Portfolio Management cheat sheet

Key terms

Passive management

Aims to match, not beat, a benchmark's return, typically by holding the benchmark's constituents (indexing), on the premise that markets are efficient enough (see Introduction to Finance and Investments, on valuation theory) that consistently beating them net of costs is unlikely.

Active management

Aims to outperform a benchmark through security selection or market timing, based on the belief that skill can identify mispricing (developed fully in the chapter on active portfolio management).

Semi-active (enhanced indexing)

Stays close to a benchmark's risk profile while taking limited, controlled active positions to add modest incremental return.

Mutual funds

Open-ended pooled vehicles (the collective investment schemes of Regulation of Financial Markets) that issue or redeem units at net asset value.

Exchange-traded funds (ETFs)

Pooled vehicles whose units trade on an exchange like a share (see Regulation of Financial Markets, on exchange-traded funds), typically tracking an index.

Separately managed accounts (SMAs)

An individually owned portfolio managed to a client's own mandate, rather than pooled with other investors, giving more customisation and direct ownership of the underlying securities.

Hedge funds

Pooled vehicles pursuing a wide range of strategies, often with more leverage, short selling and derivative use than a conventional fund, typically restricted to sophisticated or institutional investors.

Buyout / private equity funds

Pooled vehicles that acquire controlling stakes in established private (or take-private) companies, aiming to improve and later sell them.

Venture capital funds

Pooled vehicles that provide capital to early-stage, high-growth-potential companies (see Regulation of Financial Markets, on venture capital companies) in exchange for equity.

Planning step

Understanding the client's needs and investment objectives, then preparing an investment policy statement (IPS), the written document setting out objectives, constraints (see the chapter on portfolio planning) and the strategy the portfolio will follow; its major components are return and risk objectives, constraints (liquidity, time horizon, tax, legal/regulatory, unique circumstances), and the resulting strategic asset allocation.

Execution step

Asset allocation (deciding the mix across asset classes, covered in the chapter on portfolio planning), security analysis (evaluating individual securities within each asset class), and portfolio construction (combining the selected securities into the actual portfolio).

Feedback step

Portfolio monitoring and rebalancing (adjusting the portfolio as markets move it away from its target allocation, or as the client's circumstances change) and performance measurement and reporting (see the chapter on evaluating portfolio performance), closing the loop back into the planning step.