Portfolio Management

From Open Risk Manual

Definition

Portfolio Management (PM) is the set of principles, tools, processes and management roles that underpin the organized and formal management of a Portfolio (collection) of financial positions (assets), contracts or other such legally defined economic artefacts.

Types of Portfolio Management

Practices and tools for portfolio management vary depending on:

  • the nature of the portfolio and its constintuent instrumetns (e.g. credit portfolios, securities, derivatives etc.)
  • the business model of the Portfolio Manager (trading, buy-and-hold)
  • the business values, objectives and constraints (e.g., financial return, Sustainable Development Goals)

Examples

Well developed areas with the own distinct portfolio management cultures and tools include

  • Credit Portfolio Management, as practised e.g., by commercial / retail banks, credit insurers and other similar entities. This domain is characterised by the direct underwriting of credit risk, ongoing bilateral relationships
  • Market Risk Management, as practised e.g., by investment banks and hedge funds. Characterised by the focus on short term trading strategies involving marketable securities and derivatives
  • Asset Management, as practised by insurers and pension funds. Characterised by the focus on long-term investments strategies that match assets with liabilities


In the context of Sustainable Finance there is an emerging field of Sustainable Portfolio Management

Elements of Portfolio Management

Some common elements of portfolio management practices are:

  • Organizational Aspects
  • Data Infrastructure and Analytics / Measurement Tools
  • Policies and Other Management Tools


In more detail:

Organizational Aspects

  • Defining the scope of activities (including which portfolios, asset classes etc)
  • Identifying the roles and high level objectives of portfolio managers

Data Infrastructure and Analytics / Measurement Tools

Policies and other Management Tools

  • Portfolio Strategy
  • Concentration Risk Measurement
  • Stress Testing Exercises
  • Capital Requirements
  • Risk-Adjusted Returns
  • Risk Capital Allocation
  • Portfolio Optimization

Issues and Challenges

  • Portfolio Management activities have strong overlap with Risk Management which can lead to role and responsibility overlaps and conflicts within an organization
  • Same underlying financial products (e.g. credit products) can be managed according to different business models, even within the same firm

References


Disclaimer

This entry annotates a FIBO Ontology Class. FIBO is a trademark and the FIBO Ontology is copyright of the EDM Council, released under the MIT Open Source License. There is no guarantee that the content of this page will remain aligned with or correctly interprets the concepts covered by the FIBO ontology.