Portfolio Manager Meaning

A portfolio manager is an executive who is responsible for making investment decisions and manage investment portfolios with the primary goal to meet the clients’ financial and investment-related objectives and work towards the maximum benefit of the client with the minimum possible risk.

Below is the list of functions, roles, and responsibilities of a portfolio manager:

Deciding the best investment plan for an individual based on his preferences, age, risk appetite, income level, etc.
Educate the investor about the types of investmentsTypes Of Investments Stocks, bonds, and cash equivalents are the three main forms of investments. Investment, in general, refers to the purchase of anything for future use with the goal of generating a regular cash flow or increasing the value of something over time so that it can be sold for a higher price than it was purchased for, i.e. capital gains. read more available, the returns expected, and the risks involved.
Keep in touch with the client and keep him/her updated on a regular basis.
Be transparent and honest with the client.
Be able to make good decisions at the right time.
Keep himself updated with the latest changes in the financial field.
Contrive a personalized investment plan rather than suggesting a similar plan like that of a previous client as individuals vary.
They must be unbiased towards a particular investment, must not look for higher commissions but should work for the best interests of the clients.
They must keep a check on the market fluctuations from time to time and must be able to guide the investor accordingly.

Apart from all this, they must clarify to the investor that no matter how much planning is done, there would arise unavoidable circumstances that might arise in the course of investment and that the investor must be ready and have sufficient funds to tackle the same.

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What does a Portfolio Manager Exactly Do?

We can divide the process of portfolio management into six phases/steps:

Ascertain the client’s objective.
Select the most suitable asset class.
Conduct the strategic asset allocationAsset Allocation Asset Allocation is the process of investing your money in various asset classes such as debt, equity, mutual funds, and real estate, depending on your return expectations and risk tolerance. This makes it easier to achieve your long-term financial goals.read more i.e., setting weights for the suitable asset classes.
Conduct Tactical Asset Allocation – This refers to adjusting the weights within the portfolio.
Manage Risk.
Measure Performance using the Capital Asset Pricing ModelCapital Asset Pricing Model The Capital Asset Pricing Model (CAPM) defines the expected return from a portfolio of various securities with varying degrees of risk. It also considers the volatility of a particular security in relation to the market.read more. This can be done by calculating the Alpha (α) – expected returnExpected Return The Expected Return formula is determined by applying all the Investments portfolio weights with their respective returns and doing the total of results. Expected return = (p1 * r1) + (p2 * r2) + ………… + (pn * rn), where, pi = Probability of each return and ri = Rate of return with probability. read more, BetaBeta Beta is a financial metric that determines how sensitive a stock's price is to changes in the market price (index). It's used to analyze the systematic risks associated with a specific investment. In statistics, beta is the slope of a line that can be calculated by regressing stock returns against market returns.read more (β) – systematic risk, and the Residual risk.

Now that we have learned the major responsibilities of the manager, let us know some of the qualities the portfolio manager must possess in order to perform well:

Ability to communicate i.e., strong communication skills
The anticipation of the market performance
Patience
Decisiveness
Capability to generate ideas
Self- Sustainability
Competitive Spirit
Emotional Balance
Analytical Ability

Types of Portfolio Manager

The following are types of portfolio managers.

#1 – Bases on Clients They Serve

Individual Clients
Institutional Clients

Whatever be the type of the clients they serve, the main of the objective does not change. It would be to satisfy the needs and financial goals of the respective clientele.

#2 – Based on Approach

Active Approach – A manager with an active approach would be aggressive and would attempt to beat the market returns.
Passive Approach – A manager with a passive approach, he would usually prefer to buy stocks that reflect the market performance i.e., market index. When such an approach is followed, investors expect returns equivalent to that of the market index.

Example of the Portfolio Manager

Let us understand the function of a portfolio manager with the help of a numerical example:

You can download this Portfolio Manager Excel Template here – Portfolio Manager Excel Template

There is a portfolio manager, say K. K has experience in managing investment portfoliosInvestment Portfolios Portfolio investments are investments made in a group of assets (equity, debt, mutual funds, derivatives or even bitcoins) instead of a single asset with the objective of earning returns that are proportional to the investor's risk profile.read more and feels that he can follow a proper strategy and gain results rather than just following the market index. He is a manager following an active approach, or we can say, he is an aggressive portfolio manager.

Solution:

Calculation of portfolio Value will be –

As per the requirements and the risk appetiteThe Requirements And The Risk Appetite Risk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation.read more of the clients of K, he can manage from one investment firm to another, maintaining the total value of the portfolio.

Advantages of Portfolio Manager

Portfolio management by a manager helps in:

Avoiding disasters in investments.
Reducing risks by reducing volatility in the portfolio.
Optimal allocation of funds.

Important Points

The various investment styles used by a manager are as follows:

Based On	Type
Capitalization	Small Cap	Large Cap
Focus	Value	Growth
Approach	Active	Passive
Trading	Momentum	Contrarian

Financial Advisor vs Portfolio Manager Differences

The terms ‘financial advisor’ and ‘portfolio manager’ are often used synonymously. But there are differences between the two. Let us now learn the differences:

Point of Difference	Financial Advisors	Portfolio Managers
Role	They do not support the long-term financial objectives of the client. Financial advisors suggest clients based on their financial situation.	The portfolio manager’s job is to take care of the client’s financial and investment-related objectives.
Duty	Financial advisors are not having any legally bound by a trust to the client.	They are legally bound by a trust to act to the client’s best interest.
Fee	They earn fees and commission based on the products that are sold to the client by them.	They receive a fee based on the percentage of assets managed by them.
Management	They may sometimes be compelled to overtrade to boost theirs.	Since they do not receive a commission, they do not try to oversell products that are not useful for the client of products that are not in their best interest.

Investors, in reality, prefer portfolio managers over financial advisors for managing their periodical income, benefits, and savings.

Conclusion

To sum up, performing the role of a portfolio manager is very risky challenging, but at the same time, it offers rewards adequately. It offers a wide range of challenges as well as opportunities for growth, earning, and learning. A person with a willingness to take up risks and preparedness to spend a lot of time researching, with a flair for financial marketsFinancial Markets The term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read more, and with an ability to analyze can pursue suitable courses that enable him/her to become a portfolio manager.

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Portfolio Manager

Portfolio Manager Meaning