Investment Portfolio Management | Portfolio Managers

Investment Portfolio Management | Portfolio Managers

Concept and Goals – Portfolio is a collection of assets investments. An experienced investor is expected not to at least put all his investments one asset, a reasonable tact is to spread his investments into several assets or different investment portfolio to ensure the security of his funds. An investor may invest his money in assets or group of assets which could be stocks, shares, bonds, fixed deposits, business venture, real estate, motor vehicle or insurance policy. Each of these assets is a form of investment upon which the investor expects to have returns in the form of profit, interest, dividend and so on.

However, the reason why you as an investor should by all means spread your assets is because it is understandable that not all your investment will make profit, the essence is to mitigate the possible losses. In order to reduce or minimize the possibility of sustaining loss or reduced returns, a wise investor invests his money in several assets so that if there is loss in one asset, this might be offset from the profit on his total investments. Again, even an existing firm may wish to diversify its investments in various business ventures in order to increase its revenue base and limit the risk of failure. That asset an or securities that an organization has is known as investment portfolio.

The systematic process of identifying, analyzing, and selecting the best combination of securities or assets which an investor may invest in to ensure the maximization of the investor’s goal(s) is referred to as investment portfolio management. Institutions, companies or corporate bodies that are in the trade of managing portfolio or are in the business of portfolio management are also known as portfolio managers. These institutions has trained personnel who are professionals in the art of managing portfolios, they buy and sell securities or assets for their clients, with the aim of making profit at the end of each transaction for their clients. Investment Portfolio Management is geared towards ensuring that only the efficient portfolio of investments are selected at all time to ensure the maximization of the investors goals.

Investment Portfolio Management – Portfolio Diversification: Issues & Strategies

Investment Portfolio Management is a collection of investments and managing them. Diversification refers to spreading out of the investments. It is a strategy that can take many forms such as changes in products, markets, functions, forward and backward integrations, internal and external, horizontal and vertical. Forward integration is when for instance, a manufacturer becomes involved in the activities of the organizations output such as distribution, transportation, and other logistics. Backward integration is when an organization extends its activities to those of its inputs such as supplying of raw materials, plant and machinery etc. Peter Drucker provides a good list on why firms might pursue a diversification strategy. Here are the items he listed as internal and external factors:

Internal pressures:

a) Psychologically, It is normal for a group of people to be fed up with repeating a trend continually. They also believe that diversification will help them avoid the danger of over-specialization.

b) Diversification is seen as a way to balance the vulnerabilities due to one’s wrong size.

c) Diversification is seen as a way to convert present internal cost centres into revenue producers.

External pressures:

a) The economy or the market the firm is operating in appears too small and confined to allow growth.

b) The firm’s technology and research lead to the development of products which appear to haye promise.

C) Tax legislation encourages reinvestment in research, and development instead of the payment of dividends, and this leads to new products which are bases for diversification.

Diversification decision involve these questions:

1. Does the industry to be entered offer more attractive opportunities for profit than those available within the firm’s existing industry?
2. Does the firm has the equipment is establish a competitive advantage over older companies that are grounded already?
3. is the diversification to take the form of a conglomerate?
4. what are the motives for diversification?

Conglomerate is a company which has at least five or six unrelated divisions which sell different product principally to markets rather than to each other

The Motives for Diversification include

1. Growth
2. Risk-spreading
3. Market power

Market power could be exercised through three mechanisms:

1. Predatory pricing: This is the use of size and diversity to discipline or even drive out specialized competitors in individual product markets.
2. Reciprocal buying arrangement with customers: That is giving preference in purchasing to firms that are good customers for own products.
3. Mutual forbearance – The benefits of diversification can be drawn from the economies of scope

in common resource. That is, a single facility supports a number of products. Intangible resources such as brand names, corporate reputation, and technology can be transferred from one business area to another without necessitating any physical integration operations.

Investment Portfolio Management – Issues in Portfolio Planning

Anao, Osare and Ekundayo, (1993) observed that in a good portfolio, risk or possibility of loss is minimized and opportunity forward is enhanced simultaneously. In a dynamic investment, when nothing is certain, and investor cannot afford to put all his eggs in one basket and where there are

many assets, the portfolio must be properly planned and monitored. To achieve this objective, certain basic steps in the portfolio planning process must be followed. Anao et al therefore opined that the first step should be the consideration of economic, statistical, technological and socio-political or legal factors.

Graham (1962) on his part, argues that the concepts of portfolio planning is a very specialized and skilful activity that requires the attention of the financial analyst. Rose et al (1996) pointed out that it is obvious that the investor would like a portfolio with a high expected return and low standard deviation of return. It is therefore worthwhile to consider the following before choosing the best combination or portfolio of securities to hold.

1. The relationship between what the investor will get as the expected return on his is securities and what will be his expected return for all his securities.
2. The relationship between the standard deviation of individual securities, the correlations between these securities and the standard deviation of a portfolio made up of these securities.

Anao et al continued that the last step in the portfolio planning process is the formulation of the interim and feed back mechanism for monitoring the performance of the portfolio overtime and for making revision as and when necessary. This is because no condition is permanent. Erstwhile good

securities becomes unattractive in terms of yield or risk in relation to other up-coming securities or the investor’s objective may have changed. The portfolio would therefore acquire constant revision in the light of changes in the circumstances of securities.

However, a more logical and comprehensive portfolio planning steps have been preferred by the Chartered Institute of Bankers of Britain. These steps are as follows:

1. Know your customer: Before offering advice of any kind, the firm’s job is to build up a complete personal portrait of the customer. Individual requirements are different. Without knowing an investors/client’s background it would be impossible to formulate constructive advice.
2. Personal Situation: Under this factor, issues like sex, age, marital status, age of spouse, number of children and their ages are considered. A young married man with children may have little in the way of financial resources. He may need to take out term assurance policy for protection. If the clients’ children are schooling, idea of whether the returns from the portfolio investment will be used in off-setting the fees should be realized. These should aid the portfolio manager constructing an excellent portfolio mix for the investor.
3. Existing financial situation: This involves these areas of enquiry namely, income, capital and financial commitments.

(a) Income: This will cover questions of the clients employment level of earnings, tax rates and other sources of income.

(b) Capital: Questions on whether the client owns his own house, the estimated current market value, mortgage arrangements, the likelihood of moving to a bigger or more expensive property are asked.

Information on the client’s bank deposits, other cash and equity investment may be necessary.

(c) Financial Commitments: The portfolio manager should obtain information from the client on the following: –

1. estimated annual expenditure or normal day to day expenses, holidays and so forth.
2. Likely changes in spending habits

• Mortgage payments

1. Life insurance premiums, extent of cover
2. Pension contributions, membership of an occupational pension scheme.
3. Hire purchase commitments

• Likely future commitments, such as school fees.

4. Other personal factors: The three main areas to consider here are:-

(a) Degree of risk aversion: Some investors dislike and fear risk much more than others. Many will not even consider any investment where there is a risk of loss of capital. For these people, the choice is really restricted to cash investments, short dated gilts and in the longer term traditional endowment polices or guaranteed bonds with

(i) First class insurance company: Attitude to risk are very much a function of the personal psychology of the investor. Many people become less speculative and more risk averse as they grow older.

(ii) Ethical consideration: Some people do not wish to invest in certain stocks or shares because they object to the products such as tobacco or armaments or because they object to the political system in the country in which the companies operate.

(iii) Sentimental consideration: Quite a number of investors are motivated largely by sentimental considerations. They may be interested in antiques, therefore they want to buy some shares of companies in that sector.

Selling too may reject some sentimental reasons; I’ve held my shares for several years; I’m not going to sell them now, is still by no means an uncommon reaction. Once the above considerations have been made, it is time to examine the actual investment portfolio.

Investment Portfolio Management – Portfolio Characteristics

An investor/client’s investment portfolio should possess three main elements.

(a) Liquidity: As an emergency, fund, part of the portfolio should be invested in securities or cash investments which can be repaid on demand or within a few days.

(b) Short/medium term flexibility: The second portion of the portfolio should be invested in securities or cash investments which will provide reasonable income/growth prospects but which can be realize without the risk of a serious loss in capital values. The investor or client should always try to avoid getting into a situation in which he may be forced to sell investments while the markets is low.

(c) Growth: The purpose of the remaining part of the portfolio is to protect the investment against inflation by providing real capital growth as well as income through direct or indirect investment in equities. However, the split of the portfolio between each section and the type of investments in each will depend on several factors, including:

(a) The funds available both in terms of capital and savings out of income.

(b) The need for diversification as a means of reducing risk.

(c) The investor’s personal preferences and his attitude to risk.

(d) The choice between income and capital growth. This will depend on the investor’s financial resources and on his tax positions.

(e) The time horizon to be considered. This will largely depend on the investor’s age.

(f) The state of the financial markets. At various times the split between the three sections may well be varied to benefit from changes in market conditions. If an individual investor believes that security prices are about to fall, he may be tempted to sell his more risky investments and keep his capital.

Investment Portfolio Management – Portfolio Theory

Portfolio theory provides the portfolio manager with a formal means of evaluating the systematic risk profile of his portfolio.