Portfolio Management

Basics

Presented by CA Ved Dilip Beloskar

Sep 21, 2017
Portfolio Management
What is Portfolio Management?
Professional asset management of various securities and other assets in order to
meet specified investment goals for the benefit of the investors.

PORTFOLIO
MANAGEMENT

Decisions regarding Help achieve investor

Selection of correct
buying/ selling of goals by delivering
investment avenues
securities optimal returns

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Objectives of Portfolio Management

Ensuring safety of
Ensuring stable
principal amount
income
invested

Ensuring ample
Ensuring capital
liquidity in the
growth
portfolio

Diversification to
reduce risk

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Strategies in Portfolio Management

• Aim to outperform market benchmarks

• Churn in portfolio to generate returns
Active Strategy • May involve speculation and short term
(e.g. actively managed trading
mutual funds) • May involve high conviction
concentrated bets

• Does not aim to outperform market

Passive Strategy
(e.g. Exchange Traded Funds)
benchmarks
• Buy and hold strategy
• Selection of large number of securities
to reduce risk
• Less Portfolio Turnover

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Passive Management Strategies
Growth of Global ETFs
• Over the past 10 years, Assets under Management (AUM) of ETFs across the
globe has grown exponentially with assets of US$ 4.1 trillion as on July 2017.
• AUM of Global ETFs is expected to touch US$ 7 trillion by 2021.

In the above chart, bars represent AUM and the line represents number of ETFs.
Data Source: www.etfgi.com. Data as on July 31, 2017.
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Aim of Portfolio Management
Optimal balance between Return and Risk

Return Risk

Maximization of “Risk adjusted Returns”

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Return on Investment (ROI) Measure of Profitability

ROI (%) = (Proceeds from sale of investment – Cost of investment)

Cost of investment
ROI can be expressed in two ways:
• Absolute Terms
• Compounded Annualized Growth Rate (CAGR) terms

Returns are calculated in Absolute Terms for Returns are calculated in CAGR terms for
periods up to 1 year periods more than 1 year
Investment Period - 8 months Investment Period – 3 years
Particulars Amount Particulars Amount
Cost of investment 1,00,000 Cost of investment 1,00,000
Proceeds from sale of investment 1,20,000 Proceeds from sale of investment 1,40,000
ROI (Absolute terms) 20% ROI (CAGR terms) 12%

Formula Same as ROI ((End Value/ Start Value)^(1/ No. of years))-1

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Measures of Risk
Standard Deviation (SD)
• Measure of Total Risk of the Portfolio.
• Measure of dispersion from mean value.
• In terms of returns, SD is the deviation of actual return from expected normal
returns.
• Higher SD means Higher Risk.

Beta (ß) and Correlation (R2)

• Beta is a measure of the volatility, or systematic risk, of a portfolio in
comparison to the market as a whole.
• Example – Stock A which has a ß of 0.8 will give 8% return if market gives 10% return.
• R2 measures correlation between the portfolio and the market as a whole.
• Example – Stock A which has a R2 of 0.8 will move in the same direction as that of the
market 80% of the times.
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Alpha and Risk Adjusted Returns
Alpha
• The excess returns of a portfolio relative to the return of a benchmark index is
the alpha. 50%

40%

30%

20%

10%

0%
1 year 3 years 5 years 10 years
-10%

Portfolio Return Benchmark Return Alpha

Risk Adjusted Returns (RAR)

• Return generated by the portfolio per unit of risk.
• RAR = Returns of the portfolio
Standard Deviation of the portfolio

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Valuations
Price to Earnings Ratio (P/E)
• Ratio of Price of a stock relative to its Earnings Per Share (EPS).
• P/E = Price of stock
EPS

Price to Book Ratio (P/B)

• Ratio of Price of a stock to its Book Value Per Share (BVPS).
• P/B = Price of stock
BVPS

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 Examples from
Real Investment Portfolios
ICICI Prudential PMS Flexicap Portfolio

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Utility of Financial Accounting in
Portfolio Management
Fundamental Analysis using
Financial Statements
Eicher Motors Ltd.

32% CAGR
growth in PAT
over last 4 years

Huge surge in
cash flow from
operating
activities

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THANK YOU