Portfolio Manager Behavioural Analysis Illustration

How can we infer investment decisions from historical transactions?

Let's take a simple equity portfolio as an example. A portfolio manager has the objective of outperforming a defined market index and they are holding 50 stocks.

We will need to start by having an extract of past transactions or holdings. From this, we should be able to start inferring simple decisions.

What are the four main types of decision?

• Buy
• Scale up
• Scale down
• Sell

What are some important considerations when assessing decisions?

• Transactions in the same stock can be spread over multiple days to adjust to the liquidity of the stocks traded
• Some transactions are made to marginally adjust the portfolio when there is an inflow or outflow
• Some decisions are part of program trades to adjust all the holdings of the portfolio without affecting its compositions
• Some transactions are higher weighting than others and should reflect a different level of conviction on the decisions made
• Some instruments are traded together
• Some others are traded not for any investment view

To infer decisions from transactions, what can we look at?

1. The amounts held in the portfolios
2. The estimate for the weight in the portfolio for each day
3. Any significant change to the weight above a specific threshold and over multiple days

What are Equity portfolio strategies?

For Equity Portfolios, these strategies can include: Selecting a stock, Overweighting a segment (a sector or a country), going Long on a stock and short on another or Timing a Market exposure.

What are Fixed income portfolio strategies?

For Fixed income Portfolios, Strategies are linked to interest rates, Credit or bond selection on  Investment grade or High yield bonds, Currency exposure or Relative exposure of one curve versus another.

What are Multi Asset Portfolio strategies?

For Multi Asset portfolios,  we can look at Asset allocation across asset classes, regions or factors, Manager or fund selection or Overly strategies.

As long as we can articulate the portfolio into strategies reflecting investment decisions, it becomes possible to explore the behaviours of the portfolio managers and to assess if the decision-making process is delivering the desired performance outcome.