BD-05 — Portfolio Management

Office: Front.

Maturity: Provisional · 13 Service Domains for construction, monitoring, rebalancing, transition, overlay, and class-specific sleeve management

The portfolio-construction-and-management capability — the domain that takes the allocation set by strategy (BD-01) and the securities, managers and assets selected (BD-02, BD-03, BD-04) and builds, monitors, rebalances and adjusts the actual portfolio. In the CFA portfolio-management process, BD-01 is the planning half and BD-05 is the execution and feedback half: BD-05 turns decisions into a target portfolio, keeps the live portfolio aligned to it, and shapes its exposures.

Each Service Domain below is its own file.

Service Domains

Construction is mode-dependent — not one activity

Portfolio construction is not one activity. It runs in distinct modes, and which mode applies depends on what the investor controls:

• Optimiser-driven — picking and sizing positions in a continuously-priced, fully-controlled portfolio (mean-variance, risk-based, factor-budgeted). SD-05.1.
• Index replication — choosing a replication method (full / sampled / optimised) to track an index. SD-05.1, in its passive mode.
• Manager-structure — building the portfolio of managers. SD-05.10.
• Pacing-driven — for a private-markets portfolio, the investor cannot optimise weights it does not control; “construction” is the commitment-pacing schedule. That is SD-01.10 Commitment Pacing & Deployment Planning — a BD-01 capability SD-05.1 consumes.
• Liability-driven — for a pension or insurer, construction is the matching-versus-growth split and the hedge ratio. That is SD-01.7 Liability-Driven & Cash-Flow-Driven Strategy — a BD-01 capability SD-05.1 consumes.

SD-05.1 is therefore reframed mode-neutral: it constructs the target portfolio by the mode the mandate permits, consuming the pacing plan, the liability strategy and the manager structure rather than re-deciding them. The optimiser model is one mode, not the default — encoding it as the universal definition of construction would mis-model the private-markets, liability-driven and index archetypes.

Archetype activation

The Service Domains a BD-05 implementation activates depend sharply on institution type. The model is the union; an implementation activates its subset. BD-05 deliberately uses a Service Domain × archetype matrix rather than the one-row-per-archetype table the other Business Domains use: BD-05’s archetype differentiation runs at the individual-Service-Domain level, and the matrix is the form that carries that detail without loss.

The clearest dormancy: Model Portfolios (SD-05.7) is dead for asset owners, hedge funds and insurers; Alternative-Strategy (SD-05.9) is dead for everyone but hedge funds; Manager Structure (SD-05.10) is the asset-owner core but dormant for single-strategy and index managers. Cash & Money-Market (SD-05.13) activates wherever a cash sleeve is held — and is the dedicated-product core for the manager that runs a money-market fund (the asset manager’s liquidity range, the index manager’s MMF products) — but is partial for the wealth manager, where the client cash sleeve is small.

Why the manager-archetype row is split into sub-archetypes. The discriminator the sub-archetype rows divide on in BD-05 is the construction paradigm — the manager-archetype manager column is sub-typed because the construction mode is what differentiates a BD-05 implementation, not the manager archetype itself. The Construction (SD-05.1) row makes this visible: an asset manager construct-by-optimiser, a private-markets manager construct-by-pacing-plus-manager-structure, a wealth manager construct-by-model-driven, a hedge fund construct-at-book-level, an insurer construct-liability-driven and an index manager construct-by-replication — each is a genuinely different construction paradigm with its own tools, governance and consumed inputs. Sub-typing the manager row by construction paradigm carries that differentiation into the activation matrix; collapsing it back would assert one construction shape across paradigms that the operating model does not have.

Wider-source grounding

Grounded against external industry references:

• The CFA Institute treatment of portfolio construction (mean-variance, risk-based, factor-based, goals-based), rebalancing (calendar vs corridor), and the monitoring / feedback step.
• Overlay and completion-portfolio management (Russell, BlackRock, NISA), portable alpha, tail-risk hedging.
• Model portfolios and the unified-managed-account pattern; portfolio transition management and the T-Standard.
• The five construction modes across the institution-archetype panel — the finding that construction is mode-dependent.
• The buy-side platform capability maps (Aladdin, Charles River, SimCorp) at the portfolio-construction and what-if layer.
• For the cash and money-market sleeve (SD-05.13): SEC Rule 2a-7 under the Investment Company Act of 1940 — the eligible-security, WAM / WAL, credit-quality and diversification rules, the daily / weekly liquid-asset minimums, the mandatory liquidity fee and the stable-value / shadow-NAV mechanics; the EU Money Market Fund Regulation (MMFR) and the ESMA-proposed reforms (CNAV / LVNAV / VNAV structures, liquidity buffers, the decoupling of liquidity thresholds from gates-and-fees); the money-market-fund rating regimes (S&P AAAm and the Moody’s / Fitch principal-stability equivalents); and the CFA Institute fixed-income and liquidity-management body of knowledge. The institution-archetype finding: the cash sleeve is held across the whole panel, and is the dedicated-product core for the manager that runs a money-market fund — distinct from the treasury cash positioning every firm runs in SD-11.1.

Non-overlap — where the boundaries run

• BD-05 vs BD-01 Investment Strategy & Allocation (cross-Business-Domain). BD-01 decides at the asset-class-weight level — the strategic and tactical allocation. BD-05 owns everything below it: security- and manager-level position sizing, and the trade list to reach the target. Rebalancing splits the same way — BD-01 sets the rebalancing policy in the mandate (the allowable drift, the corridor policy); SD-05.3 calibrates and executes it.
• BD-05 vs BD-06 Trading & Execution (cross-Business-Domain). BD-05 decides what trades are needed and why — it produces the trade list and the intent. BD-06 decides how and when to execute them. Implementation shortfall is measured in both — BD-06 for working an order, SD-05.8 for the whole transition event (the T-Standard) — two applications of one concept.
• BD-05 vs BD-10 Investment Compliance & Guideline Monitoring (cross-Business-Domain). BD-05 constructs and what-if-tests the portfolio; SD-10.1 Investment Guideline Monitoring runs the pre-trade and post-trade compliance rule engine. Construction proposes; SD-10.1 clears.
• SD-05.1 vs SD-01.10 / SD-01.7 / SD-05.10. SD-05.1 constructs the target portfolio but does not re-decide the commitment-pacing plan (SD-01.10), the liability strategy (SD-01.7) or the manager structure (SD-05.10) — it consumes them. For a private-markets or liability-driven mandate, SD-05.1’s construction is largely the assembly of what those Service Domains decide.
• SD-05.3 Rebalancing vs SD-05.4 Overlay & Hedging. A rebalance can be physical (SD-05.3 trade list) or synthetic (a rebalancing overlay). The synthetic-rebalancing operation is shared — SD-05.3 owns the rebalance decision; SD-05.4 owns the derivative book that may express it.
• SD-05.4 Overlay vs SD-05.5 Cash Equitisation. SD-05.5 is a purpose-specific overlay — equitising idle cash to remove drag — sharing the futures and collateral machinery of SD-05.4 but kept separate because the buy-side names it as a distinct service. SD-05.4 shapes exposures; SD-05.5 removes drag.
• SD-05.4 Overlay vs SD-05.11 Completion. Both use overlay instruments. SD-05.4 shapes a portfolio’s market exposures and is measured by hedge effectiveness. SD-05.11 closes a structural gap between the manager line-up’s aggregate exposure and the total-portfolio or liability target, and is measured against that target — a different output, a different capability.
• SD-05.10 Manager Structure vs BD-03 Manager & Fund Investment (cross-Business-Domain). BD-03 sources, researches and selects the individual manager; SD-05.10 constructs the portfolio of managers — count, sizing, overlap, capacity. BD-03 feeds candidates to SD-05.10.
• SD-05.9 Alternative-Strategy Management vs SD-01.9 Risk-Capital & Strategy Allocation (cross-Business-Domain). SD-01.9 allocates risk capital across a hedge-fund platform’s pods and strategies. SD-05.9 runs the portfolio mechanics of an alternative strategy — the long/short book, leverage, the short book, prime brokerage. SD-01.9 sizes the pod; SD-05.9 runs its book.
• SD-05.12 Commodity Exposure Management vs SD-05.4 Overlay & Hedging and SD-05.5 Cash Equitisation. All three run a derivatives book over the portfolio, and the boundary is purpose. SD-05.4 shapes or hedges the portfolio’s existing exposures, measured by hedge effectiveness; SD-05.5 removes cash drag by equitising idle cash. SD-05.12 holds a wanted, standing commodity exposure — a diversifying allocation sized by SD-01.4 and measured against the commodity-allocation target. SD-05.4 reduces an unwanted exposure; SD-05.12 holds a wanted one.
• SD-05.12 Commodity Exposure Management vs SD-04.10 Direct Real-Asset Management (cross-Business-Domain). SD-05.12 holds synthetic, exchange-traded commodity-price exposure with no physical asset. SD-04.10 operates a directly-held physical natural-resource asset — timberland, farmland, a producing asset. The natural-resources / commodities asset class is invested through both routes; the split is the overlay-vs-direct mode boundary, not an asset-class boundary.
• SD-05.12 Commodity Exposure Management vs SD-01.4 Strategic Asset Allocation (cross-Business-Domain). SD-01.4 decides the size of the commodity allocation at the asset-class-weight level. SD-05.12 implements and maintains it — choosing the futures, swap or ETF expression, managing the roll, sizing collateral. BD-01 decides how much; SD-05.12 builds and holds it.
• SD-05.13 Cash & Money-Market Portfolio Management vs SD-11.1 Cash Management (cross-Business-Domain). This is the treasury-versus-investing boundary, and it is the one to get right. SD-11.1 is treasury — it positions the firm’s and the funds’ operational cash: it knows where the cash is today, runs the sweeps, funds the day’s settlements, and places idle operational balances so they earn rather than sit idle — including by buying money-market-fund units as a placement vehicle. SD-05.13 is investing — it runs a cash and money-market allocation as a managed asset-class sleeve, or runs a money-market product: the WAM / WAL discipline, the credit-and-liquidity-constraint management, the stable-value (CNAV / LVNAV / VNAV and shadow-NAV) mechanics, and the gates-and-fees. The cut: SD-11.1 places operational cash (it is a buyer of a money-market fund); SD-05.13 runs the money-market allocation or manages the fund the cash is placed into. Treasury positions cash it must keep liquid for operations; portfolio management runs cash the mandate allocates to as an asset class.
• SD-05.13 Cash & Money-Market Portfolio Management vs SD-05.1 Portfolio Construction. SD-05.1 is the mode-neutral construction of the whole portfolio — it sets the position-level target across the asset classes the allocation spans, and consumes the cash-and-money-market sleeve as one of its inputs. SD-05.13 owns the cash-class-specific discipline that SD-05.1 does not carry: the maturity-ladder, credit-and-liquidity-constraint and stable-value management of the sleeve once the allocation has decided its size. This is the same split that makes SD-05.12 a distinct Service Domain rather than a fold into SD-05.1 — a named E-09 asset class with its own construction-and-maintenance discipline gets its own Service Domain.
• SD-05.6 Liquidity-Aware Portfolio Management vs SD-01.11 Liquidity Strategy & Tiering and SD-07.3 Liquidity Risk Management (cross-Business-Domain). SD-01.11 sets the tier taxonomy and placement rules — the buckets, the buffer, the liquid-to-illiquid linking policy at the strategy layer above any single portfolio. SD-07.3 produces the per-holding liquidity classification (applying the SD-01.11 taxonomy). SD-05.6 consumes that classification and applies the policy within a specific portfolio — managing the held portfolio’s liquidity profile, including its unfunded-commitment funding capacity. SD-05.6 does not produce the classification; it builds the portfolio liquidity budget against it. The bilateral of the boundary stated in the BD-01 README.

Design notes

• SD-05.1 is mode-neutral. Portfolio construction is mode-dependent; SD-05.1 covers the modes BD-05 owns (optimiser-driven, factor-risk, replication) and consumes the modes other Service Domains own (pacing, liability strategy, manager structure).
• SD-05.11 Completion Portfolio Management is a distinct capability — measured against the liability or total-portfolio target, not hedge effectiveness.
• SD-05.12 Commodity Exposure Management. Natural resources / commodities is a named E-09 asset class; its direct route is BD-04 and its fund route is BD-03; the synthetic commodity-overlay route — a standing diversifying exposure expressed through futures, swaps and ETFs — is a fourth derivatives-book capability alongside SD-05.4, SD-05.5 and SD-05.11, kept separate for the same reason those three are: each is measured against a different target.
• SD-05.13 Cash & Money-Market Portfolio Management. Cash and money markets is a named E-09 asset class — a governed allocation segment, not a residual of fixed income — and its investing discipline (WAM / WAL, the credit-and-liquidity constraints, the stable-value CNAV / LVNAV / VNAV and shadow-NAV mechanics, the gates-and-fees of the money-market-fund regimes) is its own. SD-05.13 owns it, on the same logic as SD-05.12: a named asset class with a distinct construction-and-maintenance discipline gets its own Service Domain rather than folding into the mode-neutral SD-05.1. It is the investing counterpart to SD-11.1’s treasury cash positioning — SD-11.1 places operational cash (including into money-market funds as a vehicle); SD-05.13 runs the money-market allocation or the money-market product.
• No new master entities. BD-05 consumes the portfolio, holding, valuation, benchmark, risk and derivatives entities and produces target portfolios and trade lists as analytical artefacts.
• Panel-substitution rationale — asset-owner collapse (as a matrix column). BD-05’s archetype activation is rendered as a Service Domain × archetype matrix rather than the one-row-per-archetype table the other Business Domains use, because BD-05’s archetype differentiation runs at the individual-Service-Domain level. Within that matrix, the single “Asset owner” column collapses DBP and SWF-E — BD-05’s construction-mode axis (optimiser / manager-structure + pacing / liability-driven / replication / book-level / model-driven) cuts on capability shape, not between DBP and SWF-E. The pension-vs-SWF asset-owner differences (LDI weighting, pacing-driven mode emphasis) shape the cell contents but do not warrant a panel split. The “Insurer” column is kept separate from the asset-owner column — the liability-driven construction mode is the insurer’s defining BD-05 activation. The OCIO is not represented as a column because the matrix renders the construction-mode cut and the OCIO inherits the third-party-asset-manager column’s activation per the landscape rule.

How BD-05 relates to the rest of the model

• Consumes the portfolio and holding entities — Portfolio / Mandate (E-03), Holding / Position (E-04, book = ibor — front office runs against the IBOR), Valuation (E-07, any method), Instrument / Asset (E-02) — the reference and risk entities — Benchmark / Index (E-10), Risk Limit (E-16), Risk Measurement (E-19, any risk_type) — the allocation set by BD-01, the securities and managers selected by BD-02 / BD-03 / BD-04, and the commitment-pacing plan (SD-01.10) and manager structure it builds from.
• Owns no master entity. The target portfolio, the trade list and the construction model are analytical artefacts.
• Feeds BD-06 Trading & Execution (the trade lists it produces), BD-10 Investment Compliance (which clears them), BD-09 Performance & Analytics (which measures the result), and BD-07 Investment Risk (which monitors the portfolio it runs).