A managed portfolio is a securities account managed by a dedicated portfolio manager, who receives power of attorney to deal in assets such as shares,bonds,and mutual fund units. In Israel a portfolio manager will usually hold a license from the Israel Securities Authority and the broker administering the portfolio management service must hold the requisite license as well.
The objective of a managed portfolio is to individually tailor as far as possible the composition of the assets therein to the client’s needs and financial objectives. Each person has a different savings allocation and different purposes for the money being put aside and a good investment manager will build the best strategy possible to ensure these purposes are ultimately met. So it is important to pick a manager you feel comfortable with and who you can rely on. It is also important to find a manager or firm that takes a pro- active approach, is on hand to provide solutions to any issues you have as they arise and can tailor your portfolio in accordance with your requirements whenever these change.
The first stage in opening a managed portfolio account is to have an initial discovery meeting with an advisor to map out your specific objectives and understand your financial goals. Once you have signed the account opening agreement you will be required to give your broker power of attorney to deal in securities on your behalf using funds from your regular bank account. This power of attorney is solely for this purpose. Your dedicated manager will then build your portfolio and identify the most appropriate asset allocation for your needs.
Portfolio management has been an increasingly challenging task in recent years with low interest rates making it difficult for managers to generate returns without increasing the level of risk at the same time. Here are number of characteristics that set the professional managers apart from the rest.
Market timing – Getting the dynamics right
Should a good portfolio manager be aiming to second guess the market or should he be looking for the ideal entry and exit point? Can a broker get the timing of a trade in a specific equity exactly right? Many people will say the answer to both questions is yet but in reality it doesn’t work that way. No one can predict when the ideal time to enter the market is likely to occur, period. So what you need to do is to ensure the assets in your portfolio are constantly reviewed and adjusted so as to meet to your needs and financial objectives at any given time. You therefore need to be clear in your mind about the purpose of the money your portfolio is earning for you and when you expect to use it. How much of your savings do you want to put into your portfolio? Do you have any other realizable assets (property, for example)? What is your attitude towards savings? These are just some of the questions that you will be asked during the initial discovery meeting when opening an account, the aim being to build a portfolio suited to your needs and objectives as far as a possible. More on that in the sections below.
Focus on diversification and allocation
Having determined that trying to second – guess the markets is a non – starter where portfolio management is concerned, we can now turn our attention to the issue of diversification and allocation, or in other words how to divide investment between the various types of assets such as equities, bonds, foreign currency and how much to keep in cash. Allocation is not merely a matter of making a 30-70% split between bonds and equities. Which stocks is the 30% going to be invested in? How many of these will be local stocks? What percentage will you allocate to active instruments (such as traditional mutual funds) and to passive instruments (such as ETFs)? Risk level is another important factor that needs to be considered. If you build your own portfolio you can certainly achieve the same return as a managed portfolio but do you know what level of risk you’re taking on? The level of risk in a portfolio is derived from the level of diversification and this can protect you from ‘errors’ because these do occur from time to time.
Combine passive and active investments
Recent years have seen a step up in the inflow of capital into ETFs and ETNs, ‘passive’ savings instruments that are linked to the performance of different indices. There are many good reasons for following the current trend towards passive investment, especially if your focus is on the long term. Vanguard, the US asset manager and the pioneer of passive investing, has published extensive research that illustrates just how difficult it is for portfolio managers to beat the indices. Just one fifth of all portfolio managers succeed in outperforming the benchmark indices but even in the world of passive investing one needs to take an active approach. A manager will, for instance, have to choose whether to include ETFs that track equities or bonds, Israeli or foreign securities and so on. He/she will also have to adjust the mix between passive and active instruments in accordance with market conditions.
Take an integrated approach to personal savings as a whole
The average saver, in addition to having some ‘money put away’ in an investment portfolio will probably have pension savings and perhaps other assets too, such as an advanced training fund or real estate. So it helps to take a holistic approach that looks at all your assets collectively rather than devising strategies for each asset individually. This is because we often fail to take full advantage of the tax breaks we are entitled to on medium – to – long term savings, such as, for instance, the exemption from capital gains tax in advanced training funds. One possible solution is to make a single deposit into a provident fund (IRA or regular). It is also necessary to expose each asset group to the right level of risk. Thus pension savings, for instance, would benefit from greater exposure to assets that carry a degree of risk (e.g. equities), whereas money that you intend to use within the coming year should not be in the market at all