Giovanni Cachia

Giovanni Cachia is a Discretionary Portfolio Manager at BOV Wealth Management. For information on how to better manage one’s wealth, customers are invited to send an e-mail to: or call 2275 5553.

Discretionary Portfolio Management

Wednesday 03rd April 2019

When clients seek to invest their wealth, they often require experts to manage their investment portfolio.  One of the first decisions that needs to be taken is whether they should opt for Advisory or Discretionary Portfolio Management. 

The difference between Advisory and Discretionary Portfolio Management

There is a fundamental distinction between ‘advisory’ and ‘discretionary’ portfolio management. Advisory Portfolio Management requires the portfolio manager to contact clients and obtain their consent before any investment decision. This means that the client is actively involved in the process and is required to take decisions based on advice each and every time prior to any investment. Whilst some clients prefer this hands-on approach to their wealth management, others see the frequent consultations and requests for consent as an inconvenience.

For such clients who lead a hectic life and do not have the time nor the propensity to be so involved, a better option could be Discretionary Portfolio Management. Through this approach, the client gives the discretion to the Portfolio Manager to invest without the need to consult or consent every time an investment opportunity crops up or an investment decision needs to be taken. These clients therefore give their discretionary portfolio manager a wider berth in the investment process.

Each type of investment management approach has its pros and cons, and the choice between Advisory and Discretionary boils down to the client’s preferences and inclination. 

Actively managing a portfolio to generate wealth

Whichever route clients choose, the portfolio manager will seek to actively increase clients’ returns rather than passively holding assets. Passive investment management is when one invests in a very broad number of securities and expect to increase wealth in line with the general market.

The flipside of this is that a passive investor risks following the market regardless of its direction and invests in both cheap and expensive securities, getting the chaff along with the wheat. This is where the portfolio manager comes in, lessening this risk and boosting returns by buying into those securities which are too cheap and avoiding those which are too expensive (i.e. ‘mispriced’).

However, generating additional returns through active management is easier said than done: it requires a portfolio manager to keep up with market, economic, political and regulatory trends to act swiftly as investment opportunities or risks arise.

Absolute and Relative Performance

At the end of the day, clients care about how well a service is being provided. In the context of portfolio management, this means isolating the “active” part of the total return from the passive portion. To accomplish this, a portfolio manager’s performance must be benchmarked against the wider market on a risk-adjusted basis.

Thus, if one’s portfolio gained in absolute terms one may be reasonably pleased. However, if the value in the general market rises higher than one’s portfolio, this would understandably dampen one’s enthusiasm. Similarly, if a portfolio depreciated marginally in times of economic crisis, performance would compare favourably. The difference between the portfolio performance and the market performance is the excess return the portfolio manager has managed to generate – commonly known as ‘alpha generation’.

Understanding the relationship between risk and return is supremely important. After all, one may be fooled into thinking that a portfolio’s performance is good when the reality is that it is unsustainably risky and not consistent with a client’s financial goals and degree of risk aversion.

The Investment Process

At the end of the day, the greatest added benefit of discretionary portfolio management is that the portfolio manager will reflect a client’s financial situation, goals and risk attitude and injects own financial expertise.

Nobody is an island, so the cliché goes. Bank of Valletta’s Wealth Management arm provides clients with the technical expertise of a dedicated portfolio manager backed by a team focused in identifying the best possible market opportunities, all operating within an investment process designed to bring these opportunities to light – and increase clients’ bottom lines.

The value of investments may go down as well as up and may be affected by changes in currency exchange rates. Bank of Valletta p.l.c. is a public limited company regulated by the Malta Financial Services Authority and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap.371 of the Laws of Malta) and the Investment Services Act (Cap.370 of the Laws of Malta).