29th june 2015
So, I just got my first ever job few days to becoming 21 years of age. It is with a pension fund, a dream come true. My first real job experience, although it is for my Nysc year. I had always purred at the thought of working in a pension fund or mutual fund, because my main aim is to be a portfolio manager, and this was inline with it. Then again, I was scared. I was quivering at the thought of resuming work the following Wednesday. What if they didn’t like me?, what if I was too slow learning on the job?, what if I just mess things up?. These were the thoughts running through my mind. But then, getting the job was not by my power nor might, but by the grace of God. So I thought that since he had seen me this far, he would see me through.
So in order to get prepared, I deviced a plan of studying hard and making journals on whatever I have read. All in a bid to break into the investment management scene.This is my first journal, and with this I would be delving into a topic I just learnt which is portfolio management. Here it goes:
In portfolio management, there is a concept known as the portfolio perspective. It is when an investor has a basket of investments, and he takes them individually to ascertain their contribution to the risk and return of his portfolio. An ‘‘all egg in one basket’’ approach is frowned upon in investment management. This is when an investor holds only one investment and he invests all his money into it. This is very risky compared to a well diversified portfolio of investments. Modern portfolio theory concludes that the extra risk from holding only a single security is not rewarded with higher expected investment returns.
Diversification allows an individual reduce risk levels by spreading his investments and minimizing the risk associated with failure of one of his investments, but this does not mean he would reduce his expected return by so doing.
Diversification ratio is calculated as the risk of an equally weighted portfolio of securities to the risk of a single security selected at random. For diversification to be effective, the market has to be operating normally. Diversification has little or no significance in periods of financial crisis.
STEPS IN THE PORTFOLIO MANAGEMENT PROCESS
The first step in the portfolio management process is the planning step, the investor analyses his risk, expected returns, time horizons,liquidity needs, tax exposure, unique circumstance or preference and other legal or regulatory matters.
The investor uses this information to form his investment policy statement, it details the investors objectives and constraints.
The second step is to carry out a top down analysis. The portfolio manager analyses the economic condition, and does a sectorial analysis to determine how funds would be allocated to various asset classes. Once the asset class allocations are determined, the portfolio manager try’s to identify the most attractive securities within the asset class by then carrying out a bottom up analysis. They identify securities that appear to be undervalued, and they invest in them.
The third step is the feedback step. Through continuous monitoring, the investor’s risk and return characteristics of asset classes will change the allocations or weights of the assets in the portfolio.
The manager also measures portfolio performance and evaluate it relative to the return on the benchmark portfolio identified in the investment policy statement.