What is Portfolio Construction?
It is a process which brings sense and discipline in your portfolio. Along with the behaviour of the assets has to be seen the investor’s needs, likes, and prejudices while the portfolio is being constructed. The investment consulting process formalizes investing. Similarly to how an architect develops a blueprint for a client planning to build a house, your Financial Advisor should develop a blueprint for you, based on your goals, and risk taking need and ability. Exactly how an architect would make a blue print of how the building is going to look, an IFA should be able to help you in Portfolio Construction. Once this is made the broad outline – the countours – are available to the portfolio manager to decide where to invest and how much.
The investment strategy, and the investment philosophy statement, etc. have to be in place before the portfolio construction can be put into place.
Portfolio construction begins after you have done the strategic allocation of assets. That is to say that Portfolio construction is a process, and it ensures that the investment options are evaluated not in isolation but as complements to each other and as essential components of a larger whole.
If constructed appropriately, the overall portfolio should reduce single-manager risk while seeking to maximize portfolio-wide returns. This is made possible by combining managers that exhibit low historical correlation or behave differently in different market environments. So in a bull market an aggressive fund may be buying more of high priced equities, but a value fund manager may be going for more cash assets. A value fund may decide to buy Noida Toll Bridge – attracted by the yield, but a growth manager may refuse to touch it saying ‘there is no capital growth in the share’. So a combination of such different fund managers helps.
Honestly, I have not been able to find too many people who can articulate their needs well. That actually puts tremendous stress on the investor and the investment adviser. Also many a time there seems to be no justification to change fund managers – especially if the overall requirement and philosophy of the investor has not changed. However a few changes – of choosing a good fund manager (or choosing him during a lucky period) can camouflage the lack of strategy.
Luck is a bitch, just as bad as fate.
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