Portfolio Management Fundamentals

Course Roadmap

Learning Outcomes

01. 02.
Understand what Portfolio Recognize whether a career in
Management (PM) is Portfolio Management is for you

Key Checkpoints

Understand what Distinguish between Examine Portfolio Describe different Articulate how fund
Portfolio Management different types of Construction Client Risk Profiles performance is
is and is not Portfolio Managers measured
Portfolio Management
What is it
 What is Portfolio Management

PORTFOLIO MANAGEMENT
PORTFOLIO MANAGEMENT
PORTFOLIO MANAGEMENT

Process of…

Selecting and overseeing investments

That meet the financial objectives and risk

appetite of a client, company, or institution

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 Interactive Exercise

Interactive Exercise 1
One of these jobs is not like the other

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 What is Portfolio Management

PM
PMSS AM
AMSS IM
IMSS
PORTFOLIO ASSET INVESTMENT
MANAGEMENT MANAGEMENT MANAGEMENT

PORTFOLIO / FUND ASSET INVESTMENT

MANAGER MANAGER MANAGER

All these terms are used interchangeably in conversation

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Portfolio Manager Profiles
Strategies, Types, and Approaches
 Portfolio Manager Strategies

Active Investing and Passive Investing describe whether Portfolio Managers are making investment decisions to
outperform a benchmark or index.

Active Investing Passive Investing

• More risk, (hopefully) more return • Making investment decisions to

• Actively making investment decisions replicate a benchmark or index

• Typically, higher management fees • Aiming to match exactly, neither

outperforming, nor underperforming

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 Portfolio Manager Strategies

Active Investing PM Passive Investing PM

Based on my analysis, I believe Alibaba will My index currently has 6.7% of Alibaba.
outperform.
I’m going to ensure that my portfolio never
I’m going to put 10% of my portfolio in it. deviates from the same proportion, 6.7%.
Whether prices go up or down, I replicate
both movements.

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 Types of Portfolio Managers

Traditional Non-Traditional
Mutual funds Hedge Funds
(active/passive)

Pension funds Venture Capital

(active/may have passive portions)

Insurance Co. Distressed Funds

(active/may have passive portions)

ETFs (Exchange Traded Funds) No place for passive here -

otherwise, why would you pay
(active/passive)
them so much?

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 Portfolio Manager Approaches

Top-down Approach

Country / Economy

Sector / Industry

Individual Asset
/ Fundamentals

Fundamental Analysis

Individual securities or companies

Bottom-up Approach

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 Portfolio Manager Profiles

Insurance Envirotech
Company Hedge Fund

Active Passive Active Active

Non- Traditional Non-

Traditional Traditional
Traditional

Top Bottom Top- Bottom

Down Up Down -Up

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 Investment Manager Approaches

Insurance
Company

Active May have a portion of its portfolio dedicated to passive

Traditional May have portions of its fund dedicated to investing in various hedge funds

Guidance / Investment Strategy Execution of Strategy Day-to-day

Top-Down
Top- • Board of Directors Bottom- • Individual Portfolio
Down • Chief Executive Officer (CEO) Up Managers
• Chief Investment Officer (CIO)

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Traditional vs. Non-Traditional
Stakeholders, Risk Tolerance, and Goals
 Traditional vs. Non-Traditional

Traditional vs.
Non-Traditional

Stakeholders Risk Tolerance Goals

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 Traditional

Traditional

Traditional vs.
Stakeholders Risk Tolerance Goals Non-Traditional

Pensions Employees

Mutual Funds Investors

Insurance Cos. Policy owners

Endowments Charitable recipients

Family Office Founding family

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 Traditional

Traditional

Traditional vs.
Stakeholders Risk Tolerance Goals Non-Traditional

• If you expect a loss, you do not invest

• Cannot lose the entire fund; your
stakeholders are not individuals that
are comfortable losing it all

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 Traditional

Traditional

Goals Traditional vs.

Stakeholders Risk Tolerance Non-Traditional

• Profit – earn as much in returns as

possible while investing within limits

• Primary goal – meet the payments

coming up 20 years from today

• Secondary goal – earn as much as

possible this year to benefit
stakeholders

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 Traditional

Traditional

Ex., Single-profession pension plan for public school teachers in Switzerland

Stakeholders Risk Tolerance Goals

Traditional vs.
Non-Traditional

• Active and retired • Low risk • Profits

Swiss teachers • Stability
• The employer

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 Non-Traditional

Non-Traditional

Stakeholders Risk Tolerance Goals

Traditional vs.
Non-Traditional

All investors Higher risk Profits

All the investors put In some cases, wealth
money in and expect to preservation
get more out

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Portfolio Construction
How it is made
 Portfolio Construction

RETURN

RISK

Portfolio
Construction

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 Portfolio Construction

Asset Classes

GOOGL FI

AAPL AMZN

Equities Fixed Income Currencies

Portfolio
Construction
REIT

Commodities Real Estate Infrastructure

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 Portfolio Construction

Stakeholders Elect a Board of Directors to represent shareholder

(i.e., Investors) interests

Board of Investment Policy - Approve investment risk taken

Directors by fund (i.e., set the general rules)
(BoD)
Appoint Risk Officers – To ensure that the
Investment Policy is adhered to Portfolio
Construction
Portfolio Take on risk, meet and beat fund performance
Managers objectives
(PMs)

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 Portfolio Construction

Efficient Frontier
Risk Portfolio
Return

Return Mixer

Loading Portfolio Preview…

TSLA Portfolio
FB Construction

MSFT

XOM

Risk

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 Portfolio Construction

Return E(r)
Expected

Efficient Frontier

Portfolio A has the same expected return as

E(r) A, B A B B; however, B takes on much more risk.

E(r) C C Portfolio C has the same risk as A; however, Portfolio

C’s expected return is significantly lower. Construction

Risk
Risk A, C Risk B (Standard Deviation)

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 Interactive Exercise

Interactive Exercise 2
Feeling Lucky – The Optimal Portfolio

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 Interactive Exercise

MSFT 11% TSLA 0%

FB 50% XOM 39%

Suboptimal
Return

Risk
(Standard Deviation)

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 Interactive Exercise

% % % %
MSFT FB XOM TSLA
1 unit Biggest
Risk Return

Efficient
Expected Return

Expected Return
Frontier

Point of
diminishing
returns

Risk Risk

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Understanding Client Mandates
Portfolio Constraints
 Understanding Client Mandates

1 Universe of Investments

2 Legal Constraints

3 Client Preferences

Management Capabilities
4 (Portfolio Manager skills)

5 Investable Universe
Client Risk
Profiles

Portfolio Level Mandate

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 Understanding Client Mandates

Do Good 1 Universe of Investments

Feel Good
Equity Partners 2 Legal / Regulatory Constraints
• No leverage

“Investing with real

3 Client Preferences
purpose for a better
future, together” • ESG (Environmental, Social and Governance) Socially responsible,
environmentally conscious, and sustainable practices

4 Management capabilities
• PMs’ expertise is North America (NA) public markets only
– Therefore, maximum 10% of fund invested outside NA, in
addition to publicly listed companies only

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 Understanding Client Mandates

Do Good
Feel Good Client
Preferences Management
Equity Partners Legal Capabilities
Constraints

Investment Ideas for Meeting

1
• Belgian based
Brewery

2 • Norwegian oil
company

Investable Universe

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 The Efficient Frontier and the Impact of Constraints

Efficient Frontier and Optimal Portfolio

100%

80% Optimal Portfolio CONSTRAINED

Portfolio Efficient Frontier ORIGINAL

60%
500 Random Portfolios
Return

40%
Optimal Portfolio

20%

0% Risk
0.15 0.17 0.19 0.21 0.23 0.25 0.27 0.29 0.31 0.33 0.35 Client Risk
-20% Profiles

-40%

-60%

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How Fund Performance is Measured
Outright versus Relative Returns
 Interactive Exercise

Interactive Exercise 3
Who Outperformed?

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 How Fund Performance is Measured

The # 1 difference between amateur and professional investors lies in the way
they measure performance:

Benchmark
Benchmark Net-of-benchmark
Net-of-benchmark

Performance

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 How Fund Performance is Measured

Performance is measured as:

BEST
Return
PRO
Benchmark Return
AMATEUR Taxes & Fees Benchmark
Return = Performance Performance Performance
Performance

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 Performance Attribution

Performance attribution is an exercise to understand where or how your portfolio made (or
lost) money. It is an exercise that entails reviewing and analyzing past performance data.

Claire: The performance data tells us that we made

almost all our money in North America last year

Andrew: The tells that almost 75% of our profits

were attributed to successful trades in
Commodities

Performance

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 Performance Attribution

Frida’s Annual +2.0% above benchmark

Performance Review 6.0% outright

North
Europe Middle East Total
America
BM Frida BM Frida BM Frida BM Frida

Technology 0.5% +0.6 0.2% +0.1% - - 0.7% +0.7%

Oil & Gas 1.0% +1.0 0.5% +0.1% 1.4% +0.1% 2.9% +1.2%

Automotive - - 0.1% -0.1% - - 0.1% -0.1%

Other 0.2% +0.3% 0.1% -0.1% - - 0.3% +0.2%

Performance
Total 1.7% +1.9% 0.9% - 1.4% +0.1% 4.0% +2.0%

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Who is Portfolio Management for
Food for thought
 Who is Portfolio Management For

It is important to step back and think about whether the content that we have covered in this course fits
both your interest, as well as your personality.

01
01 02
02
Excites you Fits your personality

PM

You are excited and energized by The role is almost entirely an

the idea of taking risk independent contributor type

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 Who is Portfolio Management For

1 Able to take risk 2 Comfortable with 3 Willing to adapt

the unknown

This is not a type of job Making decisions with You are willing and able
where you produce reports imperfect and incomplete to change your opinion
information is the norm as the facts change

Portfolio management is a career path for someone who is willing to take risks and has done so in
other aspects of life (i.e., career and money). If not, you will be very uncomfortable.

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That’s a wrap!