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The Management Of Investment Portfolios: Characteristics Of It

One of the leading investment services is the portfolio management service, intended as an individual management service of investment portfolios on behalf of third parties, not to be confused with the collective asset management service, i.e. the management of mutual funds. In this initial segment, we will concentrate on the attributes of the board, while in the second, we will see the arrangement of the help. The singular administration of venture portfolios for the benefit of outsiders is that help is presented by approved parties, which is accomplished by dealing with the client’s mobile resources through an interest in monetary instruments.

The fundamental difference between individual and collective asset management is that the former is not managed upstream but is managed separately and in the interest of the individual customer and has the personalization and quality of the service as its key points. Two forms of asset management can be distinguished: Asset Management (Gpm), in which the client’s assets are mainly invested in financial instruments such as shares, bonds and derivatives, and Asset Management in Funds (Gpf), in which it is invested in units of mutual funds and Sicavs.

The relationship established between client and intermediary is substantially a fiduciary mandate, in which the client delivers money to the intermediary for the construction of an investment portfolio, according to specific risk-return directives given by the client, which the intermediary can, however, follow with a certain degree of discretion. For these reasons, in providing the service, the intermediaries must carefully comply with specific rules and regulations which, taking into account the specific nature of the service, are intended to safeguard the investor. The basic principles are established by article 24 of the Consolidated Law on Finance, which are added to those envisaged by article 30 for investment services in general.

At the same time, with regulation 11522 of 1998, regulated the individual aspects of the matter. Below, particular attention will be paid to the provisions relating to the discipline of the contract, immediately pointing out that the agreements contrary to these provisions are null and void, and the customer can only assert the nullity. The contract, which must be drawn up in writing, must, first of all, indicate the characteristics of the management, meaning by this expression the categories of financial instruments in which the assets managed can be invested.

And any limits, the type of operations that the intermediary can carry out on the aforementioned financial instruments, the maximum extent of the financial leverage that the intermediary, if authorized, can use about the characteristics of the chosen management, indicating the maximum limit of losses upon reaching which the intermediary is required to report the financial leverage to a value equal to one, and the objective reference parameter against which to compare the management performance.

By categories of financial instruments, we mean debt securities, securities representing risk capital or convertible into risk capital, quotas or shares in collective investment undertakings, derivative financial instruments and structured securities. Within each category, the financial instruments differ according to the currency of denomination, the trading on regulated markets, the geographical areas of reference, the categories of issuers (sovereign issuers, supranational entities, corporate issuers) and the industrial sectors. 

Furthermore, they differ according to some parameters specific to the individual categories: the average financial duration (duration) and the creditworthiness of the issuer (rating) for debt securities; the degree of capitalization of the issuer for risk capital securities; compliance with the provisions dictated by community legislation and volatility for units or shares issued by collective investment undertakings; the financial result at maturity (pay-off) for derivative financial instruments not used for hedging purposes and structured securities. Transactions permitted on financial instruments are spot trading, forward trading, short selling, options trading, securities lending and swap transactions and repurchase agreements.

Having clarified these concepts, let’s focus on financial leverage and objective benchmarks. Financial leverage means the ratio between the market value of the net positions in financial instruments and the value of the assets entrusted to management calculated according to specific criteria. If the financial leverage exceeds one, the intermediary can contract obligations on behalf of the investor, which commits him beyond the managed assets. The objective parameters of reference are financial indicators drawn up by third parties and commonly used, which the intermediary must indicate to the investor, consistent with the risks associated with the type of management and with which to commensurate the results of the management itself.

Continuing now to talk about the content aspects, in addition to the aspects relating to the management characteristics just seen, the contract must also: Expressly identify the operations that the intermediary cannot carry out without the prior authorization of the investor (where there are no restrictions, this circumstance must be expressly indicated). Indicate whether the derivative financial instruments can be used for purposes other than hedging the risks associated with the positions held under management.

Indicate whether the intermediary is authorized to delegate the execution of the mandate received to third parties, specifying if the delegation does not concern the entire portfolio, the financial instruments, sectors or investment markets concerning which the authorization is issued and, in any case, any limits and conditions of the authorization. Specify that the investor may withdraw from the contract at any time or order, in whole or part, the transfer or withdrawal of their assets without incurring any penalty.

Once the aspects relating to the contract have been completed, those relating to the management service, in general, are resumed. In addition to the written form of the contract, the investment service provides for the possibility for the customer to issue binding instructions regarding the operations to be performed, the prohibition for the investment company, the asset management company or the bank, unless specifically written instruction, to contract obligations on behalf of the client which commits him beyond the assets managed and the possibility of granting representation to the intermediary, for the exercise of voting rights inherent in the financial instruments under management, with the power of attorney to be issued in writing and for each meeting in compliance with the established limits and procedures.

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