The 5 Key Steps for Successful Portfolio Monitoring and Management

Portfolio Monitoring

Venture capital (VC) funds invested more than USD156bn in US start-ups in 2020. With a typical VC fund managing more than USD200m for its investors, portfolio monitoring and management becomes vital.

Here are five key steps for successful portfolio monitoring and management:

Planning and determining objectives

Entities managing portfolios would firstly want to determine their goals for investing. A VC fund that is planning to invest in a start-up may want to make exponential returns for its investors within a few years by enabling the start-up to scale. A private equity (PE) fund planning to invest in a company might be anticipating an exit whenever the latter opts for an initial public offering.

By defining clear objectives, entities such as PE or VC funds would be able to make suitable investment decisions across companies and set appropriate expectations among their investors. This also helps them establish the key performance indicators (KPIs) and reporting requirements as per investment objectives.

Analysing Companies

It is imperative to continuously analyse companies that are a part of the investment portfolio or are being tracked. A PE or VC fund would analyse companies on the basis of multiple KPIs, which include quality of management, financial statements and market potential, among others. While analysing companies, it is also important to engage with multiple stakeholders to acquire deeper perspectives.

Ensure Suitable Asset Allocation

Asset allocation involves allocating your investments across multiple avenues. For instance, a portfolio manager may discover that their portfolio has become skewed towards a particular sector or industry. Sometimes, portfolios might be skewed towards high-risk companies. There may also be times when certain companies in the portfolio have outperformed and now occupy a substantial part of the portfolio’s holdings. In either of these cases, the portfolio’s performance would be significantly impacted by a clutch of companies.

Hence, portfolio managers must aspire to achieve suitable asset allocation for their portfolio.

Risk Management

Risk management is arguably the biggest secret of a successful portfolio. Portfolios may suffer if the values of certain positions start falling. Therefore, it is crucial to be aware of threats that a particular holding might be facing. Risk management enables a portfolio manager to reduce the downside of the portfolio. Portfolio managers must monitor their holdings for potential red flags and ruthlessly take decisions to cut down their losses.

Measuring And Rebalancing

Measuring performance delivered by a portfolio would enable a portfolio manager to determine the success of the investment strategy. If a company in the portfolio is not performing as per expectations, then it might be time to either reduce the position or make a complete exit. Alternatively, if companies that are not a part of the portfolio have been performing consistently well over time, then it might make sense to take positions in them. Portfolio managers could also reduce or increase positions in existing holdings and rebalance their portfolios.

Portfolio managers could use portfolio monitoring tools to manage and monitor their portfolios effectively. A comprehensive portfolio monitoring tool would enable portfolio managers to liaise with multiple stakeholders, create customized dashboards, use analytics, monitor KPIs, calculate IRR and automate data extraction from annual reports.