Portfolio Management: An Overview

Active management involves attempting to outperform market benchmarks through various strategies, while passive management focuses on replicating the performance of indexes. Despite the growth of passive management, it still represents a smaller portion of industry revenue due to lower fees.

Traditional asset managers typically engage in long-only equity and fixed-income strategies, earning revenue from management fees. Alternative asset managers, dealing in strategies like hedge funds and private equity, earn from both management and performance fees, contributing to a higher revenue share despite managing fewer assets.

The ownership of asset management firms can be either private, often with key personnel holding stakes, or public. This structure influences the alignment of interests between managers and clients, and impacts the firm's operational and strategic flexibility.

Significant trends shaping the asset management industry include the growth of passive investing due to its cost-effectiveness, the integration of big data for enhanced decision-making, and the rise of robo-advisers which automate investment advice, appealing particularly to younger and 'mass affluent' investors.

SMAs are investment accounts managed for individual institutions or investors with substantial assets. They allow for personalized investment strategies and direct ownership of assets, but require higher minimum investments compared to mutual funds.

ETFs are investment funds that trade on stock exchanges and are structured as open-end funds. They offer intraday pricing and transactions, lower minimum investments, and the ability to short shares or buy on margin, unlike mutual funds.

Hedge funds are private investment vehicles that use strategies like leverage and short selling to achieve absolute returns. They typically have high minimum investments, restricted liquidity, and charge both management and performance fees.

These funds invest in companies to optimize and eventually sell them for profit. They are usually structured as limited partnerships and have a hands-on management approach, with revenue generated through management fees, transaction fees, and carried interest.

Individual investors include retail investors who invest for personal goals such as retirement, education, or major purchases. They may use defined contribution pension plans where both employee and employer contribute, and the employee bears investment risks.

Institutional investors are entities like pension funds, endowments, and sovereign wealth funds that manage collective investments. They have specific investment strategies based on their unique goals and obligations.

These are retirement plans funded by contributions from both the employee and employer. The employee bears the investment risk and the benefits depend on the plan's investment performance.

Employer-sponsored retirement plans that promise a specified retirement benefit. The employer bears the investment risk and is responsible for ensuring the plan is adequately funded to meet future obligations.

These are funds or entities that manage the investments of non-profit institutions, aiming to maintain the real value of the fund while generating income to support the institution's objectives. They often have a significant allocation to alternative investments.

State-owned investment funds or entities that invest globally in a variety of asset classes. They do not typically manage specific liabilities and have diverse investment objectives aligned with national interests.

Diversification involves spreading investment risks across various assets to reduce the impact of any single asset's poor performance on the overall portfolio.

By diversifying investments, portfolios can achieve lower volatility compared to investing in individual securities, thereby reducing overall investment risk.

Developed by Harry Markowitz, MPT is a framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It emphasizes the importance of diversification and the correlation between assets.

This involves selecting a mix of assets that achieves the desired risk-return profile. This can be influenced by factors such as the investor's risk tolerance, investment horizon, and financial goals.

While diversification generally reduces risk, it does not necessarily provide protection against market downturns, especially during severe market turmoil where correlations between asset returns might increase.

A document that outlines the client's investment goals and constraints. It serves as a guideline for making investment decisions and is reviewed regularly to ensure it remains aligned with the client's objectives and circumstances.

The process of deciding the mix of asset classes (e.g., equities, bonds, cash) in the portfolio. It is based on the client's risk tolerance and investment objectives as stated in the IPS. Asset allocation is a crucial determinant of portfolio returns and risk management.

Involves the detailed examination of individual securities to assess their expected risks and returns. This analysis can be approached from a top-down (focusing on macroeconomic factors) or bottom-up (focusing on company-specific factors) perspective.

The process of selecting and weighting investments in the portfolio to meet the strategic asset allocation while considering diversification to reduce risk.

Involves the ongoing review of the portfolio to ensure it remains aligned with the client's goals. Rebalancing is done to realign the portfolio's asset mix as it drifts over time due to differing returns from various assets.

Assessing the portfolio's returns against benchmarks and the client's investment objectives. This step may lead to adjustments in the IPS or investment strategy if the objectives are not being met.

Mutual funds are pooled investment vehicles that allow investors to invest in a diversified portfolio of stocks, bonds, or other securities. Each investor owns shares that represent a portion of the holdings of the fund.

The NAV is the total value of all the securities held by the fund minus any liabilities, divided by the number of shares outstanding. It is calculated daily and represents the per-share value of the fund.

These funds issue new shares as investors buy in and redeem shares as investors sell out, with the fund's asset base adjusting accordingly. The share price is determined by the NAV.

These funds have a fixed number of shares and do not issue new shares or redeem shares. Instead, shares are bought and sold on the open market, and the share price can differ from the NAV.

Load funds charge a sales fee either at the time of purchase (front-end load) or when shares are sold (back-end load). No-load funds do not charge these fees, although they may charge other types of fees.

Money market funds invest in short-term money market instruments like treasury bills and commercial paper. They aim to provide security of principal, high liquidity, and returns that align with money market rates. They can operate on a constant net asset value (CNAV) or a variable net asset value (VNAV) basis.

Bond mutual funds consist of portfolios of bonds and occasionally preferred shares. They can vary widely in the types of bonds they hold, from government to corporate to high-yield bonds. The maturity of these bonds can range from one year to over 30 years.

Stock mutual funds, which can be actively or passively managed, invest in equity securities. Actively managed funds aim to outperform market indices through selective stock picking, while passive funds (index funds) aim to replicate the performance of a specific index.

Hybrid or balanced funds invest in both stocks and bonds. They adjust the asset mix over time, often targeting specific retirement dates in the case of lifecycle or target-date funds.

SMAs are customized investment portfolios managed for individual or institutional investors with substantial assets. Unlike mutual funds, SMAs involve direct ownership of the assets by the investor.

ETFs are investment funds that trade on stock exchanges and can be bought or sold throughout the trading day. They are similar to mutual funds but offer features like the ability to short sell or buy on margin.

Hedge funds are private investment vehicles that often employ complex strategies including leverage, derivatives, and both long and short positions. They are less regulated than mutual funds and ETFs.