The term portfolio manager refers to a financial professional who makes investment decisions for individual and/or institutional investors. Portfolio managers develop and implement investment strategies and manage the day-to-day trading of a portfolio. These professionals may be responsible for managing an individual investor’s assets or those of an institutional fund, such as a mutual fund. Investors should consider the track record of portfolio managers when investing in funds.
Key Takeaways
- A portfolio manager is responsible for making investment decisions using a specific investment strategy.
- These professionals implement investment strategies and manage day-to-day portfolio management.
- Portfolio managers can take an active or passive management role.
- The ability to originate ideas and to employ excellent research skills are just two factors that influence a portfolio manager’s success.
Duties and Responsibilities
As noted above, a portfolio manager is responsible for making investment decisions about the assets of individual investors and various funds, including mutual funds, exchange-traded funds (ETFs), and closed-end funds. Managers achieve this by creating and implementing various investment strategies, such as buy and hold, value investing, indexing, diversification, income investing, small-cap, contrarian investing, active investing, and passive investing.
Portfolio managers construct and manage investment or financial portfolios based on their investment style, aiming to minimize losses while maximizing returns. This requires conducting research, making adjustments to these portfolios through rebalancing at regular intervals, and communicating with investors.
A portfolio manager holds great influence on a fund, whether it’s closed-ended, open-ended, hedge fund, venture capital fund, or ETF. Decisions made by the portfolio manager will directly affect the fund’s returns. Portfolio managers are (or should usually be) experienced investors, brokers, or traders, with strong backgrounds in financial management and a record of sustained success.
Portfolio managers may find themselves doing research as associates, directing investment teams at the mid-senior level, or working with individual clients for private wealth management firms. Senior managers commonly work with the chief investment officers (CIOs) of their funds. Depending on their workplace, portfolio managers may receive compensation through base salaries, commissions, and bonuses. Historical performance records indicate that only a minority of active fund managers consistently beat the market.
Types of Portfolio Managers
Regardless of their educational or professional background, portfolio managers generally fall into one of two categories: active or passive portfolio managers.
- Active Portfolio Managers: A manager who takes an active approach aims to consistently beat average market returns using a hands-on approach that involves regular buying and selling. The active portfolio manager’s experience and investment style directly impact the fund’s returns.
- Passive Portfolio Managers: By contrast, a passive manager mirrors a specific market index, expecting to achieve similar returns over the long term. Passive managers tend to take a hands-off approach, with their experience levels ranging from low to high.
| Active Portfolio Manager | Passive Portfolio Manager | |
|---|---|---|
| Approach | Frequent buying and selling | Index fund management |
| Management Style | Hands-on approach | Hands-off approach |
| Experience | Very experienced | Low to high level of experience |
| Goal | Outperform benchmark or market returns | Match benchmark or market returns |
Most portfolio managers have at least an undergraduate degree in finance or another related field. Many also hold additional certifications, such as the Chartered Financial Analyst (CFA) and/or the Certified Financial Planner (CFP) designations. Moreover, many managers are licensed by the Financial Industry Regulatory Authority (FINRA).
What Makes a Good Portfolio Manager?
Regardless of the investment approach, all portfolio managers need specific qualities to be successful. One is ideation; if active, the ability to have original investment insights is crucial. If passive, the originating insight comes from selecting a suitable market index.
The research process also plays a critical role:
- Active managers: Compile a list of thousands of companies, narrow it down to a shortlist for detailed analysis, and make investment decisions based on their assessments.
- Passive managers: Conduct research by comparing various market indices to choose the most suitable one for the fund.
Other essential characteristics include communication skills, independent and collaborative working capabilities, and risk management expertise.
When researching portfolio managers, review their experience, fees, and commissions. Assess their investment styles and philosophy by seeking recommendations or reading reviews to see others’ opinions.
How Much Do Portfolio Managers Earn?
A portfolio manager’s salary depends on several factors including the company they work for, the location, their experience, and the type of portfolio they manage. According to various sources, the average base pay for a portfolio manager ranges from $88,000 to $149,000 per year. Their take-home pay may increase if they meet their annual goals. The median salary for financial managers, a category that includes portfolio managers, was $156,100 per year in 2023.
How Are Portfolio Managers Compensated?
Portfolio managers often receive a base salary, with the amount depending on several factors such as their employer and location. Additional compensation can include bonuses, commissions, benefits, and stock options.
What Skills Do You Need to Become a Portfolio Manager?
The essential skills for a portfolio manager include communication, research and analytical skills, risk management, portfolio construction, and the ability to work independently and collaboratively.
The Bottom Line
It’s crucial for investors to research thoroughly when making key financial decisions. Investigate potential assets and portfolio managers alike. Key aspects to consider include the managers’ experience, fees, and investment styles, and philosophies. Seek recommendations and reviews to make an informed choice for your financial future.
Related Terms: Financial Advisor, CFA, Mutual Fund, ETF, Risk Management.
References
- CFA Institute. “What Is a Portfolio Manager?”
- S&P Global. “SPIVA U.S. Year-End 2019 Scorecard: Active Funds Continued to Lag”.
- Glassdoor. “How much does a Portfolio-Manager make?”
- U.S. Bureau of Labor Statistics. “Financial Managers - Summary”.
