Portfolio Representations – Book Review

The credit crunch provided the asset management community with a brutal reminder of the importance of having genuine knowledge of portfolio structures and the risks embedded within them. More so than ever, fund managers need a clear and consistent way of separating value from exposure in their portfolios, allowing a complete ?look-through? to the real risks contained in derivatives and pooled/structured products.

Simple portfolios no longer exist. And, as fund managers are driven to find risk-adjusted rather than just raw returns, it is imperative that the risk measures and the understanding derived from them are applied to the total portfolio, as opposed to just particular asset classes or sections. In Portfolio Representations, author Jem Tugwell, a specialist investment management consultant, provides practical and sophisticated insight into each asset type and how the different risks and exposures they involve should be combined and represented.

This book is not meant to be a detailed work on pricing mathematics; there are numerous good books out there already covering the detail of each pricing model for each asset type. Instead, pricing of each asset type is discussed only in general, using an example model to draw out the relevant risk factors. Uniquely, it looks at what the risk factors are for each asset type, how to calculate them and how to combine them in a portfolio view.

As portfolios cover global markets and multiple asset types, Portfolio Representations covers equity, fixed income, credit, inflation, and currency assets and their derivatives all in one book.

The writing style is straightforward, ensuring that the key points are fully understood.

The book is designed to be usable by a wide cross-section of readers. It should be of great use, for instance, to the heads of different business areas within an investment management organisation, who wish to assess the business implications of different portfolio representations. It should also be helpful for fund managers and their assistants interested in the practical and strategic impact of their decision-making; as well as business analysts and programmers.

Such fund managers, for instance, should be able to use the book to explain exactly what they want from programmers or business analysts, who will be able to use it to understand clearly what it is they are being briefed to create.

The first chapter of the book provides an introduction to the representation of assets in a portfolio. This is an essential starting point for readers new to the area, and covers the aspects of a portfolio that are common across all asset types and strategies.

The book is then split into parts by broad asset type. Part 2 covers equities and their derivatives. This is followed by Part 3 on money markets and derivatives. After this it looks at fixed income, credit and inflation assets and derivatives. Currency management, a hugely important topic, is dealt with in the subsequent section on covering currency trade types and derivatives. The next section is devoted to fund-of-fund structures. And the final section deals with Cross-Asset-Type Issues.

It is worth highlighting that it is assumed that the reader is familiar with the basic terms and constructs used in the portfolio management industry, i.e. what a portfolio is, that a portfolio is made up of holdings in different assets/securities, that assets have prices and that assets in different currencies need to be converted to a single currency to calculate a total portfolio value.

Overall, Portfolio Representations is a carefully constructed, thorough and extremely readable guide to the sometimes complicated areas of asset management. Its easy-to-read style allows beginners to use the book as a learning guide, while the depth and detail of the coverage will enable practitioners to use it as a reference text.