Question

Explain, as a portfolio finance manager, how you would manage a portfolio for an investor?   What analysis would you perform, how would you know when to advise a change should be made in the composition of the portfolio, and if you had to objectively explain the reason for the change, what would you say?  

Answer 1

An Investor reaches out to a portfolio manager for his specialization and expertise in managing the funds. He trusts the portfolio manager to make the best decision on his behalf and make good returns on his investment.

As a portfolio manager, I would make the best use of my abilities to manage the portfolio of the investor. First I would try and understand few important aspects like :

1) What is the risk appetite of the investor. Is he too risk averse or has risk taking potential.

2) What are his immediate, short term and long term goals.

3) What is his horizon period

4)He falls under which Tax bracket

5)Does he understands the risks associated with different asset class or not

6)Understand his basic lifestyle and spending habits

Any change in the portfolio mix depends on external factors as well as if there is any change in the above mentioned factors. Let's suppose ,if the investor has any immediate upcoming liability to be paid ,then the funds shouldnot be blocked in any fixed deposits as it would be difficult to match the liability and unneccessary charges will be incurred to break the FD.

As a portfolio manager I would keep an eye on Interest rate trend and make allocation accordingly. Also equity investment should be part of the portfolio where in I would allocate funds with a simple thumb rule of 100 minus the investor's age to be invested in equity/stocks of companies.I would definitely churn portfolio mix in stocks looking at micro as well as macro trends .Sectorial analysis is to be done regularly.

I would advise a change in composition of portfolio if the asset class show negative trend. For instance if I have gold/silver or other bullion in the portfolio and there has been sharp decline in bullion demand and the fall is going to continue, then I would advise booking some profits and invest the released fund in oil or dollar as mostly gold and oil/dollar are negatively co-related. Similarly if i have bonds in the portfolio and if I assess interest rate risks then I would advise to sell and exit.

Equity investment is risky but historically good companies have given splendid returns over longer term. I would look at qualitative factors ,like management,background and experience,revenue mix of the company,their competitive advantage,and so on.Any adverse effect on the qualitative aspect, then I would advise to sell and exit. Having a good exit strategy is also very important.