What do Portfolio Managers do?

Ankita Tiwari

20 Apr, 2023

Portfolio managers are people who handle investing strategies on behalf of individuals and organizations. Portfolio Managers decide when, how and where to invest assets. A portfolio may include assets such as stocks, bonds, real estate, individual investments, etc. Portfolio Managers manage the investing plans for large organizations including investment banks, private equity firms or even high-net-worth individuals. Wherever investment occurs, one can surely find a portfolio manager. They are also called as investment managers, wealth managers, asset managers or financial advisors, however, strictly sticking to portfolio managers their work is limited to the analytical side of investing and does not cover the sales aspect. Further, they require advanced financial knowledge and skills to manage the investment portfolios of their clients.

What are the Types of Portfolio Managers?

Portfolio Managers are distinguished by the type of clients they deal with as they serve to satisfy the earning goals of their respective clients. There are two types of portfolio managers, namely:

1. Individual
2. Institutional

What are the Different Investment Styles followed by Portfolio Managers?

To answer the question, “What do portfolio managers do?” we have to understand the various styles of investing they use. Depending upon the client’s investment goals and plans they choose the investment style. Some of the most common investing styles are as follows:

1. Small vs. Large
   In this investing style, the portfolio managers choose between the stocks of small-cap or large-cap. Small-cap stocks are shares of smaller companies that have a market cap of Rs. 5,000 crores or less and large-cap stocks are shares of large or big companies with a market cap of Rs. 20,000 crores or more.
2. Value vs. Growth
   In this investing style, the portfolio managers choose between focusing on the current valuation or analysing the future growth potential.
3. Active vs. Passive
   This investing style refers to the preference made by portfolio managers for active investing or passive investing. Acting investing aims to outperform benchmark indexes whereas passive investing aims to match benchmark index performance.
4. Discretionary vs non-discretionary
   In the discretionary investing style, the portfolio manager has the authority over the client’s finances whereas in the non-discretionary investing style, the portfolio manager has to communicate and secure approval from the client before making any investment.
5. Momentum vs. Contrarian
   This investing style reflects the portfolio manager’s preference for trading with or against the prevailing market trend.

What do Portfolio Managers Do?

Portfolio managers work closely with clients and assess their financial wants. To achieve the client’s financial goal, the portfolio managers generally follow the six-step portfolio management process which has been discussed below:

1. Determine the client’s objective
   The first step of portfolio management involves communicating with the client to determine their desired return and risk appetite or tolerance. Usually, individual clients have smaller investments with shorter and specific time horizons whereas, in case of institutional clients, larger amounts are invested with longer investment horizons.
2. Be up-to-date with financial news and economic data
   In order to successfully construct portfolios, portfolio managers must have an in-depth understanding of the market conditions, trends and overall economic trends. They must keep up with recent finance, investment and trade news.
3. Choose the optimal class of assets
   After determining the client’s objective, the manager determines the most suitable class of asset based on the client’s investment goals. Suitable assets can be equities, bonds, real estate, private equity, etc.
4. Conduct Strategic Asset Allocation (SAA)
   SAA is a process for setting weights for each class of asset in the client’s portfolio at the beginning of the investment period. For example; 60% equities and 40% bonds. SAA is done to ensure that the portfolio’s risk and return trade-off are compatible with the client’s desire. Asset weights may deviate from the original allocation over time due to unexpected returns from various assets therefore, portfolios require periodic re-balancing.
5. Conduct Tactical Asset Allocation (TAA) or Insured Asset Allocation (IAA)
   Tactical Asset Allocation^[1] TAA and IAA are two ways for adjusting the weights of assets within portfolios during an investment period. The TAA approach makes changes with the change in the situation of the capital market whereas in IAA the asset weights are adjusted based on the client’s existing wealth at a given point in time. A portfolio manager has to choose any one of the two. Both cannot be used at the same time as they have a contrasting effects. TAA portfolio manager identifies and utilizes the predictor variable that correlates with future stock returns and then converts the estimated return into stock or bond allocation. Whereas an IAA manager aims to offer clients downside protection for their portfolios by working to ensure that portfolio values never drop below the client’s investment floor i.e. the minimum acceptable portfolio value.
6. Manage Risk
   After selecting weights for each asset class, the portfolio manager gets control over security selection risk, style risk and TAA risk taken by the portfolio.
   • The security selection risk arises from the portfolio manager’s SAA actions. To avoid security selection risk, the portfolio manager has to hold a marker index directly thereby ensuring that the manager’s return on the class of asset is the same as that of the asset class benchmark.
   • The style risk arises from the investment style preferred by the portfolio manager. For example, a Portfolio manager who has opted for growth as an investment style frequently beat benchmark returns during the bull market but underperforms relative to market indexes during bear markets. Contrarily, portfolio managers who have opted for a value investment style often struggle to beat benchmark index returns in the bull market but beat the market average in bear markets. A bull market means when investment prices are rising whereas a bear market means when the investment prices are falling.
   • A TAA risk can be avoided by choosing a path other than TAA as the benchmark index. This will prevent exposing the portfolio to higher levels of volatility.
7. Measure Performance
   Lastly, the performance of the portfolio is evaluated by the portfolio manager by using the performance measures and financial ratios prescribed.  After evaluating the performance, they make strategic decisions regarding the purchase or sale of assets depending upon the market situation.

Conclusion

In summation, it can be said that portfolio managers provide tailor-made investment solutions to individuals and institutions with a guarantee of maximum returns. So in order to be a good portfolio manager, one has to be a good decision-maker and be accessible to clients for setting financial goals. Further, they play a major role in selecting the investment plan for the benefit of their client. They minimize the risk and ensure a stable return for their clients. All in all, a portfolio manager’s role involves meeting with clients, selecting customized investment plans for their clients, purchasing and selling securities on their behalf, preparing reports and using the available data to foresee the outcome of various investments.

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