Students in the AIM program manager three portfolios. While they learn the skills of how to become a solid fundamental analyst, they along have an opportunity to try their hands at being portfolio managers. The follow thoughts were taken from Larry Cao, CFA, who wrote in a recent CFA blog
posting about the Seven
Essential Steps in Portfolio Management.
These are seven steps that an aspiring portfolio manager
must learn to master according to Cao:
1. Originating ideas.
Where does a portfolio manager start in his quest to beat
the market? Fresh ideas. There are more than 7,000 listed companies in the
world, and a portfolio manager needs to know where to look. You need to look
beyond the index and the obvious, especially the ones shopped around by
sell-side analysts. Adding value starts
from idea generation, the first step in the investment process. This point is
particularly important for value managers, who by default invest in companies
that the market shies away from.
2. Conducting research.
Research is not the exclusive realm of research analysts —
far from it. You need to be able to shorten the list from a few thousand
companies to a few hundred. These companies are then ranked and analyzed. Focus
on finding the right business run by the right people that can be bought at the
right price. Consistent investment results depend on discipline and not on
serendipity. How to rank the short-listed companies clearly reflects a
manager’s investment philosophy.
3. Making decisions.
Decision making is tough. Investors are often better at
investigating investment opportunities than making investment decisions because
they are afraid of making mistakes that they’ll regret. It is critical,
however, for a portfolio manager to be able to pull the trigger when presented
with a killer opportunity. Decision-making
authority is the single most important distinction between an analyst and a
portfolio manager. The talented are particularly good at pulling the trigger
although the instinct does not come easy, even to them.
4. Structuring transactions.
There are many ways of investing in a company. Buying shares
in the open market is only one of them. Portfolio managers need to invest in
ways that benefit investors the most. A manager needs to be familiar with the
intricacies of these transactions, including accounting, legal, and tax
implications. Portfolio managers need to
have a total return perspective to investing. This is particularly important if
they are managing an outsized portfolio or invest in alternatives.
5. Executing transactions.
A portfolio manager also needs to work with traders and
ensure that ideas become investments. Traders are ultimately responsible for
trading. Portfolio managers, however, need to have an appreciation for how
their investment decision may affect the market. Trading remains an area that
affects portfolio performance and cannot be ignored.
6. Maintaining investments.
Adding an investment to the portfolio is not the end of the
story. Portfolio managers need to continue paying attention to portfolio
companies once initial investments are made. This is a continuation of the
research process. Maintain, not monitor, your investments.
7. Exiting investments.
Conventional wisdom seems to hold that exiting an investment
is almost more important than entering one. And it could be right. If portfolio
managers hesitate when they exit positions, they often run the risk of letting
small losses balloon into major headaches. Similarly, if portfolio managers do
not lock in profits when they should, it could be equally damaging to their
performance. Don’t be afraid of selling too high or too low. Exit quickly once
you’ve made the decision, especially when cutting losses.
