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.