Investment Management Certificate (IMC) Portfolio Management, Construction and Performance Syllabus

Portfolio Management, Construction and Performance syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Portfolio Management, Construction and Performance in Investment Management Certificate (IMC), not a summary of it.

1. 1

   The Investment Process

   3 topics

   • Understanding the client
     • Risk tolerance and risk capacity
     • Return objectives and constraints
   • The investment policy statement
     • Liquidity, time horizon and tax constraints
     • Legal and unique circumstances
   • Institutional versus private clients
     • Pension fund liabilities and ALM
     • Charity and insurance mandates
2. 2

   Asset Allocation

   3 topics

   • Strategic asset allocation
     • Setting the long-term policy mix
     • Capital market expectations
   • Tactical and dynamic allocation
     • Active deviation from benchmark
     • Rebalancing policies
   • Liability-driven investing
     • Matching assets to liabilities
     • Immunisation
3. 3

   Portfolio Construction Styles

   4 topics

   • Active versus passive management
     • Index tracking and replication methods
     • Sources of active return and tracking error
   • Equity investment styles
     • Value, growth and quality
     • Top-down versus bottom-up
   • Fixed income strategies
     • Duration positioning and yield-curve strategies
     • Credit and sector rotation
   • Smart beta and factor investing
     • Rules-based factor exposures
     • Combining factors
4. 4

   Performance Measurement and Attribution

   4 topics

   • Return measurement
     • Time-weighted versus money-weighted return
     • Benchmark selection
   • Risk-adjusted performance
     • Sharpe and Treynor ratios
     • Information ratio and Jensen's alpha
   • Performance attribution
     • Allocation versus selection effects
     • Brinson attribution model
   • Reporting standards
     • GIPS principles
     • Fair representation and disclosure
5. 5

   ESG and Responsible Investment

   3 topics

   • ESG integration
     • Environmental, social and governance factors
     • Materiality and data challenges
   • Responsible investment approaches
     • Screening, tilting and engagement
     • Stewardship and voting
   • Regulation and standards
     • UK Stewardship Code and SDR
     • Greenwashing and disclosure requirements

Portfolio Management, Construction and Performance flashcards for Investment Management Certificate (IMC)

20 of 51 cards from the Portfolio Management, Construction and Performance deck — real questions with worked answers.

1. What is the primary purpose of "understanding the client" in the portfolio management process?

   To gather information on the client's objectives, risk tolerance, time horizon, liquidity needs, tax status, and legal/regulatory constraints, so the portfolio can be tailored to their specific circumstances and an appropriate Investment Policy Statement can be drafted.

2. What are the two broad categories of investment objectives that must be established when understanding a client?

   Return objectives (the required or desired rate of return, e.g. capital growth or income) and risk objectives (the client's ability and willingness to bear risk).

3. Distinguish between a client's ability and willingness to take risk.

   Ability to take risk is an objective measure based on factors like time horizon, wealth, income stability and liquidity needs. Willingness is a subjective, psychological attitude toward risk. Where they conflict, the lower of the two generally governs, with client education to reconcile differences.

4. What does the acronym for portfolio constraints "RRTTLLU"-style framework typically cover?

   Liquidity, Time horizon, Tax considerations, Legal and regulatory factors, and Unique circumstances — the standard set of constraints (alongside Return and Risk objectives) captured in an IPS.

5. What is an Investment Policy Statement (IPS)?

   A formal written document, agreed between the investment manager and client, that sets out the client's objectives, constraints, governance, asset allocation policy and the framework for managing and reviewing the portfolio.

6. List the key sections typically found in an Investment Policy Statement.

   Client description and purpose; duties and responsibilities/governance; investment objectives (return and risk); constraints (liquidity, time horizon, tax, legal/regulatory, unique); strategic asset allocation/benchmark; and procedures for monitoring, rebalancing and review.

7. Why is an IPS considered a dynamic document?

   Because it must be reviewed and updated periodically to reflect changes in the client's circumstances, objectives, market conditions or regulation, ensuring the portfolio strategy remains appropriate over time.

8. What is the main benefit of having a written IPS for both client and manager?

   It creates a clear, agreed framework that promotes discipline, sets expectations, provides a benchmark for evaluating performance, reduces ad hoc decisions driven by emotion, and serves as a reference in disputes.

9. Give three key ways institutional clients typically differ from private (retail) clients.

   Institutions usually have larger asset pools, longer or defined time horizons, defined liabilities, greater investment expertise/governance, lower tax sensitivity (often tax-exempt) and are subject to specific regulation; private clients are smaller, more tax-sensitive, behaviourally driven and have more varied personal circumstances.

10. Why is taxation generally a more significant constraint for private clients than for many institutional clients?

    Many institutions (e.g. pension funds, charities) are tax-exempt or tax-advantaged, whereas private investors are typically subject to income tax, capital gains tax and other personal taxes, making after-tax returns and tax efficiency central to their planning.

11. Define strategic asset allocation (SAA).

    The long-term policy allocation of a portfolio across the major asset classes (e.g. equities, bonds, property, cash, alternatives), set to meet the client's objectives and risk tolerance, and forming the benchmark around which the portfolio is managed.

12. What does empirical research (e.g. Brinson et al.) suggest about the importance of asset allocation?

    That the strategic asset allocation policy decision explains the large majority of the variation in a portfolio's returns over time, far more than security selection or market timing.

13. Define tactical asset allocation (TAA).

    Short-to-medium-term, deliberate deviations from the strategic asset allocation made to exploit perceived market mispricings or to take advantage of expected relative performance between asset classes.

14. How does dynamic asset allocation differ from tactical asset allocation?

    Dynamic asset allocation systematically adjusts the asset mix over time in response to changing market conditions or to control risk (e.g. shifting out of equities as their value falls), whereas tactical allocation is driven by short-term market views aiming to add return.

15. What is rebalancing, and why is it carried out?

    Rebalancing is realigning portfolio weights back toward the strategic allocation after market movements cause drift. It is done to maintain the intended risk profile and to enforce a disciplined buy-low/sell-high process.

16. Define liability-driven investing (LDI).

    An investment approach, common for defined benefit pension schemes, in which the portfolio is structured primarily to match or hedge the characteristics (size, timing and interest-rate/inflation sensitivity) of the scheme's liabilities rather than to maximise return against a market benchmark.

17. In an LDI framework, what are the two notional components a pension portfolio is often split into?

    A liability-matching (hedging) portfolio, typically bonds/swaps designed to track liability movements, and a return-seeking (growth) portfolio of higher-return assets such as equities to help close any funding gap.

18. Why is duration matching important in liability-driven investing?

    Because matching the duration of assets to the duration of liabilities reduces the surplus's sensitivity to interest-rate changes, so that when rates move, asset and liability values change by similar amounts, hedging interest-rate risk.

19. Distinguish active management from passive management.

    Active management seeks to outperform a benchmark through security selection, asset allocation or timing, accepting higher costs and tracking error. Passive management aims to replicate a benchmark index's return at low cost, accepting market (not excess) returns.

20. What is tracking error, and how does it relate to active and passive strategies?

    Tracking error is the standard deviation of the difference between portfolio and benchmark returns. Passive funds aim for very low tracking error (close index replication), while active funds deliberately accept higher tracking error to pursue outperformance.

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