Portfolio Management

1. What is Portfolio Management? By AdvisorEngine.com

2. 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.

3. 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

4. Let’s 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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 RIA’s in performing the following critical tasks that are central to portfolio management:

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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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