Portfolio Manager: Definition, Types, and Duties

What Is a Portfolio Manager?

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.

Duties and Responsibilities

As noted above, a portfolio manager is responsible for making investment decisions about the assets of individual investors and of various funds, including mutual funds, exchange-traded funds (ETFs), and closed-end funds to name a few. Managers do this by creating and implementing various investment strategies including, 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. The goal is 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 a closed- or open-ended fund, 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 track records 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 where they work, portfolio managers may be compensated with a base salary, commissions, and bonuses.

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. We highlight the difference between the two below

• Active Portfolio Managers: A manager can take an active approach to investing, which means that they attempt to consistently beat average market returns. This is done using a hands-on approach, which involves buying and selling regularly. The active portfolio manager is very experienced and their role is extremely important since their investment style directly results in the fund's returns. Potential investors should look at an active fund's marketing material for more information on the investment approach.
  
• Passive Portfolio Managers: If a manager takes a passive approach, their investment strategy mirrors a specific market index. Using that market index as a benchmark is extremely important since an investor should expect to see similar returns over the long term. As such, passive managers tend to take a hands-off approach. Their experience levels tend to be low to high.

What Makes a Good Portfolio Manager?

Regardless of the investment approach, all portfolio managers need to have very specific qualities to be successful. The first is ideation. If the portfolio manager is active, then the ability to have original investment insight is paramount. If the manager takes a passive approach, the originating insight comes in the form of the market index they've decided to mirror. Passive managers must make smart choices about the index.

The way a portfolio manager conducts research is very important:

• Active managers make a list of thousands of companies and pair it down to a list of a few hundred. The shortlist is then given to fund analysts to analyze the fundamentals of the potential investments, after which the portfolio manager assesses the companies and makes an investment decision.
• Passive managers also conduct research by looking at the various market indices and choosing the one best suited for the fund.

Other key characteristics that portfolio managers should possess include communication skills, the ability to work independently and with others (especially when they work with other managers), and risk management.

When you're researching portfolio managers, make sure you review their experience, the fees and commissions they charge, as well as their investment styles and philosophies. Try to get recommendations from others or read reviews to see what others think about specific portfolio managers.

The Bottom Line

It's important for investors to do their research when it comes to making key decisions about their financial future. Make sure you research any potential assets but also portfolio managers. A few key things you should look out for when reviewing these financial professionals include their experience, the fees they charge, and their investment styles and philsophy.