Client Considerations for Equity Portfolios

Wealth managers and financial advisers often consider the following investment objectives and constraints when deciding to include equities in a client’s portfolio:

  • Risk objective addresses:
    • how risk is measured
    • the investor’s willingness to take risk
    • the investor’s ability to take risk;
    • the investor’s specific risk objectives.
  • Return objective addresses how:
    • returns are measured
    • stated return objectives.
  • Liquidity requirement is a constraint in which cash is needed for anticipated or unanticipated events.
  • Time horizon is the time period associated with an investment objective.
  • Tax concerns include tax policies that can affect investor returns
  • Legal and regulatory factors are external factors imposed by governmental, regulatory, or oversight authorities.
  • Unique circumstances may include ESG issues or religious preferences.

Portfolio managers can address these constraints using the following:

  • Negative screening (i.e., exclusionary screening), which excludes companies or sectors that do not meet client standards.
  • Positive screening (i.e., best-in-class screening), which seeks to uncover companies or sectors that rank most favorably with clients.
  • Thematic investing, which screens equities based on a specific theme, such as climate change. A related approach is impact investing, which aims to meet investor objectives by becoming more actively engaged with company matters and/or directly investing in company projects.

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