CQF alumnus, Michael Althof, is a Portfolio Manager and Head of Royalton Partners ETF Capital Markets Team. He currently oversees ETF trading activities across the dealer community and end clients, but has almost 20 years of investment experience. He previously led the ETF Capital Markets Team in EMEA for PIMCO Europe and was Fund Manager for PIMCO Real Return inflation-protected portfolios. Earlier this year, Michael gave a CQF Institute talk on ‘A Day in the Life of a Portfolio Manager’ – here is what he had to say about this exciting career.
The Basic Principles of Portfolio Management
Starting with the basic principles of portfolio management, Michael commented on the mindset that goes into a Portfolio Manager’s everyday decision-making. “You have your perceptions. You have your models. You have a view on the probability distributions. Sometimes these do not work so well and then you will have to adjust,” he observed. “We do not know the perfect distribution and we are just trying to approximate.”
In addition, quants need to understand that they are dealing with a global investment network, where everything is interlinked and in constant flux. “In fact,” Michael notes, “you could say it's a stochastic network; it's never stable and a typical day for a portfolio manager never ends because no matter where you are, the trading will continue overnight. Somebody is always making an investment decision somewhere and this may have an impact on your positions.”
These decisions, large or small, can affect any type of investment, whether it is a fund passively tracking an index, an active investment strategy trying to outperform the benchmark, or an absolute return mandate, hedge fund style. In every case, the investments can be influenced by decision-makers across the globe. “This does not mean that you should be afraid,” Michael emphasizes. “It just means that you have to be strong and confident in your opinions and in how you want to express your trades.”
As a quant, you have to be able to change your mind as well. As an example, a quant trader or portfolio manager might read a newspaper in the morning and see that something significant happened in Asia, meaning the assumptions that went into a current model may have become invalid. Now they will have to revise their previous thinking and integrate the new information. “This adaptability will dominate the kind of portfolio skills you need, and can also inform other skills you will want to have in your life,” he adds.
A typical day for a portfolio manager never ends because no matter where you are, the trading will continue overnight. Somebody is always making an investment decision somewhere and this may have an impact on your positions.
The Skills Required to be a Portfolio Manager
“Let's say you have an active mandate,” Michael states. “You want to benchmark your long positions. The first thing in the morning you will skim through the news flow. What happened overnight? Who traded what? Is there anything that challenges the view you had yesterday, either qualitatively or quantitatively?” The systems in place are naturally part of this analysis.
“You will check your portfolio management system where you can see your positions, benchmarks, and any deviations – some that you may want and others that you don't – and then you may have to clean some out,” he explains. “You could have some option positions, for example, and the delta has moved for some reason. If the position that you wanted has moved away, you will need to adjust.” Having a deep memory and understanding of the entire portfolio is key here. “You have to know by heart what you are holding and why for each and every position,” Michael advises. “Ask yourself: “What was my thinking? What was the portfolio management group’s thinking back then? Is it still true? Do I need to challenge it? And lastly you want to understand if those positions have a similar story. Is the trade that you are implementing the best way to express it?”
On the technical side, there are a number of approaches and measures to help discern the risks and opportunities. “You have a forecast and from there, you will try to back out the prices that are already embedded in the options markets, in credit markets, in yield spreads, and so forth. Once you've finalized this, then you can start implementing and comparing trades,” Michael states. “The good thing nowadays is that we have a vast amount of data, which gives you a much better comprehension of where things are going, at least for the short term.”
According to the poll conducted by the CQF Institute, 68% of the respondents strongly agreed that the portfolio manager of the future will require more technical skills than they do today; an additional 15% generally agreed with the statement.
This leads back to the quant skill set. “We can combine financial modeling and pricing, with deriving forward prices, deriving implied distributions on options markets, or credit markets and then we can get into now-casting and forecasting.” One of the essential ingredients in investing lies in developing a clear view on where the economy is going. “You have to go for the best risk-reward trade,” says Michael. “This is the essence of portfolio management and really drills down into any asset class. Think about how you can structure a portfolio that allows for liquidity.”
Every trade must take the market realities into consideration. Take the formation of a portfolio of cryptocurrencies, for example. “There will always be something on the legal side,” he comments. “Can I invest in them? Are they seen as cryptocurrencies, or are they seen as financial securities? Can I warehouse these coins? Where should they be held? Who holds the keys? Is this process accepted by the regulator? The intricacies of this portfolio management task entail not only thinking about the world and deriving underlying prices from the markets, but they may also involve fairly technical projects”.
Applying for Jobs in Portfolio Management
Turning to the job market, Michael offered advice for those looking at roles in quant finance. “The first page of your CV should tell me very directly about your understanding of quant techniques and strategies. Show that you know how they should be derived and demonstrate knowledge of the weaknesses of those models”.
Also, the preferred style for resumes has changed over the years. “When I started working, CVs were very technical and dry,” he recalled. “Nowadays, they are much more about storytelling. Where am I? What skill sets have I acquired and what am I working on now? What is the direction I want to go and why do I fit in with your company? If you formulate and tell that story to yourself several times, you'll be far ahead of the pack.”
Michael also commented on the value of practical skills. “There are some positions that will specify you need a PhD and that really depends on the shop you're looking at, but this goes back to the story you want to tell; it's a lot more about your experience, your interests, and your skill set. I prefer somebody who knows how to program and understands the modeling. They don't need to have a PhD. If you can prove your skill set, that will often be much more important.”
What Does a Typical Day in the Life of a Portfolio Manager Look Like?
Portfolio Managers start early as overnight, risk reports will have run and positions need to be checked. Was what has been traded into the close correctly estimated? Where are my Greeks? Have manually priced securities correctly been integrated? There are two viewpoints, granularly by security level and its individual risk measures, and as a composition of a portfolio, including the interdependencies across the portfolio. Since values change with market moves, they need to be constantly watched, adjusted, and checked.
In addition, a portfolio manager is optimizing positions within a certain set of guidelines. The compliance team will send automated reports with an indication of risk measures to be adjusted, with urgencies and flexibilities over time.
Secondly, a brief look at overnight news-flow, macro economic, and market data. Are there significant changes? Do my positions reflect the themes, or are the themes already priced in? Request for portfolio position changes are sent to the trade support units for calculation and pre-trade compliance verification.
If the portfolio’s units trade in the market, as an exchange traded fund (ETF), then a portfolio composition file is sent to the dealing community. The dealing community needs to understand the underlying portfolio characteristics in order to hedge daily flows in the shares.
Off to the office!
8:00 AM - 9:00 AM:
I arrive at the office, prior to market open. This is somewhat different in the blockchain asset world, since there is 24/7 trading, but for more traditional portfolios, the underlying securities start trading around when shares in the fund start trading, if it is an ETF. There is a cascade of early morning market activity. Overnight news are priced into the most liquid instruments first, for example government bonds, before being priced into securities priced off those core instruments, such as inflation linked bonds. Only the most urgent trades will be traded prior to market settling.
9:00 AM - 12:00 PM:
Most of the adjustment trades have been done and a renewed PCF is sent to the ETF dealing community.
Insights from markets and policy makers are discussed in morning briefings. The analysis is always two-fold. Need viewpoints a challenging discussion? Or are currently held viewpoints already reflected in markets?
Resulting adjustment trades are discussed and calculated for required portfolios. There is nothing constant in portfolio management. The only constant is the ongoing discussion and reevaluation of active portfolio positions. This counts all the more for absolute return mandates with leveraged positions, but even passive portfolios tracking a benchmark need adjustments from time to time. Optimization of trade flow will be discussed with the team trading the securities. In fact, the trade team will report back on market positioning, upcoming auctions and IPOs, end investor purchase needs and so on. Depending on markets, there is not always abundant liquidity and portfolio positioning across portfolios representing a theme needs consideration.
12:00 PM - 13:00 PM:
In case there have been significant portfolio changes, the dealer community in ETFs is informed by a refreshed PCF. The portfolio manager’s task is to also verify the correct screen pricing of shares in the fund in secondary markets and alert the market makers on deviations. Depending on market conditions, it’s either lunch at desk, or a lunch outside the trade floor.
13:00 PM - 14:00 PM:
This is usually the time when the US markets wake up prior to market openings and prior to the US based macro-economic numbers. Coordination of positioning into the macro data prints will be discussed, considering market liquidity and pricing levels. On the follow, market action is analyzed and again the loop of market pricing levels and portfolio composition is discussed.
15:00 PM - 16:00 PM:
This is the time for daily, weekly or other portfolio committee meetings. New themes discussed, viewpoints challenged as a group, biases checked and challenged. Resulting new portfolio compositions are taken back to the teams for adjustment trades to be enacted over a given time period and with given market price limits.
16:00 PM - 17:00 PM:
We are nearing the cutoff for the daily net asset value per unit or share calculation. This is the primary market activity in a fund including ETFs. In the case of the latter, authorized participants will come in with orders to create or redeem shares, versus in-specie (basket of securities), or cash. The pricing of the basket versus the number of shares is estimated into market close and the final prices set at the security valuation going into the NAV calculation. All of this needs close monitoring and active participation of the portfolio manager.
17:00 PM - 18:00 PM:
Pricing is behind us and follow-on adjustments are enacted as long as market liquidity can be found. Tickets traded during the day are checked if passed through post-trade compliance, settlement issues are solved, and market conformity checks are done.
18:00 PM - later the evening:
Finally time for reading, preparing presentations to teams, clients, newspapers and blog-posts. The trade floor is calm now, and there’s space for deep thinking. If you are in the CQF program, now is the time to open the books, follow the presentations and do your homework.
Find out more about careers in Portfolio Management
If you are interested in becoming a Portfolio Manager, explore The CQF Careers Guide to Quantitative Finance to find out more about the skills and average salary for Portfolio Management roles in America, Asia, and Europe.