The Role of a Portfolio Manager
What is a portfolio manager? Someone who manages a portfolio, right? But what is a portfolio and what does it mean to manage one?
This article breaks down different aspects of the role to show you some roles that portfolio managers carry out. The list is not exhaustive because the role can vary at different firms in different ways e.g. through different asset classes, investment strategies – so on and so forth. The role can also exist in different aspects of the buy-side e.g. in asset management, wealth management, or hedge funds. However, the overarching aim of all portfolio managers is to generate a return for their clients.
Overarching Aim
Portfolio managers are given the responsibility to invest money on behalf of others. These ‘others’ may include pension funds or high net worth individuals (dependent on what type of portfolio manager they are and what division they sit in). Pension funds need to invest their money because money will be eroded by inflation over time. Because pension funds need to generate a steady return (at least in line with inflation), they may be more risk-averse than other clients like high-net-worth individuals.
What Is a Portfolio?
A portfolio is a collection of financial instruments like stocks, bonds, commodities etc. To exemplify this, we will have an imaginary fund composed of 5 imaginary stocks. (Note that the number of financial instruments in a portfolio can vary.)
| Imaginary fund | % of portfolio | Country of origin |
|---|---|---|
| Stock A | 40% | Argentina |
| Stock B | 20% | Bolivia |
| Stock C | 17% | China |
| Stock D | 15% | Denmark |
| Stock E | 8% | England |
Each stock makes up a portion of the portfolio. This means that 40% of the portfolio’s value is based in stock A, 20% in stock B etc. As a result, by investing in this imaginary fund we aren’t placing all of our risk in a single stock. By exposing oneself to different markets or countries you can potentially reduce your risk because if all Argentinian stocks are doing really poorly for a period of time then it would not affect the investment as much as if all money was invested in stock A.
How Is a Portfolio Created?
The portfolio manager will use a combination of financial modelling, judgement and research to pick which elements the portfolio should consist of. They are likely to be bound by certain restraints dependent on the division they are in e.g. only long investments (buying stocks) or only equity investments. They are also likely to be bound by regulatory restraints, e.g. about how risky a portfolio can be.
The portfolio manager may be involved in the research of picking the stocks they put in an equity fund. They would do a lot of quantitative and/or qualitative analysis to choose why they want to invest in that stock. They use their judgement to make a calculated decision on how they think that that fund will do over a time horizon (for example 3 years). They then consider how the stocks will work together and the overall risk and reward level of the fund. However, the role does not end here.
Commercial Awareness
Portfolio managers need to constantly check the financial markets. They need to understand how changes in regulation or economic indicators (like interest rates) will affect the stocks in the portfolio and the overall portfolio. As news comes out about something which affects the portfolio, the portfolio manager may decide to invest more or less of their portfolio in this component. They may even remove or replace it if the trade will no longer bring a positive return.
Everyday Trading
Moreover, as the market changes, e.g. if stock A’s value increases, then this will be worth more than 40% of the portfolio’s investment. Say it is strong and now makes up for 48% of the portfolio. Although it may seem counterintuitive, stock A needs to be sold to get it back to its target of 40%. Portfolio managers need to regulate and sign off this sort of daily trading.
Challenges to the Role
Portfolio managers hold a lot of responsibility as they are investing a lot of money on behalf of their clients. When portfolios do well (against their designated benchmark or make a positive return) then this is the responsibility of the portfolio manager. They also must face the consequences if the portfolio does not do so well.