Can anybody have a look at two cases relating to discretionary/nondiscretionary portfolios on page 298-299 in curriculum Vol 6? One is in the third paragraph on page 298, “a corporate client might prohibit the sale of company stock, or a foundation might similarly ban the sale of sentimental holdings, securities issued by the company in which its founder made a fortune…none of these constraints automatically renders a portfolio nondiscretionary.” While the other case is in the highlighted column on page 299, “A client could insist that manager retain specific holdings that might or might not otherwise be held in a portfolio…the outcome would not reflect the results of the manager’s actual discretionary investment management” Seems that the portfolio is rendered nondiscretionary. In both cases, specific holdings are retained and the sale of them are banned. Why the constraints in the former case will NOT render the portfolio nondiscretionary, while nondiscretionary in the later case? Thanks a lot!
I see discretionary/nondiscretionary portfolio differences as a greyed line; as there are levels of discretion/nondiscretion in all portfolios. for example: a portfolio that is entirely picked by the port mgr without any restrictions from the client would be 100% discretionary. However, a portfolio that consists only of securities that the client has deemed appropriate is less disctretionary as the mgr does not have a choice but to invest in those stocks( he may have the ability to decide weightings though). These are easy to see that one is discretionary and the other has very limited discretion, the difficulty becomes when the client has a few investments they restrict trading in. as the %age of assets that are restricted becomes larger, at what point does the portfolio become nondiscretionary? Does it matter what effect the restrictions have on the portfolio? What if the restricted stock is a small %age of assets, but contributes a large %age of return? or vice versa? The point I’m trying to make here is they are speaking of relative discretion in these portfolios. ie. one portfolio has less discretion if certain holdings are restricted from being sold or just because a client has a few restrictions the account may not necessarily be entirely nondiscretionary.
Ultimately, the issue here is that anytime a portfolio manager is constrained from implementing the ideal strategy they would like to use due to client restrictions, the portfolio can be considered non-discretionary. The actual definition of what constitutes “discretionary” is defined on a firm-wide basis (so it could vary from firm to firm). I think the key in the first one is “none of these constraints AUTOMATICALLY renders a portfolio non-discretionary” - just because there are constraints on the portfolio doesn’t mean that the portfolio manager can’t implement the investment strategy that he/she wants.