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Portfolio Management: Principle And Types

Portfolio the board (or monetary resource the executives) comprises overseeing capital or assets to create pay and record capital additions over the long haul. Individual administration, oversaw administration, aggregate administration, and so forth. What does this comprise?

Portfolio Management: Definition

This portfolio can be managed by asset class or type of management (active, passive, etc.). Whether the investor is a professional or an individual, the portfolio is generally constituted concerning a return/risk pair. The higher the return on the portfolio, the riskier the assets. 

To limit risk, managers diversify their investments or hedge their positions using derivatives. Asset management can be free or taken care of by a professional. To practice, he must hold authorization from the Prudential Control and Resolution Authority (ACPR).

Different Types Of Portfolio Management

Individual management: the portfolio holder processes his positions (purchases/sales) directly through a securities account or a PEA. He can also call on a professional to support him. He then has the choice between:

  1. Advisory management: the holder of the portfolio continues to manage his portfolio himself by seeking, if necessary, the advice of a specialist.
  2. Managed management consists in entrusting a professional with the management of all or part of a portfolio according to a previously determined orientation (defensive, offensive, etc.). The manager can make buy or sell decisions based on the objectives set by an investor.
  3. Management under mandate where a manager approved by the AMF takes charge of the complete management of the portfolio (in return for remuneration) while respecting the return/risk pair set by the client.

Collective management: when an investor has neither the time nor the knowledge necessary to manage financial assets, he can acquire FCP units or Sicav shares. In this case, it is a management company responsible for making investors’ savings prosper through 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.

Managing A Stock Portfolio

A typical portfolio includes several asset classes, mainly interest-rate products (fixed-rate bonds, for example) and equities. Equity management aims to select stocks based on their potential. This is assessed based on sector performance, macroeconomic forecasts, and the specific potential of securities, whether individual or collective, the management of an equity portfolio is modulated according to the risk margin the investor is willing to accept.

There are generally two types of active management:

  1. “Top down” management, which starts from economic forecasts for all sectors, goes down to the sectors with the most upside potential. Then the investor selects the securities with the highest return according to the forecasts.
  2. In contrast, the “Bottom up” approach focuses on the intrinsic qualities of companies. It gives less importance to macroeconomic analyses. The purpose of this management is to identify stock market nuggets underestimated by the market by spotting them through graphical analysis and a series of financial ratios: PER (market capitalization over estimated profits for the next 12 months), P/B (market capitalization to equity), EV/EBIT (enterprise value to operating profit), EV/EBITDA (enterprise value to operating profit before depreciation), EV/Sales (enterprise value to the business), etc.

Note: the inverse figure of active management and the search for performance, passive management consists of reproducing – via trackers – the performance of a market (for example, that of the CAC 40 ) as closely as possible (without the over or under /perform). Note: some UCITS practice “alternative” management. It guarantees investors 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 market for OATs is accessible to individuals, most securities can only be acquired on the secondary market (where securities already issued are traded). In addition, the listing of bonds is less intuitive than stocks. 

When this rises, the price of the bond (less profitable) falls and vice versa. The other significant bond-related risk is borrower default when the borrower fails to repay their debt. It is possible to reduce this risk by acquiring a UCITS that buys only government securities (OAT, etc.) deemed unsinkable if their “rating” (financial rating assessing repayment capacity) is high.

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