Equity Portfolio Management
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 management 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 in 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.