Portfolio Manager

A portfolio manager is the professional responsible for deciding how an investment portfolio is invested. The manager chooses which assets to buy and sell and in what proportions, so that the portfolio meets its stated investment objective within its risk limits, rules and budget. Portfolio managers run mutual funds, ETFs, pension and insurance mandates, private client accounts and hedge funds.

Portfolio managers usually work for an investment adviser, the regulated firm that holds the contract with the fund or client and carries the fiduciary duty. The individual manager is supported by analysts who research companies and markets, traders who execute orders, and risk and compliance staff who check that the portfolio stays within its limits. In a hedge fund, the senior portfolio manager is often also the founder; see hedge fund manager.

A portfolio manager is like the head coach of a sports team. The club owners set the goal, such as winning the league or simply avoiding relegation, and give the coach a budget. The coach picks which players to field, when to change tactics and when to substitute someone who is not performing, while scouts and assistant coaches supply information.

The coach is judged on results compared with expectations, not on any single match. In the same way, a portfolio manager is judged on how the whole portfolio performs over years against a fair comparison, after costs.

The investment process differs between firms, but most follow a similar sequence:

1. Understand the mandate. Read the fund's prospectus or the client's investment policy statement, including the objective, the benchmark, permitted assets and limits.
2. Set the asset allocation. Decide how much to hold in shares, bonds, cash and other assets, where the mandate allows a choice.
3. Select securities. Choose individual holdings, for example through value investing, growth investing or quantitative models.
4. Build and size positions. Decide how much of each holding to own, balancing conviction against diversification and liquidity.
5. Monitor and rebalance. Track risk, react to new information and keep the portfolio within its rules.

In an index fund the manager's job is different: the goal is to match the index as closely and cheaply as possible, so the main measure is low tracking error rather than outperformance.

In the United States, Form N-1A requires a fund's prospectus to name the person or people primarily responsible for day-to-day management, with their title and how long they have managed the fund. Since amendments adopted in 2004, the Statement of Additional Information (SAI) must also disclose the other accounts each manager runs, the structure of their pay, including whether it is linked to performance, and the dollar range of the fund's shares they own. Fund shareholder reports and fact sheets must flag a change of portfolio manager, because it can change how the fund is run. Many funds are team-managed, which reduces the risk tied to one person but can blur accountability.

Portfolio managers typically hold degrees in finance, economics or a quantitative field, and many hold the Chartered Financial Analyst (CFA) designation awarded by CFA Institute. In the US, individuals giving advice to retail clients for a state-registered or SEC-registered adviser often need to pass the Series 65 or similar examinations. In the UK, senior individuals at fund managers fall under the Financial Conduct Authority (FCA) Senior Managers and Certification Regime. In India, discretionary "portfolio management services" are a separately licensed business under SEBI's Portfolio Managers Regulations, 2020.

Pay usually combines a salary with a bonus linked to multi-year performance against a benchmark or peer group, the firm's profits and assets gathered. In hedge funds and private equity, managers may also share in performance fees or carried interest.

Results are usually measured by total return after fees, compared with a benchmark and with similar funds. Risk-adjusted measures add context: alpha estimates return beyond what market exposure explains, beta measures sensitivity to the market, and the Sharpe ratio compares excess return with volatility. The portfolio turnover ratio shows how actively the manager trades. Independent ratings such as the Morningstar Rating rank funds on past risk-adjusted returns.

Long-running studies, including S&P Dow Jones Indices' SPIVA reports, have found that most actively managed US equity funds underperform their benchmark over periods of ten years or more after fees. This has pushed money towards index funds and raised questions about what active managers add. Short-term bonus structures can encourage managers to take hidden risks or to hug the benchmark to avoid falling behind it. Star-manager funds also face key-person risk when a manager leaves.

• CFA Institute