. A significant difference in portfolio management exists due to different client types. Institutional clients, such as endowments, have certain similar risk and return objectives due to a similar time horizon. It is most often believed that endowments will exist forever; their time horizon is very long-term.
While each endowment may have specific goals, in a broad sense, most endowments have similar unlimited time horizons. In contrast, individual investors’ objectives vary more widely and must be ascertained for active portfolio management. For example, an individual may have different time horizons (e.g., saving for college and retirement), which may call for customized portfolio management. Individual investors are often unique since each client may have distinctive requirements and concerns (e.g., taxes).
What are some additional resources that students can access to prepare for portfolio management?
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