A portfolio manager will implement the fund’s investment strategy as well as manage the day-to-day portfolio trading. When looking at fund investing, a portfolio manager is one of the most important factors to consider.
How a portfolio manager works
Portfolio management can be either active or passive and their success is not guaranteed all the time. Historically, only a few active fund managers have consistently beat the market. It is imperative that investors choose the right portfolio manager, due to the influence they have on the fund.
Whether it’s an open or closed mutual fund, a venture capital fund, hedge fund or exchange-traded fund, the manager of the fund’s portfolio and the decisions they make will directly affect the returns of the fund.
Typically, portfolio managers are experienced investors, brokers or traders with a long background in financial management and hold a strong track record of investing success. If a manager takes a passive approach to portfolio management they will implement an investment strategy that mirrors a specific market index.
They will use the chosen market index as a benchmark and when a fund is managed in this way it should see similar returns as the index over the long term. Alternatively, portfolio managers can take an active approach whereby they will actively attempt to consistently beat market average returns.
Your investment goals will likely determine whether you want an active or passive approach, but beyond choosing your approach there are some shared characteristics of a good portfolio manager that are worth considering.
A good portfolio manager must have the ability to have original investment insight, to help them better manage a fund’s portfolio. Additionally, portfolio managers must have excellent research skills to narrow down the investment opportunities to identify the ones that will perform the best and achieve the best returns.
Benefits of portfolio managers
The advantages of a portfolio manager include:
Make better investment decisions
Using a portfolio manager can help you make better investment decisions. Investment decisions are more informed and the investment strategy is defined based on the investor’s investment objectives.
Achieve better returns
By using a portfolio manager and their expertise and investment experience should help investors achieve better returns on the investments. While this is not guaranteed, it can be more achievable than if an investor were to go it alone.
Drawbacks of portfolio managers
The disadvantages of a portfolio manager include:
Can risk over diversification
Portfolio managers may invest funds among many different asset classes in a bid to diversify the portfolio and therefore spread the risk. But sometimes this can become too large to manage effectively and can result in significant losses.
Poor forecasting
As portfolio managers use historical data for evaluating the returns on the investments they make, the data can be incorrect or unreliable which can lead to poor forecasting. If this happens it could