Monday, July 26, 2010

So you think you can be a portfolio manager?

The task of managing portfolios isn't as easy as it seems. Not only do you have to think about issue selection, you also need skills like portfolio construction and trading. Over the years, I have seen very smart and experienced sell-side analysts who have had great difficulty making the transition to the buy-side and portfolio management.

David Merkel at Aleph Blog wrote a terrific series called The Education of a Corporate Bond Manager (see Part 1, part 2 and part 3) that addresses many of these problems. For example, Merkel discusses the problems of putting together a portfolio when time is limited and there is no time for analysis:

But when the market was hot, and deals would close within an hour, I would work differently. When the deal would come, I would put in for bonds, so that I would get some allocation. I would ask for the high end of what I would normally ask for, knowing that I would get scaled back considerably. Then I would send the details to my credit analyst, telling them that if they did not like the company, I would sell the bonds.
Eventually, most of my analysts during the times when the market was hot would come to me and say, “How can you put in for bonds without an opinion from us?” First I would reassure them, and tell them that I valued their opinions, and that I would not hold onto a bond permanently unless they liked it. I would sell all bonds they did not like, but when the technicals favored it, within a few months.
And the problems with trading:

But I started selling away, and began to learn the art of price discovery. When you want to sell a bond, you first have to look at what investment banks ran the books of the deal. There is an unwritten rule that if they play that large role in origination, they have to make a market in the bonds thereafter.
I also wrote a series called What do you do after you've made your picks that looks at the problems from the viewpoint of an equity manager (see Part 1, part 2 and part 3).

Go and read them and you'll get some perspective.

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