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A Portfolio Manager is a professional responsible for making investment decisions and carrying out investment activities on behalf of vested individuals or institutions. The investors invest their money into the portfolio manager's investment policy for future fund growth such as a retirement fund, endowment fund, education fund and other purposes. Portfolio managers work with a team of analysts and researchers, and are responsible for establishing an investment strategy, selecting appropriate investments and allocating each investment properly towards an investment fund or asset management vehicle.
In th 1950s, Harry Markovitz, an American economist, developed the Capital Asset Pricing Model (CAPM), which is one of the primary portfolio management tool. The CAPM formula calculates the potential return percentage of an investment vehicle based on its vested risk appetite. The formula is:
er = rf + β (rm - rf), where
- er = expected returns
- rf = risk free rate
- rm = expected market returns
- β = risk measure
The goal of an investment manager is to earn a greater return than the given level of risk. This return can be monitored by investors through weekly, monthly, quarterly, or yearly performance reports shared by the portfolio manager. The manager may setup a performance benchmark or track their investment strategy alongside an index. The investment policy shared by the manager outlines the details such as minimum investment requirements, liquidity provisions, investment strategy and markets the manager will be actively investing in.
Institutional investors include Fund of Hedge Funds, Insurance companies, Endowment funds and Sovereign Wealth funds. Individual investors include Ultra-High Net Worth Individuals (UHNW) or High Net Worth Individuals (HNW).
Portfolio Managers & Investment AnalystsEdit
Portfolio managers are presented with investment ideas from internal buy-side analysts and sell-side analysts from investment banks. It is their job to sift through the relevant information and use their judgment to buy and sell securities. Throughout the day, they read reports, talk to company managers and monitor industry and economic trends looking for the right company and time to invest the portfolio's capital.
A team of analysts and researchers are ultimately responsible for establishing an investment strategy, selecting appropriate investments and allocating each investment properly for a fund or asset-management vehicle.
Portfolio managers make decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. Portfolio management is about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and other trade offs encountered in the attempt to maximize return at a given appetite for risk.
In the case of mutual and exchange-traded funds (ETFs), there are two forms of portfolio management: passive and active. Passive management simply tracks a market index, commonly referred to as indexing or index investing. Active management involves a single manager, co-managers, or a team of managers who attempt to beat the market return by actively managing a fund's portfolio through investment decisions based on research and decisions on individual holdings. Closed-end funds are generally actively managed.
The IT Infrastructure for a portfolio manager facilitates the delivery of updated prices and market information to allow for trade orders, trade executions and their overall portfolio value. The IT infrastructure, known as a portfolio management system (PMS), include components such as an order management system, execution management system, portfolio valuation, risk and compliance. A front-back PMS will also include a middle office and back office components such as trade management, pre/post-trade tools, cash management and Net asset value calculations.
- Conroy, Robert M. (2014). CFA Institute Level I: Corporate Finance & Portfolio Management. p. 237.
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- Investment Analysis and Portfolio Management
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