The Definitive Guide to Portfolio Management Jobs

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Portfolio management is the process of managing assets and investments. The main objective of portfolio management is to make the largest returns possible on original investments.

Features

The main duty of a portfolio manager is to accommodate clients’ risk tolerance with their investment goals and objectives. These professionals strive to attain optimum returns given the amounts of acceptable risk.

Benefits

Effective portfolio management ensures that clients’ investment goals and objectives are met. For example, if the goal of a client is asset protection, portfolio managers will invest in conservative, low-risk securities.

On the other hand, if a client needs current income, portfolio managers will invest in income-generating securities such as bonds. Generally, younger clients prefer to invest in high risk securities because of their long-term perspectives.

Portfolio Management Techniques

 

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Passive and Aggressive

There are two main types of portfolio management strategies: passive and aggressive.

Using either of the two strategies does not require great deal of knowledge about investment markets. The main goals of the two strategies are diversification of assets, cash cycles, industry, assets and duration.

Passive and aggressive investment portfolio techniques rely on alternating price points.

The main features of the passive strategy are that it assumes that the market is highly efficient and has return goals equal to the market. On the other hand, an aggressive strategy assumes that the market is highly inefficient and therefore, portfolio managers must strive to make returns above the market.

Techniques

The type of strategy a portfolio manager will use is determined by the type of information he/she has.

Active portfolios use available information from industry reports and performance indicators to seek out more information. Passive portfolios are composed of well-known value stocks that pay dividend.

A passive portfolio relies on markets with solid yields. Aggressive portfolios take on riskier investments because they aim at generating greater returns than the market.

Self-Discipline

Success of a portfolio management technique is largely determined by self-discipline.

Value-oriented, low risk investment portfolios are usually more successful than those that try to take advantage of short-term market anomalies. Your investment character is defined by your adherence to chosen strategies when markets move against your techniques.

What You Need to Do to Become a Portfolio Manager

Education

Enroll in a portfolio management program in college. Most portfolio managers have a bachelor or master’s degree in economics, accounting, finance or business administration.

Try to establish relationships in companies located in larger cities and financial centers such as New York City, London and Tokyo, because most investment firms are headquartered in countries’ financial hubs.

Internship

Gain work internship to improve your analytical skills. One of the best ways to begin a career in portfolio management is to complete an on-the-job training program to familiarize yourself with securities analysis past your university education.

Once you complete the program, you may obtain a job as a securities analyst and specialize in specific geographic regions or investment products. Your success as an investment analyst will determine whether you will be promoted to the post of portfolio manager.

Portfolio Investment

Seek advanced training after a few years’ work experience. Many financial managers seek certifications such as the Chartered Financial Analyst (CFA), sponsored by the CFA Institute.

The most distinct benefit of this charter is that it is a professional designation recognized all over the world. This is a securities designation to aspire if you plan to become a portfolio manager.

According to the CFA Institute, the Chartered Financial Analyst designation is the most respected and recognized designation for securities analysts. Unlike college degree programs, you can keep working and furthering your CFA education because it is a self-study program.

Advanced Work Responsibilities

Seek advanced recognition at work. You need to have advanced educational credentials and work experience to be promoted to the post of portfolio manager.

You are your own best advocate when climbing the corporate ladder. With this in mind, negotiate promotions and responsibilities when necessary. Added responsibilities mean longer hours and extreme competitiveness.

Duties of a Portfolio Manager

 

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Supervise Analysts

A group of financial analysts works under a portfolio manager to study the market and identify investment vehicles.

One of the duties of portfolio managers is to meet regularly with the financial analysts to discuss and design investment strategies.

Strategize and Prioritize

Portfolio managers may come up with many investment strategies. However, the most important factor in the success of an investment strategy is whether it will advance the objectives of the company.

It is the responsibility of the portfolio manager to analyse investment strategies and decide the projects and plans that will advance the objectives of the company.

Other duties of portfolio managers are to prioritize each investment vehicle, allocate resources and plan implementation.

To succeed in portfolio management, you must maintain perspective when implementing strategies and always act in the best interest of your company’s long-term financial plans.

Manage the Bottom Line

Many commercial banks and financial institutions hire portfolio managers to decide how to invest in securities such as bonds. These portfolio managers also ensure that depositors are paid interest that is proportionate to interest earned from loans.

Adapt

Good portfolio managers keep abreast of market conditions and try to adapt accordingly. For example, if you work with stocks and funds, you may be required to make split-second decisions to adapt to market shifts.

It is your responsibility as a project manager to remain flexible and creative while continuing to advance your company’s long-term financial objectives.

Investment Portfolio Management Guidelines

Asset Allocation

This is one of the most important components of investment portfolio management. The main goal of asset allocation is to manage risks effectively. Aggressive portfolios can have about two-thirds in stocks and the rest in bonds.

Today, many portfolio managers will advise their clients to place about 10 percent of their portfolios in gold and silver as well. The objective is to diversity investment by allocating resources to unrelated investments.

The underlying reason for allocating resources to diversified investments is to cancel out losses and protect gains made in other segments.

Investment Goals

Your investment portfolio management guidelines are partly determined by your investment goals.

Aggressive goals will have less stringent guidelines.

Clients saving for retirement in about 20 years will put more emphasis on risky investments like stocks and commodities. Older clients will probably want investment portfolios dominated by fixed income debts to ensure steady incomes with limited downside risks.

Many people favor long-term federal debt because they are relatively safe investments.

Trading Techniques

Short-term investment portfolios use different strategies than those used in long-term investment portfolios.

Short-term investment portfolios can lose a large percentage of their capital because they are filled with leveraged investments. Investors are advised to exit their losses early to prevent significant losses.

Hedging

This is an important risk management strategy in portfolio management. Hedging refers to the process of buying opposite position on the same or correlated asset for each investment.

The Compensation & Salary for a Portfolio Manager

Average Salary and Compensation

According to Payscale.com, the annual average salaries of portfolio managers are between $60, 524 and $115,410.

In addition, they can earn annual bonuses between 8.5 percent and 30 percent, commissions of between 7 percent and 13 percent as well as profit sharing of between 5 percent and 13 percent. Consequently, you can earn a total annual income of between $72,723 and $180,713 as a portfolio manager.

Experience

Portfolio managers with significant experience can expect to earn higher salaries. For example, according to Payscale.com, portfolio managers with less than a year’s experience earn annual salaries of between $45,663 and $68,784.

Portfolio managers with 1 to 4 years’ experience can earn yearly salaries of between $45,827 and $71,464.

If you are a portfolio manager with 5 to 9 years’ experience, you can earn annual salaries of between $64,105 and $100,965.

After 10 to nineteen years working as a portfolio manager, you can expect an annual salary of between $81,776 and $132,494. Portfolio managers with the highest salary expectations are those who have more than 20 years’ experience in the field. They can expect an annual salary of between $82, 379 and $135,873.

Salary by Industry

The salaries of portfolio managers can be determined by industry. According to Payscale.com, portfolio managers in the investment fund industry are the highest earners with annual salaries of between $92, 710 and 157, 386.

The second highest earners are portfolio managers in asset management with annual salaries of between $72,193 and $133,867. Other high earners are portfolio managers in fund management or trust companies earning annual salaries of between $57,990 and $122,815. The lowest earners are portfolio managers working for commercial banks who earn between $50,958 and $77,226 per year.

Salary by State

Salaries of portfolio managers vary widely by state. According to Payscale.com, the annual salaries of portfolio managers in:

  • Massachusetts – $72,929 to $146,291
  • New York – $75,858 to $134,922
  • Illinois – $63,392 to $134,498
  • California – $63,931 to $124,526
  • Texas – $63,486 to $105,603
  • Florida – $54, 988 to $103,706
  • Ohio – $51,518 to $98,939

Portfolio management goes against the classical security analysis approach by constructing a collection of investments through asset allocation and diversification.

One of the biggest challenges in securities trading is the uncertainty of investments’ future performance and the risk of potential losses.

However, effective portfolio management prevents losses by cancelling out different investment returns among investment components.

Image: bravercapital dot com

Author Bio:Tammi Rogers writes for Blueprint Wealth Financial Planners in Perth, Western Australia. Have a question on something within this article? Connect with Tammion on Google+ to discuss!

How to Get into Portfolio Management- Part IV

 

1x1.trans How to Get into Portfolio Management  Part IV

Portfolio Management

This is fourth post in the series how to get into portfolio management. In this post, we will cover the basics of Financial Portfolio Management – what is CAPM, Beta, Market Risk Premium and Risk Free Rate. We will also see how to calculate beta of any stock.

 

Diversification and Beta 

We diversify the portfolio to reduce total risk. By doing this, only systematic risk remains. Beta is used to measure systematic risks. A conservative investor would look for beta of 0.5 whereas an aggressive trader would look for the betas around 1.5. If one is looking for reducing total risk, he should go for good diversification strategy instead of lower betas.

 

Capital Asset Pricing Model 

In finance, the Capital Asset Pricing Model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset’s non-diversifiable risk. The model takes into account the asset’s sensitivity to non-diversifiable risk (also known as systemic risk or market risk), often represented by the quantity beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.

The model was introduced by Jack Treynor, William Sharpe, John Lintner and Jan Mossin independently, building on the earlier work of Harry Markowitz on diversification and modern portfolio theory. Sharpe received the Nobel Memorial Prize in Economics (jointly with Markowitz and Merton Miller) for this contribution to the field of financial economics.

The CAPM is a model for pricing an individual security or a portfolio. For individual securities, we made use of the security market line (SML) and its relation to expected return and systematic risk (beta) to show how the market must price individual securities in relation to their security risk class. The SML enables us to calculate the reward-to-risk ratio for any security in relation to that of the overall market. Therefore, when the expected rate of return for any security is deflated by its beta coefficient, the reward-to-risk ratio for any individual security in the market is equal to the market reward-to-risk ratio. 

The Capital Asset Pricing Model (CAPM) represents the relationship between the expected risk and expected return.

Assumptions of CAPM

All Investors:

1) Aim to maximize utilities.

2) Are rational risk-averse.

3) Are price takers i.e. they can not influence prices.

4) Can lend and borrow unlimited under the risk free rate of interest.

5) Securities are all highly divisible into small parcels.

6) No transaction or taxation costs incurred.

Application of CAPM requires following inputs:

1. Risk-free rate

2. Market Risk Premium

3. Beta

 

  1. Risk-free rate

The risk-free rate is the return on a security or even a portfolio of securities which is void of default risk and is not interrelated to returns from anything else in the economy. In theory, the best estimate of the risk-free rate is the return on a zero-beta portfolio. However, constructing zero beta portfolios is an expensive and complex affair and hence they are mostly unavailable for risk-free rate estimation.

Two alternatives are most commonly used in practice:

1. The rate on a short-term government security like the 364-days Treasury bill.

2. The rate on a long-term government bond with maturity of 15 to 20 years.

 Each of the above alternatives has its own pros and cons and the choice depends extensively on the judgment of the analyst.

  1. Market Risk Premium

The risk premium in CAPM is usually based on historical data and it’s computed as the difference between the average return on stocks and average risk-free rate. In this context, two measurement issues need to be tackled: What should be the duration of the measurement period? Should geometric mean or arithmetic mean be used?

The answer to the first question is to use the longest possible historical period, lacking any risk premium trends over the course of time.

Practitioners appear to disagree over the option of geometric versus arithmetic mean. The geometric mean is the compounded annual return over the period of measurement where as arithmetic mean is the average of annual rates of return over the measurement period.

Determinants of Risk Premium 

The market risk premium is primarily influenced by three factors:

Discrepancy in Underlying Economy:

Risk premium is likely to be large if the underlying economy is more volatile. For instance, the risk premiums for budding markets, taking into account their high-growth rate and high-risk economies, are larger than that for developed markets.

Political Risk:

Risk premiums are often more in markets that are exposed to higher political volatility. It should be noted that political instability causes uncertainty in an economy.

Market Structure:

Risk premium is smaller if the companies listed on the market are large, steady and diversified. Whereas, for small companies listed on the market, risk premium is larger.

3. Beta

Beta is a relative measure of risk associated with the company’s shares as against the market as a whole. Beta measures the volatility of the stock. When the market is going up, the stocks which have higher betas (more than 1) are preferred and in falling markets the stocks having lower betas (less than 1) are preferred. 

Calculation of Beta 

The calculation of beta may be illustrated with an example. The rates of return on stock A and the market portfolio for 15 periods are given below:

Period Return on stock A (RA Return on market portfolio, RM Deviation of return on stock A from its mean (RA – mean of RA) Deviation of return on Market Portfolio from its mean (RM – mean of RM) Product of the deviation, (RA – mean of RA) (RM – mean of RM) Square of the deviation of return on market portfolio from its mean (RM – mean of RM)2
1 10 12 0 3 0 9
2 15 14 5 5 25 25
3 18 13 8 4 32 16
4 14 10 4 1 4 1
5 16 9 6 0 0 0
6 16 13 6 4 24 16
7 18 14 8 5 40 25
8 4 7 -6 -2 12 4
9 -9 1 -19 -8 152 64
10 14 12 4 3 12 9
11 15 -11 5 -20 -100 400
12 14 16 4 7 28 49
13 6 8 -4 -1 4 1
14 7 7 -3 -2 6 4
15 -8 10 -18 1 -18 1

Table : Calculation of Beta

These are important factors in portfolio management/Stock Portfolio Management.

Have any queries? Write to me in ‘Comments’ section.

How to Get into Portfolio Management –Part I

Portfolio management involves deciding what assets to include in the portfolio, given the goals of the portfolio owner and changing economic conditions. Selection involves deciding what assets to purchase, how many assets to purchase, when to purchase them, and what assets to divest. Read more »