All
investment analysts have one simple goal; to make investment decisions or
advise clients in making good investment decisions. Investment analysis is
therefore both, a science and an art, and there is a complex link between equity
portfolio management and equity analysis. Students of business and economics
usually learn these two linked concepts side by side. This helps them in their
career as investment managers. Before we understand how equity portfolio
management works, we need an understanding into the background of such managers
How are portfolio managers trained?
Despite
studying subjects like modern portfolio theories and having a good
understanding about equity analysis, investment companies require their
recruits to get an in-depth understanding of a few basis mechanical and
practical elements of portfolio management services. This practical training is
meant to help portfolio managers when they have to construct and run equity
portfolios for clients. Like every other profession in the world, the real-world
application of theoretical concepts requires the individual to think beyond
their training. There is the need for administrative efficiency while running
portfolio groups that involve great attention to detail and computerization.
The mechanics of portfolio management
The philosophy of investment: Professional
portfolio managers hired by investment companies usually cannot choose a
general investment philosophy in governing the portfolios they manage. Most
investment firms have strictly designed constraints for managing investments
and selecting stocks e.g. a firm defines a value investment by using specific
trading guidelines. Portfolio managers are further constrained by certain
guidelines of market capitalization. This is why the first step of equity
portfolio management is to understand the limited universe from which
investment options can be selected. Furthermore, such managers also need to
analyse the portfolio in question using approaches like the bottom-up or
top-down approach. While in the former,
the investment choices are made by selecting stocks without consideration of
economic forecasts; in the latter, portfolio managers, eye macroeconomic trends
while beginning analysis and stock selection. Most styles combine the two
approaches.
Sensitivity towards taxation laws:
Several institutional equity portfolios are not taxable.Pension funds are a
good example of this category. These funds give portfolio managers great
management flexibility as opposed to taxable portfolios. Non-taxable portfolios
require a far greater exposure to short term capital gains and dividend income
as compared to taxable portfolios. As such, people managing taxable portfolios
must pay special attention towards stock holding periods, capital losses, tax
lots, tax selling as well as any dividend income generated by such portfolios.
Taxable portfolios are usually more effective when they have a lower turnover
rate. Portfolio management services come with a detailed understanding of tax
consequences, which is integral in building and managing a portfolio over a
course of time.
Portfolio model building:
Building and maintaining portfolio models is a common aspect of portfolio
management. Individual portfolios are co-ordinated using a standard portfolio
model where managers generally assign a percentage weight to every stock within
the portfolio model. Individual portfolios are then modified as per this
weighing mix. Managers rely on some specific software tools to model
portfolios. One of the most common software tools used for portfolio
managements is Microsoft Excel. A portfolio manager creates an excel sheet in
which he does a mix of company, sector and macroeconomic analysis, after which
he guides clients on investing a particular sum in a stock. He uses the same formula in guiding different
sets of clients from part-time investors to regular investors. All portfolios
are run is a similar fashion as per a specific styles mandated by a portfolio
group. The manager expects all portfolios is a group to generate standardized
returns viz a viz risks/rewards. As such, all the analysis and security
evaluation done by an equity portfolio management personnel is basically run on
a standardized model as opposed to creating individual portfolios.
Achieving an efficient portfolio: A
portfolio manager can achieve a great deal of analytical efficiency by running
most or all portfolios in a similar fashion. The manager only required an
understanding of 30 to 40 stocks which are owned in similar quantities or
proportions across all portfolios as opposed to understanding 200 or more
stocks owned in different proportions in different portfolio accounts. Analysis
of these selected 30 to 40 stocks may be applied across all portfolios
effortlessly and simply by changing the weight models over a period of time.
With the changing outlook of individual stocks, portfolio management services
can modify their model weightings so as to mirror the decision for investments
in all simultaneous portfolios. A set portfolio model comes in handy while
managing every day transactions at individual portfolio levels and also helps
in quick and efficient set-up of new accounts by buying against the set model.
