Understanding the Management Portfolio: Requirements and Responsibilities - Essay Example

 Portfolio Management Basically, oversight investment performance is amongst the main responsibilities that management should partake in an organization. Besides supervising and managing the fund in consistent with its prospectus and further disclosures, managers also have to oversee and determine good management and investment measures through the formulating a good portfolio. Essentially, Effective performance of a project requires the corporation and collaboration of various members of the organization (Verzuh 2003, p. 298). Managers thus have the responsibility of making sure that funds are appropriately managed through the creation of a good investment portfolio. Usually, there are various steps and processes that are used to oversee the portfolio of a fund. It is important for managers to examine the portfolio structure of a fund in order to know how well they can deal with the potential risks and increase the general performance of the investment. For that reason, this paper aims at explaining various investment concepts such as fund benchmark, performance target, and asset classes in which funds can be invested in. Furthermore, the paper will illustrate how allocation of risk and capital in the portfolio can be attained by use of various strategies such as beta and alpha. Even more importantly, the paper will illustrate the preferred investment process of the portfolio, explaining the various metrics that the fund can uses for the purpose of to measuring risks in the portfolio. Lastly, there will be identification of the limits that can be imposed upon various facets of the portfolio. Primarily, fund benchmark refers to that return which can be attributed to a specific targeted class of various investment allocation (Cornelius 2010, p. 58). The management should thus strive towards employing efficient strategies in order to realize a fund portfolio return which surpasses the returns of the fund benchmark. During the launch of a new private global macro fund, and all through its life, the manager, board as well as the investment financial advisers should cultivate collective and realistic prospects for the investment performance of the fund. This can be achieved through the determination of the fund’s investment strategies, its risk parameters, and its objectives, established on communications and disclosures to the investors. This mutual indulgence is important in the establishment of the base within which successive assessment of the fund’s performance and, if needed, a determination of the plans that can be used for probable remediation. Furthermore, the manager should have an understanding of the main investment characteristics and determine the ways that these characteristics correlate with the fund’s benchmarks. Besides, they should evaluate the relative risks and the performance expectations of existing benchmarks in other distinct market environments (Fabozzi, Focardi & Kolm 2010, p. 18). For that reason, it is important for the manager to provide both information, through oral and writing, so as to inform, and remind other interested parties such as the board and shareholders of the fund’s progress. A performance target can be defined as an objective or a goal that is set by an organization to enable it to work towards attaining the goal in a particular amount of set period. As such, the performance target is “effective security” of an organization since it provides the framework upon which it performs its core duties. Moreover, the management should also understand the investment objectives of fund, which basically can comprise of elements such as current income, capital preservation, and capital growth. Besides, it is important for the managers to apprehend and supervise the investment strategies that the portfolio expects to follow to in order to realize the set goals and objectives. In addition, they should identify the various policies and restrictions concerning the levels and types of investment exposures, as well as the risk sources as unveiled in the Statement of Additional Information (SAI) and/or fund’s prospectus. Some funds, such as absolute return funds, long-short, and market neutral try to find several objectives (Ineichen, 2002, p. 36). For instance, the new private global macro fund may seek an integration of long-term growth with short-term stability. However, this integration should be accompanied by a comparatively low asset class correlation. Therefore, the use of a benchmark to assess the funds’ performance can sometimes become complex than with the use of other strategies. Accordingly, an asset class refers to a collection of securities which possess same or related financial characteristics, are subjected to the same rules and regulations, and show parallel behavior in the marketplace. Notably important, there exists three main asset classes which are identified as follows (Nelson Information Inc. 2008, p. 2254). First, are equities which are made up of stocks, secondly, cash equivalents which mostly include money market instruments and finally, fixed-income assets such as treasury bonds. Managers should thus have a clear understanding of the asset classes in which the fund may invest in. For instance, in our case, the private global macro fund can decide to either invest in equities, international, fixed income, real estate interests, cash equivalents or even commodities among others. Importantly, some funds could target a particular sub-asset class to diversify their portfolio. For instance, funds such as target date funds, asset allocation, ad balanced can invest across a range of asset classes. In addition, it is of great significance to understand the degree of active management used by the portfolio managers. To illustrate, the board should know the degree to which the funds invested in the portfolio structure could fluctuate from the benchmark’s allocations or holdings in the individual securities or among several sectors. Whereas a passive or index fund may try to find the structure, risks as well as returns of the benchmark, funds that are actively managed aim at earning substantial returns over a long period of time (Cleary & Jones 2000, p. 387). This is achieved since these funds usually hold positions in allocations that are different from the benchmark, including those that could not be shown in the benchmark, and also by trading among holdings. Similarly, active and passively managed funds which target similar benchmarks and markets usually experience the same absolute risks, that is, they have the same return uncertainty levels as well as similar potential for capital losses. The market risk of a fund, also known as beta, refers to the degree of measurement to which the value of a portfolio fluctuates with fluctuations in its benchmark or market (Dowd 2005, p. 8). To illustrate, a lower beta portfolio, for instance that which is Read More