MODULE 6

PORTFOLIO MANAGEMENT STRATEGIES AND PERFORMANCE

EVALUATION

Portfolio:

 A portfolio refers to a collection or combination of financial assets, such as stocks,

bonds, mutual funds, and other investments, held by an individual, institution, or
investment fund.

 Portfolios are carefully constructed to achieve specific financial objectives while

managing risk.

 The portfolio is a collection of investment instruments like shares, mutual funds,

bonds, FDs, other cash equivalents, etc.

 In other words, a portfolio is a group of assets. The portfolio gives an opportunity to

diversify risk. Diversification of risk does not mean that there will be an elimination
of risk.

 With every asset, there is an attachment of two types of risk;

diversifiable/unique/unexplained/unsystematic risk and undiversifiable/market
risk/explained/systematic risk.

 Even an optimum portfolio cannot eliminate market risk but can only reduce or
eliminate the diversifiable risk. As soon as risk reduces, the variability of return
reduces.

Key elements and aspects of a portfolio:

1. Diversification: A well-constructed portfolio often involves diversifying investments

across different asset classes, industries, geographic regions, and types of securities.
Diversification is a risk management strategy that aims to reduce the impact of poor
performance in one investment by spreading the risk across multiple investments.
2. Asset Allocation: Asset allocation is the process of determining the optimal mix of
different asset classes (e.g., stocks, bonds, cash) based on an investor's financial goals,
risk tolerance, and investment horizon. The goal is to achieve a balance between risk
and return.
3. Investment Strategy: Portfolios are managed based on a specific investment
strategy. Strategies can include active management, where investment professionals
actively make decisions to outperform the market, or passive management, where the
portfolio aims to replicate the performance of a market index.
4. Risk Management: Risk management is a critical component of portfolio
management. Investors consider various types of risks, including market risk, credit
risk, and liquidity risk. Risk management strategies may involve diversification,
hedging, and other techniques to protect against potential losses.

Prof. Ningambika G Meti Dept of MBA, SVIT

 5. Financial Objectives: Portfolios are designed to meet specific financial objectives,
which vary among investors. Common financial goals include capital appreciation
(growth), income generation, wealth preservation, and achieving a specific level of
return within a defined time frame.

PORTFOLIO MANAGEMENT

Portfolio management refers to the process of managing a collection of investments, known

as a portfolio, to achieve specific financial objectives while considering factors such as risk
tolerance, investment horizon, and return expectations.

 Portfolio management is the art of selecting the right investment tools in the right
proportion to generate optimum returns with a balance of risk from the investment made.

 Best PM practice runs on the principle of minimum risk and maximum return within a
given time frame.

 A portfolio is built based on an investor’s income, investment budget, and risk appetite
keeping the expected rate of return in mind.

OBJECTIVES OF PORTFOLIO MANAGEMENT

A portfolio manager should keep the following objectives of investments in mind while
building a portfolio based on an individual’s expectations. The choice of one or more of these
depends on the investor’s personal preference.

1. Capital Growth: Portfolio management focuses on building a portfolio that aims to

maximize the growth of the invested capital over the long term. The primary objective
is to increase the value of the portfolio through capital appreciation rather than
focusing solely on generating income.
2. Security of principal amount invested: Ensuring the security of the principal amount
invested is a fundamental aspect of portfolio management, especially for investors
who prioritize capital preservation over aggressive growth.
3. Tax Efficiency: Tax planning is centered on maximizing tax efficiency across all
aspects of portfolio management, including asset allocation, investment selection,
trading strategies, and withdrawal strategies. Tax-efficient investing involves
considering the tax implications of each investment decision and optimizing the
portfolio's structure to minimize taxes while achieving the investor's financial goals.
This may include utilizing tax-advantaged accounts such as IRAs and 401(k)s,
managing capital gains and losses, utilizing tax-deferred investment vehicles, and
implementing estate planning strategies to minimize estate taxes.
4. Diversification of Risk: Diversification aims to spread investment risk across
different asset classes, sectors, and geographic regions to reduce the impact of adverse
events on the portfolio's performance. PM involves selecting investments that offer
favorable return and tax treatment, such as tax-exempt municipal bonds or qualified
dividend-paying stocks. By diversifying the portfolio in a tax-efficient manner,
investors can manage risk while optimizing after-tax returns.

Prof. Ningambika G Meti Dept of MBA, SVIT

 5. Marketability of Securities: Marketable securities are easily bought and sold in the
market without significant transaction costs or delays. PM focus on investing in
securities with high market liquidity to facilitate timely transactions and minimize
trading costs.
6. Liquidity: Liquidity refers to the ability to quickly buy or sell assets in the portfolio
without significantly impacting their market price. Managing liquidity effectively is
essential to ensure that the portfolio can meet its cash flow needs, take advantage of
investment opportunities, and navigate unforeseen circumstances. Portfolio managers
ensure that the portfolio maintains an appropriate level of liquidity to meet the
investor's cash flow needs. This involves balancing illiquid investments, such as real
estate or private equity, with liquid assets that can be easily converted into cash.
7. Risk Management: Portfolio management aims to manage and mitigate risk. This
includes diversifying investments across different asset classes, industries, and
geographic regions to reduce the impact of adverse events on the portfolio's
performance.

PORTFOLIO MANAGER:
 A portfolio manager is a person who understands his client’s investment needs and
suggests a suitable investment mix to meet his client’s investment objectives.
 This tailor-made investment plan is recommended keeping in mind the risk-return
trade-off.

IMPORTANCE OF PORTFOLIO MANAGEMENT:

 PM is a perfect way to select the “Best Investment Strategy” based on age, income,
the capacity for risk-taking of the individual, and investment budget.

 It helps to gauge the risk taken as the process of PM keeps “Risk Minimization” as the
focus.

 “Customization” is possible because an individual’s needs and choices are kept in

mind, i.e., when the person needs the return, how much return expectation a person
has, and how much investment period an individual selects.

 Taking into account changes in tax laws, investments can be made.

 When investment is made in fixed income security like preference share or debenture
or any other such security, then in that case investor is exposed to interest rate risk
and price risk of security. PM can take the help of duration or convexity to immunize
the portfolio.

PORTFOLIO MANAGEMENT STRATEGIES:

 Portfolio management involves the selection and management of a combination of

different assets, such as stocks, bonds, and other securities, with the aim of achieving
a specific investment objective.

Prof. Ningambika G Meti Dept of MBA, SVIT

  There are various strategies employed in portfolio management, and these strategies
can be broadly categorized into different approaches. Here are some key portfolio
management strategies:

1. Active vs. Passive Management:

Active Management: Involves the selection of individual securities with the goal of
outperforming a specific benchmark or the overall market. Active managers often
engage in extensive research and analysis.

Passive Management: Involves replicating the performance of a specific market

index. Passive investors typically use index funds or exchange-traded funds (ETFs) to
achieve broad market exposure with lower fees.

2. Diversification:

 Definition: Diversification involves spreading investments across different asset

classes, industries, geographic regions, and types of securities to reduce risk.

 Objective: By holding a diverse portfolio, the impact of poor performance in one

investment may be mitigated by the positive performance of others.

 Example: Investing in a mix of stocks, bonds, and real estate in various sectors and
regions.

3. Asset Allocation:

Definition: Asset allocation involves determining the optimal mix of different asset
classes based on an investor's risk tolerance, financial goals, and time horizon.

Objective: The goal is to balance risk and return by allocating resources to various
asset classes in a way that aligns with the investor's financial objectives.

Example: A conservative investor might have a higher allocation to bonds, while an

aggressive investor might have a higher allocation to stocks.

4. Market Timing:

Definition: Market timing involves adjusting the allocation of assets based on

predictions about future market movements. This strategy requires making decisions
about when to buy or sell assets.

Objective: The goal is to capitalize on expected market trends and avoid losses
during downturns.

Challenge: Successfully timing the market consistently is difficult, and mistimed

decisions can lead to significant losses.

5. Tactical vs. Strategic Allocation:

Prof. Ningambika G Meti Dept of MBA, SVIT

 Tactical Allocation: Involves making short-term adjustments to the portfolio based
on current market conditions or economic indicators.

Strategic Allocation: Involves establishing a long-term plan for asset allocation

based on an investor's financial goals and risk tolerance.

6. Risk Management:

Definition: Risk management in portfolio management involves assessing and

mitigating potential risks to achieve a balance between risk and return.

Objective: Protecting the portfolio against significant losses by using risk mitigation
tools such as hedging or setting stop-loss orders.

7. Income Generation:

Objective: Some investors focus on generating a consistent income stream from their
portfolio. This can be achieved through investments in dividend-paying stocks, bonds,
or other income-generating assets.

8. Factor Investing:

Definition: Factor investing involves selecting securities based on specific factors or

characteristics believed to contribute to superior risk-adjusted returns, such as value,
momentum, or quality.

Objective: The goal is to target specific risk factors that are expected to drive returns.

TYPES OF PORTFOLIO MANAGEMENT

Prof. Ningambika G Meti Dept of MBA, SVIT

 BASIS OF ACTIVITY:

Active & Passive Portfolio Management

 Active PM refers to the service when there is the active involvement of portfolio
managers in buy-sell transactions for securities. It ensures meeting the investment
objectives of the investor.

 Passive PM refers to managing a fixed portfolio where the portfolio performance

matches the market index (i.e., market).

Active Portfolio Management: Active portfolio management involves the continuous

buying and selling of securities by portfolio managers or fund managers in an attempt to
outperform the market or a specific benchmark index. Active Management is holding
securities based on the forecast about the future. The portfolio managers who pursue
active strategy with respect to market components are called ‘market timers’. The
managers may indulge in ‘group rotations’

Key Characteristics:

 Research and Analysis: Active managers conduct extensive research and analysis to
identify mispriced securities, trends, and investment opportunities.

 Frequent Trading: Active managers make frequent buy and sell decisions based on
their analysis and market outlook.

 Managerial Discretion: Portfolio managers have a high degree of discretion in stock

selection, asset allocation, and market timing.

Objectives:

 Outperformance: The primary goal of active portfolio management is to achieve

returns that exceed the benchmark or market average.

 Capitalizing on Market Inefficiencies: Active managers believe they can identify and
exploit market inefficiencies to generate alpha (excess returns).

Challenges:

 Higher Costs: Active management often involves higher fees and transaction costs
due to frequent trading and the need for in-depth research.

 Performance Risk: There is a risk that active managers may underperform the market,
and consistent outperformance is challenging to achieve.

Examples: Actively managed mutual funds, hedge funds, and some institutional
portfolios.

Prof. Ningambika G Meti Dept of MBA, SVIT

 Passive portfolio management involves replicating the performance of a specific market
index or benchmark. Instead of attempting to outperform the market, passive managers
aim to match the returns of the chosen index. Passive management refers to the investor’s
attempt to construct a portfolio that resembles the overall market returns. The simplest
form of passive management is holding the index fund that is designed to replicate a good
and well defined index of the common stock such as BSE-Sensex or NSE-Nifty.

Key Characteristics:

Index Replication: Passive managers use index funds or exchange-traded funds (ETFs) to
replicate the performance of a market index.

Low Turnover: Passive strategies typically involve lower turnover compared to active
strategies, as the portfolio is adjusted only when the index composition changes.

Objectives:

Market-Matching Returns: The primary goal of passive portfolio management is to

achieve returns that closely match the benchmark or index.

Cost Efficiency: Passive strategies often have lower fees and transaction costs compared
to active management.

Advantages:

Lower Costs: Passive strategies are generally more cost-efficient due to lower
management fees and reduced trading activity.

Market Exposure: Investors get exposure to the overall market without the need for
extensive research or stock picking.

Examples: Index funds and ETFs that track popular market indices like the S&P 500,
FTSE 100, or other benchmarks.

BASIS OF DISCRETIONARY

 Discretionary Portfolio Management refers to the process where PM has the

authority to make financial decisions. It makes those decisions for the invested funds
on the basis of the investor’s investment needs. Apart from that, he also does the
entire documentary work and filing.

 Non-discretionary PM refers to the process where a portfolio manager acts just as an

advisor for which investments are good and unprofitable. And the investor takes the
decisions.

Prof. Ningambika G Meti Dept of MBA, SVIT

PROCESS IN PORTFOLIO MANAGEMENT

The portfolio management process is not a one-time activity. The portfolio manager manages
the portfolio regularly and keeps his client updated with the changes. It involves the
following tasks:

1. Understanding the client’s investment objectives and availability of funds.

2. Matching investment to these objectives.

3. Recommending an investment policy.

4. Balancing risk and studying the portfolio performance from time to time.

5. Taking a decision on the portfolio investment strategy based on discussion with the client.

6. Changing asset allocation from time to time based on portfolio performance.

Portfolio Revision

The investor should have competence and skill in the revision of the portfolio. The portfolio
management process needs frequent changes in the composition of stocks and bonds.
Mechanical methods are adopted to earn better profit through proper timing. Such type of
mechanical methods are Formula Plans and Swaps.
 Portfolio revision refers to the process of making changes to an existing investment
portfolio.
 Investors may revise their portfolios for various reasons, including changes in
financial goals, risk tolerance, market conditions, or economic outlook.
 The goal of portfolio revision is often to reallocate assets in a way that aligns with the
investor's current objectives and market expectations
Reasons for Portfolio Revision:

1. Change in Financial Goals: Investors may revise their portfolios when their
financial goals evolve. For example, a change in time horizon, risk tolerance, or
liquidity needs may prompt a revision.

2. Market Conditions: Changes in economic conditions, interest rates, or market trends

may lead investors to revise their portfolios. For instance, during economic
downturns, investors may seek defensive assets, while during periods of economic
growth, they may tilt towards more aggressive investments.

3. Asset Allocation Adjustments: Investors may revise their asset allocation to achieve
a better balance between risk and return. This could involve adjusting the percentage
of the portfolio allocated to stocks, bonds, cash, and other asset classes.

4. Risk Management: A desire to manage risk more effectively might lead to a

portfolio revision. This could include reducing exposure to high-risk assets or
increasing diversification.

Prof. Ningambika G Meti Dept of MBA, SVIT

 5. Tax Considerations: Changes in tax laws or an investor's tax situation may prompt a
revision to optimize the portfolio for tax efficiency.

6. Performance Review: Periodic performance reviews may reveal the need for
adjustments. If certain assets underperform or overperform relative to expectations,
investors may revise their portfolios accordingly.

PORTFOLIO REVISION STRATEGIES:

Portfolio revision strategies involve making adjustments to an investment portfolio to align

with changing market conditions, economic outlooks, risk tolerance, and investment
objectives. Here are several common portfolio revision strategies:

1. Rebalancing: Rebalancing involves periodically adjusting the asset allocation of the

portfolio to maintain the desired risk-return profile. This strategy ensures that the
portfolio does not become overexposed to certain asset classes due to market movements.
For example, if stocks have outperformed bonds and now represent a higher percentage of
the portfolio than intended, the portfolio may be rebalanced by selling some stocks and
buying more bonds to bring the allocation back to the target levels.

Objectives:

 Maintain the desired asset allocation.

 Control risk exposure.

 Align the portfolio with long-term goals.

Performance Plans:

 Periodically review the current asset allocation.

 Adjust portfolio holdings to bring the allocation back to the target weights.

 Monitor and rebalance as market conditions and investment performance warrant.

2. Tactical Asset Allocation: Tactical asset allocation involves making short-term

adjustments to the portfolio's asset allocation based on near-term market trends, economic
indicators, or valuation metrics. Portfolio managers may overweight or underweight
certain asset classes temporarily to capitalize on perceived opportunities or mitigate risks.
Tactical asset allocation is more active than strategic asset allocation, which involves
maintaining a predetermined asset mix over the long term.

Objectives:

 Capitalize on short-to-medium-term market opportunities.

 Adjust asset allocation based on current economic conditions.

Performance Plans:

Prof. Ningambika G Meti Dept of MBA, SVIT

  Regularly assess economic indicators and market trends.

 Make strategic shifts in asset allocation to take advantage of perceived opportunities.

 Requires active monitoring and adjustments to exploit changing market dynamics.

3. Market Timing: Market timing involves attempting to predict future market movements
and adjusting the portfolio accordingly. While market timing can potentially enhance
returns, it is notoriously difficult to execute consistently and accurately. Investors who
engage in market timing may buy or sell assets based on factors such as economic data,
technical indicators, or geopolitical events. However, mistimed decisions can result in
significant losses.

4. Dynamic asset allocation: Dynamic asset allocation is an investment strategy that

involves actively adjusting the asset allocation of a portfolio in response to changing
market conditions, economic factors, or other relevant variables. Unlike static asset
allocation, which maintains a fixed allocation to different asset classes over time,
dynamic asset allocation seeks to capitalize on short-term opportunities and mitigate risks
by dynamically adjusting the portfolio's asset mix.

Objectives:

 Adapt to changing market conditions.

 Optimize returns and manage risk dynamically.

Performance Plans:

 Use quantitative models or algorithms to adjust asset allocation dynamically.

 React to changes in economic indicators, market volatility, or other factors.

 Requires continuous monitoring and systematic decision-making.

5. Tax-Efficient Portfolio Revision: Tax-efficient portfolio revision involves making

adjustments to an investment portfolio while considering the tax implications of those
changes. The goal is to optimize after-tax returns by minimizing taxes owed on
investment gains, maximizing tax deductions, and strategically managing taxable events.

Objectives:

 Minimize tax liabilities.

 Optimize after-tax returns.

Performance Plans:

 Consider tax implications before making portfolio changes.

 Use tax-efficient investment strategies, such as tax-loss harvesting.

Prof. Ningambika G Meti Dept of MBA, SVIT

  Optimize the location of assets in tax-advantaged and taxable accounts.

6. Strategic Asset Allocation Review: A strategic asset allocation review involves

evaluating and potentially adjusting the long-term asset allocation of an investment
portfolio based on changes in market conditions, economic outlook, risk tolerance, and
investment objectives.

Objectives:

 Assess the long-term strategic allocation.

 Align the portfolio with evolving financial goals.

Performance Plans:

 Periodically review financial goals and risk tolerance.

 Assess the appropriateness of the current strategic asset allocation.

 Adjust the long-term allocation based on changes in objectives.

7. Risk management and hedging: Risk management and hedging are essential
components of portfolio management aimed at minimizing the impact of adverse events
and protecting the portfolio against potential losses

Objectives:

 Protect against downside risk.

 Manage volatility and drawdowns.

Performance Plans:

 Use derivatives or hedging strategies to mitigate specific risks.

 Adjust the portfolio to protect against market downturns.

 Monitor risk metrics and make changes as needed.

Income Generation: Income generation in portfolio revision involves adjusting the

allocation of assets within a portfolio to increase the amount of income generated from
investments. This is particularly important for investors who rely on their investment
portfolios to provide a steady stream of income to support their living expenses.

Objectives:

 Generate a consistent income stream.

 Meet income needs in retirement.

Prof. Ningambika G Meti Dept of MBA, SVIT

Performance Plans:

 Allocate a portion of the portfolio to income-generating assets (e.g., dividend stocks,

bonds).

 Reinvest income or distribute it based on the investor's cash flow needs.

IMPORTANT QUESTIONS:

1. What do you mean by portfolio in investment? Explain the two portfolio management
strategies .7m
2. What is the need for portfolio revision? 3m
3. Explain the types of portfolio revision strategies? 7m
4. Enumerate the process of portfolio management? 7m
5. Elaborate the importance of portfolio management? 7m
6. Explicit the importance of portfolio revision? 7m
7. Explain the types of portfolio management strategies.7m

Prof. Ningambika G Meti Dept of MBA, SVIT

Prof. Ningambika G Meti Dept of MBA, SVIT