In the world of portfolio management, it is essential to periodically measure the aggregated portfolio performance results against predefined business goals and objectives to illustrate progress towards achieving these goals. This concept is not only integral to the Portfolio Management Professional (PfMP) exam but in the real-world application of portfolio management strategies as well.
Understanding the portfolio’s strategic goals and objectives
To effectively measure this, one needs to start with a clear understanding of the portfolio’s strategic goals and objectives. These should be defined at the onset and act as a guide for the selection and prioritization of projects and programs within your portfolio.
Taking a Telecom company example aiming to grow revenues by 10% over the next financial year, the strategic objective could be to increase market share in existing markets and develop new markets to help drive this growth.
Projects to achieve strategic objectives
To achieve this strategic objective, the portfolio can include a mix of projects:
- Project A: Develop a new product targeting a younger demographic in existing markets.
- Project B: Expand network coverage to reach untapped regions.
The portfolio performance has to be suitably measured and aligned to these strategic objectives. Aggregated portfolio performance measurement can be a multi-faceted approach, but the following methods are commonly used:
Performance measurement methods
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Financial Measurements: This could include Return on Investment (ROI), Net Present Value (NPV), or Payback Period.
For instance, for project A and project B, your ROI could be calculated as follows:
Project Investment Profit (end of year) ROI A $1M $500K 50% B $2M $800K 40% -
Non-Financial Measurements: These can include customer satisfaction scores, market share percentage, or employee turnover rate.
For instance, the new product developed in Project A might result in a higher customer satisfaction score, contributing indirectly towards increased financial returns in the long run.
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Strategic Alignment: How well the projects align with strategic objectives. This could be assessed qualitatively or using a scoring model.
For instance, project A and B could be scored based on their alignment to the strategic objective in existing and new markets.
Project Strategic Objective Alignment Score A Market penetration 8/10 B Market development 9/10
Assessing strategic goals with measurements
After these measurements are done, the aggregated portfolio performance can be assessed vis-Ã -vis the strategic goal (10% revenue increase). If the projections show the achievement of this goal, the portfolio performance can be deemed as good. If not, a reassessment of the portfolio is necessary.
The importance of robust measurement system
Remember, a robust measurement system is crucial to illustrate progress, communicate value, satisfy stakeholders, and improve portfolio decisions and management. By aligning your portfolio to your clear strategic goals, and measuring performance accordingly, you not only ensure that you’re on track to achieving those goals, but you also make your portfolio more efficient, effective, and value-oriented. All of these are key concepts in the PfMP exam and critical skills for any portfolio management professional.
Practice Test
True or False: The primary use of aggregated portfolio performance results is to demonstrate progress towards the achievement of business or strategic goals.
Answer: True
Explanation: Aggregating portfolio performance results does not only help with current goal progress tracking but it also provides a meaningful context for future projections and strategic planning.
In Portfolio Management, what is the purpose of measuring the aggregated portfolio performance results?
- A. To determine the investment risk level
- B. To check the progress of business or strategic objectives
- C. To calculate the individual investor’s returns
- D. To analyze the company’s market share
Answer: B. To check the progress of business or strategic objectives
Explanation: The measurement of aggregated portfolio performance results is to indicate if the portfolio is on track to achieve the defined business or strategic goals.
True or False: When measuring the aggregated portfolio performance results, financial outcomes should be given priority while disregarding non-financial measurements.
Answer: False
Explanation: Both financial and non-financial metrics should be taken into account when measuring aggregated portfolio performance results for a holistic view of value creation.
Which among these is not a parameter to measure the aggregated portfolio performance results?
- A. Total portfolio value
- B. Number of projects undertaken
- C. Business or strategic goals achieved
- D. Number of employees in a company
Answer: D. Number of employees in a company
Explanation: The number of employees in a company is not a direct parameter to measure the aggregated portfolio performance results.
Why are defined business or strategic goals important in relation to measuring portfolio performance results?
- A. They provide a benchmark
- B. They indicate the company size
- C. They give competition insights
- D. They show the market trends.
Answer: A. They provide a benchmark
Explanation: Defined business or strategic goals serve as the benchmark or target against which the performance of the portfolio is measured.
True or False: Measuring portfolio performance cannot support strategic decision making.
Answer: False
Explanation: The measurement of portfolio performance helps in making informed strategic decisions by showing whether current activities and projects are in line with business goals.
What is one potential outcome if a portfolio is not measured against defined business or strategic goals?
- A. Increase in project success
- B. Misalignment of portfolio with organizational goals
- C. Enhanced portfolio efficiency
- D. Better risk management.
Answer: B. Misalignment of portfolio with organizational goals
Explanation: Without regular performance measurement against goals, portfolios may drift and become misaligned with organizational goals.
In the context of portfolio management, what does ‘aggregation’ refer to?
- A. Compilation of all project data
- B. Collection of company information
- C. Combination of all portfolio performance metrics
- D. Gathering of individual stakeholder feedback
Answer: C. Combination of all portfolio performance metrics
Explanation: Aggregation refers to the combination of all performance metrics, financial and non-financial, to provide an overall view of portfolio performance.
True or False: There is no need to periodically reassess and readjust the defined business or strategic goals while measuring the portfolio performance.
Answer: False
Explanation: Goals may need to be adjusted as business needs and market conditions change, hence, the importance of periodic reassessment.
Portfolio performance metrics should align with:
- A. Portfolio Risk
- B. Market Volatility
- C. Defined business or strategic goals
- D. Financial Market
Answer: C. Defined business or strategic goals
Explanation: Aligned performance metrics with strategic goals will provide accurate indications of progress towards those goals.
Interview Questions
What is the primary aim of measuring aggregated portfolio performance against business or strategic goals and objectives?
The primary aim is to illustrate how much progress is being made towards achieving the set business or strategic goals and to make adjustments where necessary to improve output and outcomes.
What statistical measure can be used to quantify the degree to which the portfolio performance meets the defined strategic goals and objectives?
The Sharpe Ratio is often used to measure the degree to which the performance of a portfolio meets the defined strategic goals and objectives, by comparing portfolio returns with risk.
What are some common tools used for measuring aggregated portfolio performance?
Tools commonly used for this purpose include financial analysis tools like return on investment (ROI), net present value (NPV), Alf, Sharpe Ratio and Treynor Ratio among others.
Why is it important to analyze the portfolio performance against the strategic objectives regularly?
Regular analysis allows for the identification of any performance issues early enough for corrections to be made. It also provides an opportunity to reassess and realign the portfolio with changing strategic objectives.
Is the benchmarking process relevant in portfolio performance measurement?
Yes, benchmarking often serves as a reference point against which portfolio performance is measured. It facilitates the identification of gaps in performance and highlights opportunities for improvement.
What defines a successful portfolio performance measurement metric?
A successful portfolio performance measurement metric is able to clearly and accurately showcase the progress towards achieving business and strategic goals and aids in decision making for resource allocation and strategic adjustments.
What is the role of a Portfolio Manager in measuring aggregated portfolio performance against business goals?
The Portfolio Manager leads the effort to define the metrics and conducts the performance measurement against set business and strategic goals. They are also responsible for making recommendations based on the results of these measurements.
Why is it important to measure both quantitative and qualitative aspects of portfolio performance?
Quantitative measures give numerical data on portfolio performance, while qualitative measures provide insights into more subjective aspects such as risk level, strategic alignment and stakeholders’ perception. Both are critical in making a holistic assessment of portfolio performance.
How can one handle variances in portfolio performance against set objectives?
Once variances are identified, a root cause analysis should be conducted to understand the reasons behind the variance. Following this, corrective actions should be triggered to realign the portfolio performance with the objectives.
Is it advisable to have specific thresholds for portfolio performance?
Yes, having specific thresholds for portfolio performance acts as a guide and helps to trigger corrective actions once the performance drops below the acceptable level. It also helps to keep performance consistently aligned with business goals.
What is the purpose of a balanced scorecard in measuring portfolio performance?
A balanced scorecard is a performance measurement tool that looks at different perspectives of performance including financial, customer, internal processes, and learning and growth. It helps to ensure a balanced view of portfolio performance against strategic goals.
What happens once the performance measurement is completed?
Once the performance measurement is completed, the findings are communicated to relevant stakeholders, decisions are made on necessary adjustments, and actions are carried out to optimize portfolio performance.
What is the role of key performance indicators (KPIs) in portfolio management?
KPIs provide specific and measurable metrics that are used in performance measurement. They help in tracking the progress of portfolio performance against business and strategic goals.
How do financial ratios help in portfolio performance measurement?
Financial ratios such as ROI, NPV and IRR, provide numerical evidence of portfolio performance, enabling easy comparison against business goals and other investments. These ratios help to assess the effectiveness and profitability of portfolio assets.
What is strategic portfolio management?
Strategic Portfolio Management is the proactive management of investments to achieve specific business objectives. It involves aligning portfolios with strategic goals and making investment decisions to optimize resource allocation and achieve better returns.
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