Express (August 29, 2011)
Portfolio management is the most scientific concept that is conventionally used to assist, guide, analyse and manage investment in capital market. It helps the investors, by identifying the threats and opportunities, the strengths and weaknesses as well as the risks and rewards of investments. Through its proper uses, the investors decide to buy or sell, or buy or hold investments in shares, stocks, bonds, mutual funds, treasury bonds and on and on, either in domestic or international markets, if doing so in the latter is allowed.
The portfolio managers are generally engaged with portfolio management and they apply all the arts, practices, procedures and techniques for portfolio management. They are entrusted with the important and sensitive tasks of taking timely decisions on investments with the sole motive of maximising the possible returns within a minimum period of time.
Portfolio managers are supported by a team of experts like financial analysts and market researchers who analyse the trends and volatility of the markets. It is an important task of the portfolio management to have a clear idea of the day-to-day and the latest information about capital markets, to collect all relevant data from the stock broker-houses, and also to keep track on reports appearing in various journals and newspapers, besides talking to the managers of different publicly trading companies and monitoring economic growth of different industries.
The portfolio managers make consistent and fruitful decisions about an investment by considering an investment-mix policy -- matching investments to objectives, balancing risks against performance, and making asset allocation for individual or institutional investors. They are responsible for establishing an investment strategy, after taking into consideration the information and data available, selecting appropriate investments and allocating fund for each investment or putting the investment in asset management vehicle.
Generally when the investors decide to buy or sell shares either from the primary market or from the secondary market, they consider the changes in turnover, price/earning (P/E) ratio, earning per share (EPS), net assets value (NAV), capital gains and losses, trends about dividend payment, status and structure of shareholders and paid-up capital. But the investors need to follow the prudent and scientific portfolio management theorem, to consider other theories, practices, rules and formulas on investment in capital markets. There are many tested theorems on portfolio management such as buy-hold rebalancing, constant-mix investments, returns in trending markets, diversification, spread-the-wealth in domestic and international capital markets, follow-up index of stocks, bonds, mutual funds and on and on.
Portfolio management involves risks management; hence, the portfolio managers must be cautious, knowledgeable, prudent, dynamic and well-conversant with the capital market. According to Candy Schwab and Dr Charles B Schwab, ten actions are designed to clear out the deadweight in the portfolios, your office and your mind to clear the way of better returns, These are summarized as: (1) having an investment plan that is realistic and actionable, is crucial to meeting goals, (2) understanding your plan, following and adjusting it when things change in your life, (3) saving and spending rates have the greatest impact on success and choosing only the good positions and avoiding the bad ones, (4) diversification is the second most important factor in reaching goals, (5) selecting asset allocation that is right for you and sticking with it, (6) choosing professionally managed investments can be better way to invest, (7) acting now generally beats waiting, (8) making periodic checkups to keep a portfolio healthy, (9) making progress towards goals is more important than short-term performance and (10) using the right benchmarks to evaluate performance.
There are many time-tested Modern Portfolio Theorems (MPT), dealing with the portfolio management. One of such theorems is about diversifying the investments into different segments of investments such as socks, bonds, mutual funds of different companies and reducing the risks on investments. MPT quantifies the benefits of diversification; this is also commonly known as "don't put all of your eggs in one basket".
Here are five filters a portfolio manager can use to come up with a selection universe of higher quality companies: (1) credit rating report (with minimum B+ scoring), (2) history of profitability, (3) history of regular dividend payments, (4) a reasonable price index and (5) regular reports from stock exchanges (relating to market status, new highs vs. new lows, share index, daily and weekly turnover).
The Bangladesh capital market is still weak and instable. It needs to be further strengthened and stabilized. The investors should follow the portfolio management theorems, factors and formulas, while investing in shares or bonds, irrespective of types and the size of investment. The fluctuations in the capital market are generally based on some specific information about the shares, bonds, securities etc., and the changes happen about the share market indices in both developed and developing countries. The difference is that the information and rumours are found to be true and based on facts in the developed countries but in the developing countries, the information is found to be fabricated and very often not based on facts. Any kind of publicity about the capital market or any sort of comments by responsible ministers affects the capital market. It is advisable for all concerned to refrain themselves from making any comment on the capital market until and unless he/she can add or contribute something special to it. Unwanted and undesirable comments on the capital market are likely to cause a great many problems in the market.
It is very difficult to get correct information about the capital market, especially in a developing country like Bangladesh due to unreliable and incorrect sources of information. The investors, for example, analyse the balance-sheet and income statement of an organization to calculate NAV, EPS, net profit/loss, current ratio, liquidity ratio, leverage ratio and so on. The credit rating companies take the audited balance and income statement as an important piece of document to give their opinions about the credit worthiness of an organisation, in addition to other areas of information. The Security Exchange Commission (SEC) also takes the audited balance sheet and income statement as a very relevant document before according its approval for issuance of shares, bonds and mutual funds.
It is evident that the audited balance-sheet and income statement of an organisation is the most important document used by the portfolio managers, credit rating companies, the regulator (SEC), the stock exchanges, and the brokerage houses to make strategic decisions having a bearing on investments in the capital market.
But unfortunately, we find the audited balance-sheets and income statements, in many cases, are based on fabricated facts and figures. This implies that they are "window-dressed balance-sheets and income statements". Lack of professionalism, transparency and genuineness and absence of up-to-date information are the main constraints to getting correct and true information from a company and to express true and fair view about its state of affairs.
Portfolio management shows the pros and cons, strengths and weaknesses in depth of investments to the investors, the regulator, and financial institutions and to the government so that they can take appropriate actions to correct the situation and help stabilise the capital market. All concerned agencies should follow the portfolio management principles, theories, formulas and analyses while making decisions on buying or selling shares and bonds.
If investments are made on the basis of such exercises having been made properly beforehand, there will obviously be less possibility for losing money in the capital market. This will, in turn, contribute to investors gaining more confidence. More fund will then be injected to the capital market, ultimately stabilizing and strengthening the market itself.
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