What is Portfolio Management Software (PMS)?

Portfolio Management Software (PMS) is one of the most used terms in the financial buy-side industry. This term is applicable to both:

• Individual investors who manage their own wealth
• Institutions that manage hundreds of billions of dollars

Obviously, the same system isn’t used in both cases.

The term Portfolio Management Software is also used by different types of buy-side institutions to mean different concepts.  As a rule of thumb, for an asset manager, a PMS typically denotes a Front Office system used for portfolio modelling.  On the other hand, for a hedge fund, a Portfolio Management System usually refers to a back office system.

Thirdly, there is a noticeable trend towards the adoption of broader systems that encompass a wider range of functional areas. Hence, a PMS as it’s known for an asset manager is becoming less common as a standalone system. Nowadays, the PMS is more often a part of an Investment Management Software (IMS) or Front-to-Back Office system.

In this article, we’ll explore the concept of Portfolio Management Software for institutional investors. We’ll focus on the PMS distinct interpretations for asset managers vs. hedge funds. We’ll dive into key features for each group and highlight the associated benefits. Additionally, we’ll clarify some common misperceptions between Portfolio Management Software (PMS) and other related systems such as:

• Investment Management Systems (IMS)
• Order Management Systems (OMS)
• Execution Management Systems (EMS)

By the end of this article, we hope that you’ll have a clear understanding of what a Portfolio Management Software can mean.

What is Portfolio Management Software (PMS) for an Asset Manager?

Portfolio Management Software is a system used by asset managers for portfolio modelling and decision support. It can be used to conduct what-if analysis of hypothetical changes to a portfolio. As such, it’s a tool for portfolio managers. PMS sometimes includes features for calculating orders (e.g. % NAV, duration targeting for fixed income, mass rebalancing to a model/benchmark).

Different kind of Portfolio Management Solutions

Portfolio Management Software can have different interpretations depending on the context and industry. When defined for use by an asset manager, Portfolio Management Software is used by a portfolio manager in the front office. The primary purpose of the software is to assist portfolio managers when they consider making changes to a portfolio(s). These portfolios can take the form of actual portfolios, such as a client mandate or a fund. Alternatively, they can also be a model portfolio that other portfolios subscribe to, either in their entirety or in part.

On the other hand, there is a different interpretation of the definition of Portfolio Management Software among hedge funds. For hedge funds, the PMS is a back office system, i.e., it’s used to manage the administration of portfolios. For this use case, it's also sometimes referred to as Investment Portfolio Management Software. This includes process support for setting a NAV at the fund or share class level. It also involves storing and updating time-series (assets, cash, FX) and GIPS performance calculations. In the context of an asset manager, these functions often reside in a system referred to as an IBOR for Asset Management.

Both uses for the term Portfolio Management Software makes sense:

• One interprets it as a tool for portfolio managers to manage their portfolios
• Whilst the other sees it as a tool for operations to administer portfolios

This dual use of the same term has caused significant confusion in the buy-side industry. In fact, the dual definition of Portfolio Management Software can make vendor shortlisting more challenging for both asset managers and hedge funds.

Features of Portfolio Management Solutions for Asset Managers

Portfolio management tools provide a range of features to make it fast and transparent for portfolio managers to simulate changes to their portfolios. Here are some key features of a PMS for asset managers:

Portfolio Construction and Analysis

A PMS allows portfolio managers to create and analyse investment portfolios based on various criteria such as risk tolerance, exposures, and investment objectives. It can provide in-built tools to optimise asset weights.

Simulation and What-If Scenarios

A key capability of Portfolio Management Software is to simulate changes to a portfolio. i.e., it helps portfolio managers answer the question: “If I make change X, what will happen to my risk and exposures?”. This could be anything from value-at-risk to the duration profile of a fixed-income portfolio.

Features of Portfolio Management Systems for Hedge Funds

Here are some key features that are typically found in Portfolio Management Software for hedge funds:

Portfolio Tracking and Analysis

A PMS allows you to track investments and analyse your portfolio's performance, on a day-by-day basis and/or in real-time. You can view key metrics such as profit and loss (P&L), usually across all asset classes and investment strategies in the same system.

NAV Management

A core feature of a PMS, as defined by hedge funds, is NAV management. This includes a process for cutting cash, positions, and FX snapshot at the close of each day. Valuation of each position is then processed and finally, a NAV is struck.

Timeseries Management

Once the daily NAV is struck, the Portfolio Management Software stores it away in a database so it can be used for functions. This timeseries can include other data as well, such as P&L, cash, FX and position (including strategy level) valuations.

Optional: General Ledger

Some hedge fund Portfolio Management Systems can create general ledgers. These are often used to shadow official investment accounting, which is typically managed by a fund administrator.

Optional: Reporting

Portfolio Management Software for hedge funds may streamline the generation of customisable reports and statements. These reports could be for investors, including detailed performance summaries and asset allocation breakdowns, or they could be used for regulatory reporting.

Other Concepts Commonly Confused with Portfolio Management Software

When discussing Portfolio Management Software, it's essential to distinguish it from other related concepts that are often confused with it, especially in an asset manager context. Two such concepts are Investment Management System (IMS) and Order Management System (OMS), as well as Execution Management System (EMS).

The following illustration highlights where a PMS fits into a system landscape in the context of an asset manager.

Essentially, the front office of an asset manager can be broken down in the following three parts:

• Portfolio Management System (PMS) - This system helps Portfolio Managers answer the question, “What should my portfolio or model look like?”.
• Order Management System (OMS) - An OMS helps portfolio managers make a reality of the target portfolio that the PMS helped generate. This usually includes compliance controls and substantial audit capabilities. Handover to traders typically happen in this system.
• Execution Management System (EMS) - An EMS helps traders make the changes happen, i.e., execute the orders that the OMS created.

Let’s use a passive fund manager, tracking an index, as an example. For this manager, the index is the target portfolio, hence there is typically no need for a PMS. The OMS takes the index as input and provides functionality to constantly rebalance the actual fund to the index. The need to rebalance stems from market prices (if the index weights don’t float with market prices), deposits/redemptions, corporate actions and other events (e.g. coupon payments). Once the fund has been rebalanced, orders are sent to the EMS for execution in the market.

What is an Investment Management System (IMS) then? It's an enterprise platform that streamlines and centralises operational models for asset managers, across the front and middle office. An IMS covers the entire investment lifecycle, including portfolio and risk management, order management, and post-trade settlement. It integrates compliance and managed data throughout the process in a seamless manner. Compared to an OMS and PMS, an IMS usually contains the functionality of both an OMS and sometimes a PMS. EMS functionality can be part of an IMS as well, however, this is less common and offers less additional value.

The benefits of Cloud-based Portfolio Management Software for asset managers

Cloud-based Portfolio Management Software (PMS) offers a range of benefits for asset managers, including:

Faster, More Robust Portfolio Construction and Analysis Tools

An alternative to using a PMS for an asset manager is often Microsoft Excel. Portfolio Management Software makes the process of constructing portfolios and analysing “what-if” scenarios faster and less prone to human error.

Audit of Decision Processes

A Portfolio Management System logs the process of formulating a target portfolio. This is stored as an audit trail, which can be retrieved at a later stage should it be necessary, for example, to provide evidence for a specific investment decision.

Scalability and Flexibility

Cloud-based Portfolio Management Software is designed to accommodate the evolving needs of asset managers. It can handle a growing number of portfolios and positions, support multiple asset classes, and adapt to changing investment strategies. Scalability and flexibility enable asset managers to efficiently manage their expanding portfolios, without having to spend precious front office resources to rebuild spreadsheets.

Integration with your Investment Ecosystem

A PMS can integrate with other upstream or downstream systems. These integrations ensure seamless data flow and enable asset managers to leverage the full potential of their investment ecosystem.

Key Takeaways

We hope that this article has been useful in helping you understand one of the most used, yet least well-understood, concepts in the buy-side industry: the Portfolio Management System.

Should you wish to receive regular updates on the industry, such as research and guides, please subscribe to our monthly newsletter.

Limina offers an Investment Management System, with built-in functionality covering portfolio management capabilities as they’re defined for an asset manager.

For hedge funds, we cover the Investment Portfolio Management Solution capabilities as well. Although we label them according to the asset manager use case.