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Portfolio Management Definition
Portfolio Management is managing the diverse investments of a company or an individual. A good Portfolio Manager tailors investments to the goals of its holder, allocates assets judiciously to maximise profits, and balances risky investments with safe options. Portfolio Management is the science of studying market changes – both domestic and international, monitoring policy changes, analysing net revenue and earning potentials of assets, and keeping a tab on all the moving parts of the financial markets to maximize portfolio gains while keeping losses at a minimum.
A Little More on What is Portfolio Management
Active Portfolio Management involves investments in publicly traded entities like IPOs, stock units, commodities, Closed-end funds, etc. Passive Portfolio Management involves tracking investments in non-market assets like mutual funds, also otherwise known as index investing for it involves tracking indices. The Portfolio Management team could be made of a one-man army, or a team of people tracking the markets, and making investments based on research, on behalf of their clients.
Allocation of Assets: Managing an investments portfolio successfully over a long term requires smart investments, diversification of assets and enough low-risk investments to cover for losses incurred in high-risk investments. The division of assets towards reaping long term benefits, making quick short term gains, and betting on highly volatile investments depends on the goals of the clients and what they are looking to get out of their investments.
Diversifying Investments: Spreading the risk of investments over diverse assets like mutual funds, real estate, bonds and equities, and volatile stocks, and consistently moving them around in accordance with their market performance is called diversifying the basket of investments. A good Portfolio Manager chooses these options carefully to capture the best performing options at any given moment, while reducing the risks associated with volatility by covering base with low-risk investment options. Creating a basket of investments that covers different sectors of the economy, different types of assets, and different geographical locations, is a good diversification model.
Keeping the baskets of investments aligned with the investors goals requires rebalancing. This is a tactic wherein the portfolio is periodically returned to its original asset allocation profile.
Portfolio Management Objectives
A Portfolio Manager plans the basket of investments in accordance with the nature of returns sought by the investors. It could be one or more of the following in combination:
- Raising capital
- Securing funds
- Ease of assets trading
- Spreading of risk across assets
- Consistent and periodic returns
- Tax accounting.
References for Portfolio Management
Academic Research on Portfolio Management
Portfolio Management for New Product Development, Cooper, R. G., Edgett, S. J., & Kleinschmidt, E. J. (2006). Portfolio Management for New Product Development. This article sheds light on Portfolio Management for product innovation.
Active portfolio management, Grinold, R. C., & Kahn, R. N. (2000). Active portfolio management. This article does a deep dive on Active Portfolio Management.
New product portfolio management: practices and performance, Cooper, R. G., Edgett, S. J., & Kleinschmidt, E. J. (1999). New product portfolio management: practices and performance. Journal of product innovation management, 16(4), 333-351. This journal highlights the correlation between Portfolio Management and innovation. It studies data from 205 companies in the US to gain insights into Portfolio Management practices and performance.
Portfolio management for new product development: results of an industry practices study, Cooper, R., Edgett, S., & Kleinschmidt, E. (2001). Portfolio management for new product development: results of an industry practices study. r&D Management, 31(4), 361-380. This paper studies the results of Portfolio Management practices in industries and their effect on product innovation.
Delegated portfolio management, Bhattacharya, S., & Pfleiderer, P. (1985). Delegated portfolio management. Journal of Economic Theory, 36(1), 1-25. This paper sheds light on the phenomenon of experts in Portfolio Management industry, hired for their forecasting abilities, delegating their tasks to lesser known and reliable managers.
Best practices in IT portfolio management, Jeffery, M., & Leliveld, I. (2004). Best practices in IT portfolio management. MIT Sloan Management Review, 45(3), 41. This review highlights the best practices of Portfolio Management in the IT sector.
Customer portfolio management: Toward a dynamic theory of exchange relationships, Johnson, M. D., & Selnes, F. (2004). Customer portfolio management: Toward a dynamic theory of exchange relationships. Journal of Marketing, 68(2), 1-17. This paper explains relationship management in investment portfolios with the help of dynamic models and theory of exchange.
New problems, new solutions: making portfolio management more effective, Cooper, R. G., Edgett, S. J., & Kleinschmidt, E. J. (2000). New problems, new solutions: making portfolio management more effective. Research-Technology Management, 43(2), 18-33. This paper proposes solutions and offers insights to address poor performance in Portfolio Management companies.
Portfolio management in new product development: Lessons from the leaders—I, Cooper, R. G., Edgett, S. J., & Kleinschmidt, E. J. (1997). Portfolio management in new product development: Lessons from the leaders—I. Research-Technology Management, 40(5), 16-28. This paper presents learnings and insights gained from industry leaders and applies them to the science of Portfolio Management in innovative products.
Portfolio management approach in trade credit decision making, Michalski, G. (2013). Portfolio management approach in trade credit decision making. arXiv preprint arXiv:1301.3823. This paper examines the effect of applying the Portfolio Management approach in the trade credit decision making process.
Portfolio management of R&D projects: implications for innovation management, Mikkola, J. H. (2001). Portfolio management of R&D projects: implications for innovation management. Technovation, 21(7), 423-435. This paper takes a look at Portfolio Management in projects in the R&D sector and discusses its implications on managing innovation.
Role of single-project management in achieving portfolio management efficiency, Martinsuo, M., & Lehtonen, P. (2007). Role of single-project management in achieving portfolio management efficiency. International journal of project management, 25(1), 56-65. This paper examines data from 279 firms and studies the effect of single project management and its contribution to efficient Portfolio Management.