Portfolio management: principle and types 5


Portfolio management (or financial asset management) consists of managing capital or funds in order to generate income and record capital gains over time. Individual management, piloted management, collective management, etc. What does it consist of ?

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Portfolio management: definition

Portfolio management consists of making a set of financial securities (stocks, bonds, mutual funds , etc.) grow .

This portfolio can be managed by asset class or by type of management (active, passive, etc.). Whether the investor is a professional or an individual, the portfolio is generally constituted with reference to a risk / return ratio. The higher the portfolio's return, the riskier the assets. To limit risks, managers diversify their investments or hedge their positions using derivatives .

Asset management can be free or taken care of by a professional. In order to exercise, this person must have an authorization from the Prudential Control and Resolution Authority (ACPR).

Different types of portfolio management

There are different types of portfolio management: individual management and collective management .

The individual management  : the portfolio holder treats its positions (buying / selling) directly through a securities account or PEA . He can also call on a professional to support him. He then has the choice between:

  • Advised management : the portfolio holder continues to manage his portfolio himself, seeking, if necessary, the advice of a specialist.

  • The controlled management of entrusting a professional management of all or part of a portfolio, according to a previously determined direction (defensive, offensive, etc.). The manager can make buy or sell decisions based on the objectives set by an investor.

  • The discretionary management as a registered manager by the AMF supports the complete portfolio management (remuneration) respecting the risk / return set by the customer.

The collective management  : when an investor has neither the time nor the knowledge to self-manage financial wealth, it may acquire shares FCP or SICAV shares. In this case, it is a management company that is responsible for making investors' savings prosper in accordance with a profile summarized in the KIID ( Key Investor Information Document ). In a few pages, this KIID provides the identity card of each UCITS , including its investment strategy, past performance, etc.

Management of an equity portfolio

A typical portfolio has several asset classes, mainly interest rate products (fixed rate bonds, for example) and equities.

Equity management aims to select securities according to their potential. This is assessed on the basis of sector performance, macroeconomic forecasts and the specific potential of the securities. Whether individual or collective, the management of an equity portfolio is adjusted according to the risk margin that the investor is ready to accept.

There are generally two types of active management:

  • The management "Top down" that part of economic forecasts across all sectors, down towards the sectors with the most upside potential. Then the investor selects the securities with the highest yield according to the forecasts.

  • In contrast, the “Bottom up” approach focuses on the intrinsic qualities of companies. It places less emphasis on macroeconomic analyzes. The goal of this management is to identify the stock market nuggets underestimated by the market by identifying them thanks to the graphical analysis and / or a series of financial ratios: PER (market capitalization on estimated profits for the next 12 months) , P / B (market capitalization over equity), EV / EBIT (enterprise value over operating income), EV / EBITDA (enterprise value over operating income before depreciation), EV / Sales (enterprise value over sales business), etc.

Note: the reverse figure of active management and the search for performance, passive management consists in reproducing - via trackers - the performance of a market (for example the CAC 40 ) as closely as possible (without the over or under /perform).

Note: some UCITS practice “alternative” management. It is supposed to guarantee investors a regular and absolute performance independent of the direction of the financial markets.

Management of a bond portfolio

In most cases, the bond management of a portfolio takes place through a UCITS (Sicav, FCP, etc.). Because even if the primary OAT market is accessible to individuals, most securities can only be acquired on the secondary market (where securities already issued are traded). Moreover, the quotation of bonds is less intuitive than that of equities. The value of bonds fluctuates with rates. When these rise, the price of the bond (less remunerative) falls and vice versa.

The other major risk associated with bonds is the default of the borrower, when he fails to repay his debt. It is possible to reduce this risk by acquiring a UCITS which only purchases government securities (OAT, etc.) deemed to be unsinkable if their “rating” (financial score evaluating the repayment capacity) is high.

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