Portfolio Administration, Portfolio Rebalancing and Investments

By Angel Broking | Published on 4th March 2021 | 221

Portfolio Administration, Portfolio Rebalancing and Investments

Portfolio administration is one of the most important tasks involved with making investments into any market or on any type of security. Portfolio administration is usually performed by a portfolio administrator, on behalf of an investor client.

Portfolio administration involves the processes involved in ensuring that a high return on investment (ROI) is achieved, and it requires remaining vigilant regarding market movements and trends. Securities, such as equity stocks especially, are susceptible to even the slightest changes in the market, caused due to factors as diverse as social, economic, or political happenings and disturbances.

Portfolio administration goals include assessing the market and aligning investments accordingly, while adhering to the investor’s pre decided risk profile. Portfolio administration service is provided by several firms all over the country, and it is always best to call in a professional who is adept at studying market trends and accurately forecasting the direction of how stocks will move.

Portfolio administration requires making choices on a regular basis, while performing a strength, weaknesses, opportunities and threats (SWOT) test. The portfolio administrator is required to make choices and trade-offs regarding which are the best investment instruments to hold onto and which should be sold off soon.

Portfolio administration goals remain the same, but the strategy may differ. There are two types of portfolio administration, which have been detailed below.

Passive Portfolio Administration:

Passive administration is geared toward enabling an investment strategy wherein you set the trades in place and then let them develop. Often, passive administration of the portfolio involves investing into index funds, which can be optimized for high returns.
Passive portfolio administration goalsusually involve using a benchmark index and then working toward duplicating its returns. A portfolio administrator, implementing a passive strategy, mimics the index rather than individually buy or sell stocks. The fees required for ensuring a passive portfolio administration strategy is far lower than in managing an actively administered portfolio.

Active Portfolio Administration:

For active portfolio administration, the administrator has to actively work toward beating the performance of the index. It may usually take a team of administrators to manage an active portfolio strategy. It also requires a huge amount of market research, ability to accurately forecast market conditions, and prior expertise of the team of investment administrators.
These portfolio administrators have to constantly keep an eye out for market developments, and keep their hand on the pulse to ascertain the direction of the market, and then take informed decisions on where they should be investing their investor clients’ funds.

Rebalancing the Portfolio:

Regardless of whether the portfolio is administered via an active or passive strategy, it is often necessary to take steps to adjust and balance it at regular intervals.

Rebalancing is one such strategy that is employed in portfolio administration, through which the interests of the fund are aligned with the original risk portfolio decided upon by the investor, on a frequent basis by the portfolio administrator. Rebalancing can also be done in order to revert to the original or a desired level of asset allocation with the investments.

For instance, say a portfolio started out with a 50-50% investment allocation on bonds and stocks. If over time, the stocks performed better, there is a possibility that the investment allocation increased for stocks while reducing the share allotted toward bonds. In order to return the portfolio allocation to their initial share and allocated balance, rebalancing is an activity that is carried out by a portfolio administrator on an annual basis.

Rebalancing offers two major advantages to an investor:

  1. Rebalancing reduces the risk profile of an investor by re-allocating his investments in a manner that is more aligned to his desired risk profile, in case of the risk profile having increased in line with market movements and conditions
  2. Rebalancing the portfolio also allows the administrator to bring the investment allocations back within their scope of expertise. Often when an investment is made into the market, it is likely to be buoyed by existing market conditions which results in a higher share of the investment becoming allocated toward a certain kind of instrument, which may not have been intended by the portfolio administrator.

The reason that rebalancing is one of the most important portfolio administration services on offer is because rebalancing helps in maintaining a secure amount of while also enabling the investor to earn returns from their investment.

Through rebalancing, portfolio administrators often target selling high valued stocks while buying low value stocks, since they can avail the gains they have received from the higher value stocks to invest them towards newer or lower valued stocks.

Rebalancing can also be done in terms of investments made either locally or abroad. While it is recommended that the rebalancing exercise be conducted once a year, it is also helpful to keep a vigilant eye on the assets invested into and whether it requires balancing to ensure continued high returns.

Even aside from rebalancing endeavours, portfolio administration requires vigilance in terms of market conditions and trends. Portfolio administration goals can only be achieved if an administrator actively keeps an eye on market forces and factors, which are likely to impact the investment, and takes measures to mitigate any potential negative impact.

Factors which impact portfolio administration:

  1. Time Span:
    The type of assets into which the investor intends to invest his funds depends on the amount of time during which he intends to remain invested. For instance, for meeting long term goals, equity stocks which offer high returns but are riskier are usually recommended whereas for meeting short term goals, investments on government securities are preferred since they offer stable returns over any specified period of time without the risks.
  2. Investor’s Age:
    The age of an investor is an important factor when it comes to deciding on the strategy for their investment portfolio administration. Older investors who are saving up for retirement prefer low risk instruments, whereas younger investors prefer high risk investments which can yield higher returns over a period of time.
  3. Risk Profile:
    An investor’s risk profile is the most important factor governing their portfolio administration. If the investor has a low risk profile, investments that offer stable returns over a period of time is better whereas if an investor has a high risk profile, the portfolio can be administered in a way wherein the investor gains the highest returns.

Portfolio administration services need to be conducted with care and in a way that the investor gains the highest returns while facing the least amount of risks.