To make informed investment decisions, it’s vital to understand the functions of portfolio management and the role of a portfolio manager in India. Essentially, the core functions of portfolio management include asset allocation, risk assessment, and performance evaluation. Asset allocation involves diversifying investments across various asset classes like equities, bonds, and other financial instruments to balance risk and reward. Risk assessment is crucial for identifying potential market uncertainties and strategizing ways to mitigate them. Performance evaluation helps in reviewing how well the portfolio is doing against the pre-set benchmarks. These functions highlight the various roles and strategies portfolio managers employ to ensure optimal returns and risk management for their clients:
1. Risk Diversification:
An essential function of portfolio management is to access the risk and to spread risk related to the investment of assets. Diversification can occur across different securities and industries, effectively reducing risk. This limits your chances of being significantly impacted if a specific type of asset you’ve invested in takes a hit, as diversification will protect the rest of your investments, which are spread across various assets.
2. Asset Allocation:
This function refers to the strategic distribution of a client’s investment portfolio among different asset classes such as equities, fixed-income securities, cash, real estate, commodities, and alternative investments. The goal of asset allocation is to optimize the portfolio’s risk and return profile based on the investor’s financial goals, risk tolerance, and investment horizon.
3. Beta Estimation:
Portfolio managers estimate the beta coefficient, which measures and ranks the systematic risk of different assets. The beta coefficient is an index of systematic risk and is useful for the final selection of securities for investment.
4. Rebalancing Portfolios:
Rebalancing involves periodically adjusting portfolios to maintain their original conditions. Adjustments can be made through methods like the ‘Constant proportion portfolio’ or the ‘Constant beta portfolio’. The former maintains relative weightings in portfolio components based on price changes, while the latter adjusts to the values of component betas in the portfolio.
5. Strategies:
Portfolio managers may adopt various strategies as part of efficient portfolio management. Some of these strategies include:
- Buy and Hold Strategy: Where a portfolio of stocks is built and not disturbed for a long period.
- Indexing: This strategy attempts to replicate the investment characteristics of popular bond market measures.
- Laddered Portfolio: Bonds are selected so that their maturities are spread uniformly over time, distributing funds throughout the yield curve.
- Barbell Portfolio: Similar to the laddered portfolio, bonds are chosen to spread their maturities uniformly, aiming to distribute funds across the yield curve and benefit from lower transaction costs due to better
At Aequitas, the fund manager follows a disciplined investment philosophy to identify the right set of stocks to add to the portfolio, focussed on long-term strategy to reap Multibagger returns. The investment strategy is primarily built on 3 key pillars – Growth, Value & Contrarian.
Growth: The company has to be a growth driven company with above average growth potential for the next 3-5 years. Markets reward a higher PE multiple for growth companies. Value: The valuation has to be reasonable. This is important because there has to be potential for re-rating. A combination of EPS growth and PE re-rating leads to multibagger returns.
Contrarian: Contrarian approach does not mean doing the opposite of others, rather, it means doing things differently. Buying in popular names will not provide multibagger returns.
Conclusion
Fund Managers of the best portfolio management companies in India, like Aequitas follow a disciplined approach to focus on the primary research, done in-house, without relying on 3rd party market research or other market narratives. Based on predefined parameters, the screening is done to identify potential stocks. Further due diligence is done after discussing
with the company management, attending AGMs, vetting their annual reports, understanding challenges with corporate governance, based on which filtered stocks get added to the portfolio at the right valuation. And the research continues on existing stocks as well as for any potential stock for the future.