What is the Role of the Portfolio Manager?

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What is the Role of the Portfolio Manager?


Simply put, the role of the portfolio manager is to provide the discipline and the knowledge to help you achieve your goals.

Financial Planning is the process of identifying problems and goals, and developing plans, methods, and tools to solve those problems and attain those goals.  Once the planning process is complete, the advisor generally turns to saving and investing to help meet financial goals.

The role of the portfolio manager is often underappreciated and misunderstood.  What you see and read in the media, and what I hear all the time, is the following question:  “Why should I pay a fee, when I could easily put the money in an S&P500 index funds and forget about it.  After all, 79% of portfolio managers underperform the benchmark anyway.”    (http://money.cnn.com/2012/02/23/pf/fund_manager_performance.moneymag/index.htm).

While this appears to be a true statement (21% beat the index), it is also irrelevant for a number of reasons.  First, the benchmark is fictional and has no trading costs or fees, while even the most cost-effective index investment will have fees and trading costs.  Secondly, there is no benchmark against which to weigh portfolio manager performance.  Weighted averages of asset class allocation seem to fit best, but this still ignores the fees and charges of the real world.

More importantly, it is not the role of the portfolio manager to beat the index.

It is the role of the portfolio manager to maintain the discipline required to meet your goals.

Let’s look at the S&P 500 index investor.  You could invest in the index and then let it ride.  The problem is, most retail investors don’t!  DALBAR performed research on this and published a study on March 31, 2012.  For the twenty years ending on December 31, 2010, the S&P500 Index returned an average 9.14% a year, while the average investor’s return for that period is only 3.83% (http://moneyover55.about.com/od/howtoinvest/a/averageinvestor.htm).

Why is this the case?  Extensive research reveals that people are people, and they are prone to human behavior.  Part of that human behavior includes having emotions that effect our decision making prowess.  In the investment world, fear and greed are the two emotions that dominate the thought process.  When things look bad, we are loathe to invest.  When things look good, we throw caution to the wind.  The portfolio managers job is to maintain the discipline to stay invested when times are bad, even invest more when possible, and to be the voice of caution when times are great and the markets are never going to go down again, because it really is different this time …..

The other disciplinary factor is the human bias.  We all have biases.  The portfolio manager’s job is to be disciplined and thorough in his or her approach to keep those biases in check.  We all have a recency bias.  “The market went up yesterday and last week, so it will go up in the future”.  Some of us have the opposite recency bias.  “The market went up yesterday and last week, so it has to come down”.  The fact of the matter is, that what the market does tomorrow has nothing to do with what it did yesterday.

We also have a cultural or socio-political bias.  Invest in what you know.  Most often this is reflected by anecdotes like, “I only want to invest domestically”.  Many investors have their retirement account invested in their own company stock because of this bias.  “It’s a great company, I should know, I work there”.  The opposite bias also exists, where “the grass is greener on the other side”, and investors look only to Asia, for example, for investment opportunities.  The fact of the matter is, that investment opportunities present themselves everywhere.

The role of the portfolio manager is to obtain the best return at the most reasonable risk for your investments to reach your goals.  That means, they have to offer diversification and well-researched and well thought out methodologies for determining how to best get on the right path.

A portfolio manager’s role is to be objective, be research driven, and to be aware of biases, to be able to maintain the discipline to implement the strategy that will best help the client attain his or her goals.

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