Different Types Of Portfolio Management (With Advantages)

By Indeed Editorial Team

Published 20 October 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Companies often use a portfolio management model to successfully administer multiple projects simultaneously. Project managers who want to move into organisational leadership positions can pursue a high-level portfolio management role and take responsibility for overseeing an entire project portfolio. Understanding more about portfolio management and the different types can help you advance your career in the field. In this article, we discuss types of portfolio management and their benefits, explain the project portfolio process and review some frequently asked questions (FAQs) to help you better understand portfolio management.

Types Of Portfolio Management

The following are some of the types of portfolio management:

Active portfolio management

In this type, a portfolio manager uses a direct approach to make investment decisions that achieve maximum results. This style conducts a predictable quantitative analysis of a company to determine its actual stock value. Portfolio managers purchase undervalued stocks and begin selling them as their prices rise. These managers generally skip the market hypothesis and base their investment decisions on ratios. They also diversify investments across various sectors and industries to reduce investment risk.

Understanding the business cycle is crucial for making smart investment choices. Managers typically favour this approach for investors with a high risk tolerance, meaning they are willing to accept greater investment risk for higher returns.

Passive portfolio management

Inactivity characterises the passive portfolio management methodology. The primary goal is to provide investors with substantial profits while minimising risk. This portfolio manager adheres to an efficient market hypothesis. The strategy focuses on using fundamentals to comprehend the stock price of a company. Investors seeking to minimise risk tend to prefer passive strategies. This strategy has the potential to consistently generate long-term profits.

Related: What Is Portfolio Management? (With Benefits And Types)

Discretionary portfolio management

In discretionary portfolio management, the portfolio manager has the authority to make financial decisions according to the client's or investor's preferences. These managers make purchase and sale decisions on behalf of their clients and employ investment strategies that maximise returns. The manager may use the investor's objectives and risk tolerance to guide their selection of an appropriate investment strategy. Delegating decision-making authority to portfolio managers can help investors feel more confident.

Related: Programme Management Vs Project Management (Definitions)

Non-discretionary portfolio management

Financial advisors who are portfolio managers usually prefer the non-discretionary type of portfolio management. Their primary responsibility is advising investors on how to maximise profits. After receiving an investor's approval, the portfolio manager makes decisions on their behalf. It is up to the investor to accept or reject the manager's recommendation.

Advantages Of Portfolio Management

Below are some benefits of portfolio management:

Improves project selection

Portfolio management prioritises the analysis of projects and their projected usefulness. Organisations can decide which projects are worth pursuing with information such as the amount of time and resources a project requires and how well it aligns with the company's goals. Portfolio management helps ensure that the organisation performs proper analysis and considers essential criteria with quantitative and qualitative techniques.

Related: What Is Asset Management? (With Career Options)

Enhances communication

By organising multiple projects in a central location, organisations can improve their project-wide communication. This data-dashboard approach enables each portfolio manager to quickly assess the status of their projects and reduces the time spent defining objectives or seeking directions. It also encourages an open line of communication where everyone feels they are working towards the same strategic objectives.

Related: 12 Communication Benefits For The Workplace (Plus Tips)

Improves prioritisation

Organisations use portfolio management to compare the relative performance of their various projects according to certain metrics, such as revenues or new clients. With this information, they can determine which projects to prioritise and which require revision or no longer align with the organisation's objectives. Portfolio management helps companies invest more resources in projects that are performing well rather than those that are not.

Offers quick change implementation

With centralised management, it is simpler to implement changes from the top down across multiple projects. Organisations can have the portfolio management team develop and clarify these modifications and instruct project managers through implementing them. Establishing a clear organisational hierarchy can potentially increase the speed and efficiency of communication throughout an organisation.

Related: 19 Essential Project Management Skills To Master

Helps with simultaneous project management

Proper portfolio management can help organisations discover more effective ways to manage multiple projects simultaneously. For instance, separate projects with distinct objectives could share resources. The portfolio management model facilitates the identification of information, personnel, funds and equipment that teams can share.

Reduces investment risk

Investment risk is a crucial element in project and investment management across all industries. Portfolio management helps ensure that investment risk is always as low as possible and that the business works towards maximum project success. By managing all investments in a single location, managers can ensure that businesses invest equitably in various assets to maintain an optimal risk-reward balance. By spreading the risk, managers keep the probability of investment profit significantly high and minimise the drawbacks from any unsuccessful investments.

Project Portfolio Processes

Below are typical processes of project portfolio management:

1. Set a strategy

Identify the strategic goals of the organisation. This includes short- and long-term goals. This process includes identifying the projects that can help you achieve these strategic goals.

Related: Your Guide To The Strategic Management Process

2. Collect information

Since you can use data to drive every project-based decision, information is essential for effective portfolio management. Start by gathering information on any current projects, including budgets, timelines and current progress. Then list who oversees each. For every new project proposal, you may want to gather additional data. Calculate the costs and revenues, identify team members and compile a list of resources necessary for successful completion.

3. Conduct analysis

The purpose of portfolio management is to help you determine the performance of different projects. A key step is analysing each individual project and identifying its strengths and weaknesses. Some goals of the analysis include:

  • Determining whether a project is worth continuing

  • Finding whether you can merge two or more projects

  • Identifying the risk level of every project

  • Forecasting the return on investment (ROI) for each project

4. Align the project with the company's objective

Alignment ensures that each project supports the overall strategic objectives of the organisation. You may have a project with a positive ROI projection that does not align with the company's long-term objectives. During alignment, it is important to ensure that the resource allocations are correct or that the most crucial projects are utilising primary resources. Shifting employees from a lower priority to a higher-priority project demonstrates re-alignment.

5. Manage the project

Throughout the management process, the project portfolio manager decides whether to terminate a project, where to allocate resources and how to adjust project timelines. The objective of this phase is to create a healthy project portfolio that aligns with company goals. It is important for portfolio managers to ensure that teams successfully meet the requirements of each project.

Related: Asset Management Vs Investment Banking: Differences

6. Test the changes

Project portfolio management is a continuous process. It may be necessary to regularly test any changes and measure the results. You could find that the changes you implemented were ineffective and that it is essential to reconsider your options to ensure success. Continue to test, gather feedback and adapt throughout the lifecycle of each project to achieve the best possible results.

Related: Benefits Realisation Management: Definition And Stages

FAQs Related To Portfolio Management

The following are the answers to some portfolio management-related FAQs:

What is portfolio management?

Portfolio management is the process by which a company develops a model to supervise and manage different investments and projects in the company's internal structure. There is a centralised location from which to manage each project and investment. There, the company assesses every factor of each project, such as outgoing expenses, specific purposes and project durations. Unlike a project manager, who oversees a single asset, portfolio managers oversee and adapt every asset in the organisation.

The primary objective of portfolio management is to help ensure effective and efficient oversight of every project and investment to increase business revenue. It is possible to operate with significantly more profitable investments through proper alignment of each project with current business objectives and ideas. It is important for each project to exhibit a positive overview of the company. Portfolio management employs data analysis to maintain each project in a network of profitability and optimise company operation, growth and revenue.

What is the role of a portfolio manager?

Portfolio managers help guide the execution of an organisation's strategic vision. Using various factors in their analysis, including returns, resource investments and strategic aims, portfolio managers can decide whether the projects under their supervision are helping achieve company targets. A portfolio manager oversees the progress of a portfolio and makes decisions regarding its direction to maintain alignment with the company's goals. They might also set standards and procedures for the projects under their supervision.

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