Saturday, February 25, 2012

Portfolio Management in Practice - The Investment Decision Process II (Roles)

Roles in the Investment Decision Process and the Implementation of Strategic Changes

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Investment Committee
Duties: Decision on Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA)
The investment committee consist of senior members of the management of the bank. At Credit Suisse for instance, Ossi Gruebel as CEO of Credit Suisse Private Banking was a member of the Credit Suisse investment committee. Further more the chief investment officer (CIO) and the head of private banking usually are committee members. Last but not least the head of portfolio management, the banks chief economist and the quantitative specialist will participate.

Strategy Team
Duties: Decision on investment product selection according asset allocation in case of strategic  
             Decision on switches (sell a stock and replace it by an other)
    Usually this duties are structured according markets. Usually they are structured into stocks Switzerland, stocks Europe, US stocks, stocks Asia/Emerging markets and bonds. Depending on asset classes the bank is offering there might be other groups, such as commodities, alternative investments etc. In bigger banks, there are usually teams, who are exclusively responsible for one of those groups/market. They are not involved in rebalancing of client portfolios at all. In smaller banks responsibilities for above mentioned groups are shared among the portfolio managers. In hour days its not common anymore, that one PM is individually covering all markets and even rebalance client portfolios

    Implementation Team
    Duties: Implement strategy changes and changes of specific investment products on client
    These portfolio managers, evaluate the gap in-between the model portfolios and the client portfolios and are increasing, decreasing, buying and selling positions accordingly. Doing this they have to consider client restrictions. If by proceeding according the decisions of the strategy team a restriction would be violated, the have to find an alternative and buy this investment product instead. In bigger banks there are teams only being responsible for the implementation. In smaller banks the are also responsible for selection of investment products.

    Duties: Controlling portfolio manager
    This unit should be outside the portfolio management unit. They analyze all client portfolios and among others ensure that no client and no bank restrictions are violated. They also analyze the standard deviation of performance of client portfolios and inform the head portfolio management/ portfolio managers if deviation is to big.


    Saturday, February 4, 2012

    Portfolio Management in Practice - The Investment Decision Process I

    Above chart can be found HERE

    Decide on Strategic Asset Allocation (Benchmark/SAA)
    Investment Committee (IC) defines an Asset Allocation for the various Risk Profiles the bank wants to offer their clients. Risk in this sense means, the maximal possible loss. Usually a bank offers at least 15 risk profiles, from bonds only to stocks only (eg. Fixed Income, Yield, Balanced, Growth, Equity in the common reference currencies USD, EUR, CHF). These asset allocations consist of various Asset Classes. The common asset classes are Equity, Bonds, Cash. Since around the year 2000 the asset class alternative investments and a bid later commodities became more popular. This asset allocation is optimized (Diversification) in order to achieve the maximal return with the risk taken. The strategic asset allocation remains unchanged over years. Changes happen when due to longterm market outlook a new asset class is seen to be favorable as for example the asset class “alternative investments”.

    Decide on Tactical Asset Allocation (TAA)
    Investment Committee reviews the current tactical asset allocation usually several times per month and decides if an adjustment is needed. A change happens several times per year. The bet is taken against the strategic asset allocation. That means because of the current market outlook the Investment Committee meight underweight or overweight TAA against SAA in order to achieve a higher return. Since the tactical/strategic asset allocation (usually) is static, but the asset asset allocations of client portfolios change because of market movementsa decision is needed, when to rebalance back to the static asset allocation. Depending on the banks organization this is made in the Investment Committee or by the portfolio management unit itself.

    Within the limitation of the tactical asset allocation specialists from the portfolio management unit decide, which investment products to by or sell. Adjustments are made when the TAA changes, but changes are also made when market conditions and company outlook favor a switch from one instrument into an other. An example: IC decides to overweight stocks US against strategic asset allocation. Tactical asset allocation is increased from 20% to 26%. As as result the PM specialist for US stocks needs to find two US stock investments for 3% each.