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28th March 2019 | Flawiusz Pawluk | Financial Markets Expert

What is Portfolio Management and how does it work?

Let’s start with simple definition taken from Wikipedia: “Portfolio Management is the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation and balancing risk against performance”. 

In our opinion the Portfolio Management is all about determining proper choice between debt vs. equity, domestic vs. international, growth vs. safety, one currency vs. other currency and many other trade-offs taken in the attempt to maximize return while staying within certain risk limits. Sometimes Portfolio Management is also called assets management, however the latter covers broader scope of activities as it also included the service related to bank accounts, etc.

Historically Portfolio Management was primarily focused on beating market benchmarks understood as having better performance than the performance of key indexes such a S&P, DAX, FTSE, etc. Portfolio managers could achieve this goal investing in various assets classes or individual financial instruments and generally were allowed to choose a proper moment when to buy or sell these instruments – therefore this type of activity was called “Active asset management”. Unfortunately, portfolio managers usually took unnecessary or excessive risk to achieve these goals and ultimately beat the benchmark. Therefore, they final results on client’s portfolios were not great, especially taking into account pretty high costs induced by management and trading fees.

Therefore, over the past few years portfolio managers change their attituded to investment goals and focused primarily on tracking or following performance of benchmarks - therefore we call this type of activity “Passive”. The most popular instruments which track key indexes are ETFs. Actually, the key duty of portfolio manager is now to control risk and limit costs rather then beat the benchmark.

A few years ago, Portfolio Management service was dedicated primarily to High Net Worth Individuals (HNWI) or Ultra HNWI with net worth of min USD 1m and institutional clients. For retail client’s distributors such as banks and insurers offered primarily units of mutual funds. The key disadvantage of units of mutual funds was: pretty high upfront fee paid at the moment of acquiring a unit which covered cost of distribution, high management fees and finally low transparency of these products structure (portfolio composition of fund).

However, the revolution in digital distribution channels changed the approach of portfolio managers to retail clients. First of all, resignation from traditional distribution channels allowed to reduce up-front fee to nil and significantly squeeze management fees and other costs. Secondly Portfolio Management service started to be finally offered to retail clients, who wanted to invest a few GBP. However, in our opinion the key advantage of Portfolio Management is easy digital access to the portfolio service and high transparency in terms of client’s individual portfolio structure (what financial instruments are in Client’s individual portfolio), which could be monitored on a daily basis.

Our Portfolio Management service is dedicated to wide range of retail clients from very experience to rookies who value profits or safety over profits and are risk averse. In general, we have 4 different, basic, Model Portfolio Strategies build in 3 main currencies: USD, EUR and GBP which gives overall 12 different products with different investment objectives, risk profiles and investment timeframe. Our services are built on digital platform with ease of access to all our products and individual portfolios replicating the structure (content) of chosen by client Model Portfolio Strategy. We offer high transparency in terms of costs of structure of our products, which after acquisition could be monitored by our clients in Mobile or Internet application on a daily basis. In addition, we also provide additional information in Mobile and Internet application including, performance of Client’s portfolio, changes in value of Client’s Portfolio in given period, and structure of client’s Portfolio. All transaction performed on Client’s portfolio are performed automatically, clients shall only define the amount of potential investment. Any withdrawals of money from Client’s Portfolio could be initiated in any moment without any additional costs. However, our client shall have bear in mind that any instruction related to adding or withdrawing money from their portfolio generates a number of transactions and results in additional trading costs.

Golden Sand Bank ("Bank") exercised due diligence to ensure that the information contained in this publication was not incorrect or untrue as at the date of publication.

All Investment products are at risk, as their value can go down as well as up. The tax treatment of client’s investment will depend on client’s individual circumstances and may change in the future. If client is unsure about whether investing is right for client, please seek financial advice. This publication is not an investment recommendation or investment advice in connection with any services provided by the Bank to the Client.