Steps in the Portfolio Management Process (2024)

In this study notes, we’ll dive into the key steps of the portfolio management process.

Imagine yourself as a portfolio manager, creating and managing your client’s investment portfolios. There are three major stages: planning, execution, and feedback.

Planning Stage

During the planning stage, you’ll analyze your client’s risk tolerance, return objectives, time horizon, tax exposure, liquidity needs, legal and regulatory constraints, and any unique circ*mstances or preferences. Remember the acronym RRTTLLU to help you recall these seven key elements. We’ll discuss each of these elements in detail in later lessons.

After analyzing the client, document your findings in an Investment Policy Statement (IPS). The IPS acts as guiding principles for managing the portfolio and includes investment objectives, constraints, and a benchmark for performance evaluation. Make sure to review and update the IPS every few years or when the investor’s objectives or constraints change significantly.

Execution Stage

With the client’s approval of the IPS, it’s time to construct a suitable portfolio. Start by deciding on a target asset allocation, followed by security selection and purchasing individual securities.

To determine the target asset allocation, analyze the risk and return characteristics of various asset classes, such as cash, fixed-income securities, publicly traded stocks, private equity, real estate, and commodities. Using a top-down analysis approach, examine current economic conditions and macroeconomic variables to identify the most attractive asset classes. Based on this analysis, establish the target asset allocation.

Next, security selection. Use security valuation models and the bottom-up approach to identify the most attractive securities within each asset class.

Finally, construct the portfolio by purchasing the selected securities in the most cost-efficient way.

Feedback Stage

Think of the feedback stage as the maintenance stage. Over time, investor circ*mstances, asset class characteristics, and portfolio asset weights will change. As a portfolio manager, you must monitor these changes, update the IPS with the client if needed, adjust the target asset allocation and securities, and rebalance the portfolio periodically.

Lastly, evaluate the portfolio’s performance by measuring its returns relative to the benchmark identified in the IPS. This analysis may suggest that the client’s objectives need to be reviewed and updated.

And there you have it – the steps in the portfolio management process! This overview is just the beginning, as we’ll dive into more details in future lessons.