Portfolio Management
Unit – 1
Session No.2
Topic: Portfolio Management Process
Session Plan
• Recap the Previous Session
• What is Portfolio Management Process?
• What is Planning Step?
– Four Stages in Planning Step
– Investor’s Objectives and Constraints
– Investment policy Statement
– Capital Market Expectations
– Strategic Asset Allocation
Recap
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What is a Portfolio?
List out the Securities.
What is an Investment?
List out the characteristics of Investment
What is Investment Management?
What are the different types of Investors?
What are the distinguish characteristics of Investors?
What is a Portfolio Management Process?
• Involves decisions an active or passive investment
approach
• Relationships between various investment alternatives
• Investor is to hold an optimal portfolio
• Three elements:
– Planning Step
– Execution Step
– Feed back Step
Give elements of Portfolio management process.
What is a Portfolio Management Process?
Planning Step
• Understanding client needs
• Preparing an investment policy
statement (IPS)
Feedback Step
Execution Step
• Portfolio monitoring and
rebalancing
• Portfolio measurement and
reporting
• Asset allocation
• Security analysis
• Portfolio construction
What is a Portfolio Management Process?
What is a Planning Step?
• Investor related input factors
– Investor Objectives
– Constraints and,
– Preferences
• Economic, Social, political consideration
• To attainment of Investor’s Objectives
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What is general objective of an investor?
What kind constraints generally faced by an investor?
What is a Planning Step?
• Planning Step – Stages:
A. Identification and specifying the Investor’s Objectives
and Constraints
B. Creating the Investment Policy Statement
C. Forming Capital Market Expectation
D. Creating the Strategic Asset Allocation
What is a Planning Step?
A. Identification and specifying the Investor’s
Objectives and Constraints
• Investment Objectives – Desired investment Outcomes
• Constraints – Limitations (Internal & External)
• Internal – Client’s Specific Liquidity needs, time and unique
• External – Tax issues and legal & regulatory requirements
What is a Planning Step?
B. Creating the Investment Policy Statement
• Governing document for all investment decision making
• Includes –
• Brief client description
• Purpose of establishing policies and guidelines
• Duties and responsibilities of parties
• Statement of investment goals, objectives and constraints
• Schedule of review
• Performance measures
• Guidelines for rebalancing the portfolio on feedback
What is a Planning Step?
B. Creating the Investment Policy Statement
• Elaboration of Investment Strategy – Clarifies the basis
for investment Decisions.
• Three Approaches:
a. Passive Investment Approach – Does not react to
changes in Capital market expectations
b. Active Investment Approach – Portfolio manager will
respond to changing CME
c. Semi active , risk-controlled active or enhanced
index approach
What is a Planning Step?
C. Forming Capital Market Expectation
• Long run forecast
• Risk and return characteristics
• Asset classes
• Maximize expected return and minimize risk
What is a Planning Step?
D. Creating the Strategic Asset Allocation
• Determine target asset class weights
• Combine IPS and Capital market expectations
• Specification of risk control mechanism (Single-period and
Multi-period perspectives)
• Single period – Advantage of Simplicity
• Multi-period – Liquidity and Tax considerations
Summarizing
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What is the need for investment objectives?
Give an example for Internal and External Constraints.
What is IPS?
How the investment strategies broadly categorized?
What is the need for the forming capital expectations?
What is Asset Allocation?