Investment portfolio management

Revision as of 17:19, 27 February 2019

Abstract

The scope of this article is to points out the similarities and differences between project and investment portfolio management. Project Portfolio Management (PPM) refers to a senior leadership discipline that drives strategic execution and maximizes business value delivery through the selection, optimization, and oversight of project investments which align to business goals and strategies ^[1]. The objectives of PPM are to determine the optimal resource mix for delivery and to schedule activities to best achieve an organization’s operational and financial goals, while honouring constraints imposed by customers, strategic objectives, or external real-world factors. The International standard defines the framework of the Project Portfolio Management ^[2]

On the other hand Investment Portfolio Management is the science of making decisions about asset management , matching investments to objectives, asset allocation for private investors (mutual funds or exchange-traded funds) and institutions (insurance companies, pension funds, corporations, charities) and balancing risk against performance. Portfolio management, implies in tactfully managing an investment portfolio, by selecting the best investment mix in the right proportion and continuously shifting them in the portfolio, to increase the return on investment and maximize the wealth of the investor. ^[3].

A wide range of investments and financial products are available when building an investment portfolio. Those products are accessible for individual and institutional investors. Investors utilize investment products to meet various investment goals and objectives. The most well known investment products are: stocks and stock funds, bonds and bond funds and financial derivatives.

Portfolio Manager

Many firms select investment portfolio management processes to manage investment mixes efficiently and profitable. One of the essential players in portfolio management is the portfolio manager, a executive responsible for the overall running of portfolio management. The skills this individual should have are above to those of project managers, as portfolio managers should take a spherical view over all running projects. Investment portfolio manager is responsible for making investments decisions and to establish an investment strategy, selecting appropriate investments and allocating each investment properly towards an investment institution.

Project Portfolio Managers help with planning and scheduling teams to identify the fastest, cheapest or most suitable approach to deliver projects and programms. Also project portfolio managers define key performance indicators and the strategy for their portfolio ^[4]

Portfolio Manager Skills

Poertofolio Manager responsibilities

Becoming a succesfull portfolio manager requires some essential skills. In this article will take a look at the top nine skill areas for a portfolio manager. Those skills are:

• Tenacity
• Anticipation
• Communication skills
• Humility
• Ability to work independently
• Strong emotional control
• Decisiveness
• Competitive spirit
• Analytical ability

The Business Problem

One of the main problems associated with organisations, is that the ratio between Human resources, money and perspective or future projects is inordiate. A usual phenomenon connected with over-loading phenomenon, mentioned above is the difficulty of management teams to deny new projects. Instead, present day management teams try to do everything by cramming more work onto the calendars of already overworked project teams or by cutting corners during the project.

Despite a heavy investment of people and money in projects, the organization still gets poor results because people are working on the wrong projects or on too many projects. Trying to do too much work, causes all projects to suffer from delays, cost overuns, or poor quality^[5]

Project Portfolio Funnel Management

Portfolio Management Connets Strategy with Execution

Sufficient project organisations, focus their limited resources on the first-rate projects, declining to contribute on projects that are not good enough. Project Portfolio Funnel Management (PPfM) empowers them to make and implement these tough project selection decisions. PPfM is a funnel that connects strategic planning to the execution of projects, making the strategic objectives executable. The inputs of the funnel takes in all of the ideas for projects or financial products that the organization might invest to. These ideas may come from strategy, customer requests, regulatory requirements or ideas from individual contributors. The purpose of the funnel is to select only those projects that meet certain criteria and not move forward with others. The resulting collection of projects is a focused, coordinated, and executable portfolio of projects that will achieve the goals of the organization. The same process is also applicable in financial or investment portfolio management as well. In this case instead of project selection organizations do the wright selection between financial products.

The Portfolio Management Process

The Project Portfolio Managemet Process contains five primary steps. Those steps are:

• Carify business objectives
• Capture and researc requests and ideas
• Select the best projects using difined differentiators that align, maximixe and balance the portfolio
• Validate portfolio feasibility and intiate projects
• Manage and monitor the portfolio

Project Risk Management

Project risk management is the process of identifying, analyzing and then responding to any risk that arises over the life cycle of a project to help the project remain on track and meet its goal. Risk management isn’t reactive only, it should be part of the planning process to figure out risk that might happen in the project and how to control that risk if it in fact occurs ^[6]. Risk management is a common and widely adopted project practice. Practitioners use risk management based on a common assumption that risk management techniques add value to projects. Yet, in the complex and ambiguous environment of a project, value is often subjective ^[7]. Following the article there will be an extensive explanation about the types of risks in projects and for the sources of projects risks.

Risks on projects can be practically branched into project risks and technical risks.

• ´Project Risks are those that occur during the execution or construction of the project. For example, suppose a heavy component such as a specialized vertical stabilizer needed for the construction of an aircraft, can only be purchased from a limited number of suppliers. If the demand for this product is very high and none of the suppliers can supply it on time, the plan for accomplish the project will be endangered. Generally groups such as purchasing, finance and human resources are responsible for managing project risks.

• Technical Risks are risks that occur during the operation of a project after it is completed. For example, a cars component is designed and built in such way to give better steering on the road. This type of risk should be identified during the design of the project and moderated by adjust the design.^[8]

Sources of Project Risks

Project risks originate from such events as the following:

Project location: This includes geopolitical conditions, legal environment and manmade or natural catastrophes. For example, the risks posed by severe weather events such as floods, tornadoes or extreme temperatures during project execution and subsequent operation of the facilities associated with the project.

Economic, industry and market environment: This includes demographic trends, inflationary environment, business cycle, changes to the business structure, changes in the price of inputs and changes in interest rates or foreign exchange rates. For example, some project proponents purposely proceed with projects when the overall business cycle is in a trough. Although a project proponent must have the necessary financial resources, this will reduce the likelihood of cost overruns, for the equipment, material, and human resources required to execute the project can likely be procured at lower prices. Conversely, severe cost overruns can result when projects are executed at a peak in the business cycle.

Project size and complexity: Large projects tend to be more complex than smaller projects, with increased numbers of communication channels and increased levels of project governance. This tends to make large projects riskier than small projects.

Financial strength: It may be prudent for the project proponent to find a partner with whom to share financial risk. However, this will introduce new risks related to project governance, for there will now be two different entities involved in the project.

Technology: Projects using state-of-the-art technology require extensive demonstration scale testing to prove out the technology and develop the design criteria required to complete detailed design for a commercial facility.

Logistics: The transport of equipment, material, and people to and from the project site can be a major risk. During the planning of a transport must take into consideration the cargo dimensions imposed by the transport route. For example a construction site which is located near coast could take advantage of the cost savings resulting from pre-assembled parts. On the other hand, a construction site which is located inland will be restricted in terms of load size and load limits of the access road or rail line.

Communications: Communication becomes more complicated as project size increases and on remote project sites. Satellite communication or the installation of fiber optic cables may be required for the communication system to provide the bandwidth required by the project.

Financial Risk Management

Portfolio Performance Meausurements

References

1. ↑ https://acuityppm.com/ppm-101-why-you-need-project-portfolio-management/
2. ↑ https://www.pmi.org/pmbok-guide-standards/foundational/standard-for-portfolio-management/fourth-edition
3. ↑ https://www.investopedia.com/terms/p/portfoliomanagement.asp
4. ↑ https://www.slideshare.net/igorkokcharov/what-is-project-portfolio-management
5. ↑ https://www.pmi.org/learning/library/project-portfolio-management-limited-resources-6948
6. ↑ https://www.projectmanager.com/blog/risk-management-process-steps
7. ↑ Value creation through project risk management, Pelle Willumsen, Josef Oehmen, Verena Stingl, Joana Geraldi, May 2018
8. ↑ Enterprise Risk Management, Chapter 4, Mike Fontaine, 2016