Investment management
From Wikipedia, the free encyclopedia
- "Asset management" redirects here. For other uses, see Asset management (disambiguation).
Investment management, the professional management of various securities (shares, bonds etc) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes eg. mutual funds) .
The term asset management is often used to refer to the investment management of collective investments, whilst the more generic fund management may refer to all forms of institutional investment as well as investment management for private investors. Investment managers who specialize in advisory or discretionary management on behalf of (normally wealthy) private investors may often refer to their services as wealth management or portfolio management often within the context of so-called "private banking".
The provision of 'investment management services' includes elements of financial analysis, asset selection, stock selection, plan implementation and ongoing monitoring of investments.
Investment management is a large and important global industry in its own right responsible for caretaking of trillions of dollars, euros, pounds and yen. Coming under the remit of financial services many of the worlds largest companies are at least in part investment managers and employ millions of staff and create billions in revenue.
Fund manager (or investment advisor in the U.S.) refers to both a firm that provides investment management services and an individual(s) who directs 'fund management' decisions.
[edit] Industry scope
The business of investment management has several facets, including the employment of professional fund managers, research (of individual assets and asset classes), dealing, settlement, marketing, internal auditing, and the preparation of reports for clients. The largest financial fund managers are firms that exhibit all the complexity their size demands. Apart from the people who bring in the money (marketers) and the people who direct investment (the fund managers), there are compliance staff (to ensure accord with legislative and regulatory constraints), internal auditors of various kinds (to examine internal systems and controls), financial controllers (to account for the institutions' own money and costs), computer experts, and "back office" employees (to track and record transactions and fund valuations for up to thousands of clients per institution).
[edit] Key problems of running such businesses
Key problems include:
- revenue is directly linked to market valuations, so a major fall in asset prices causes a precipitous decline in revenues relative to costs;
- above-average fund performance is difficult to sustain, and clients may not be patient during times of poor performance;
- successful fund managers are expensive and may be headhunted by competitors;
- above-average fund performance appears to be dependent on the unique skills of the fund manager; however, clients are loath to stake their investments on the ability of one or two men or women- they would rather see firm-wide success, attributable to a single philosophy and internal discipline;
- evidence suggests that size of an investment firm correlates inversely with fund performance, i.e., the smaller the firm the better the chance of good performance.
- analysts who can offer generate above-average returns often become sufficiently wealthy that they eschew corporate employment in favor of managing their personal portfolios.
The most successful investment firms in the world have probably been those that have been separated physically and psychologically from banks and insurance companies. That is, the best performance and also the most dynamic business strategies (in this field) have generally come from independent investment management firms.
[edit] Representing the owners of shares
Institutions often control huge shareholdings. In most cases they are acting as agents (intermediaries between owners of the shares and the companies owned) rather than principals (direct owners). The owners of shares theoretically have great power to alter the companies they own...via the voting rights the shares carry and the consequent ability to pressure managements, and if necessary out-vote them at annual and other meetings.
In practice, the ultimate owners of shares often do not exercise the power they collectively hold (because the owners are many, each with small holdings); financial institutions (as agents) sometimes do. There is a general belief that shareholders - in this case, the institutions acting as agents - could and should exercise more active influence over the companies in which they hold shares (e.g., to hold managers to account, to ensure Boards effective functioning). Such action would add a pressure group to those (the regulators and the Board) overseeing management.
Some institutions have been more vocal and active in pursuing such matters; for instance, some firms believe that there are investment advantages to accumulating substantial minority shareholdings (i.e, 10% or more) and putting pressure on management to implement significant changes in the business. In some cases, institutions with minority holdings work together to force management change. Perhaps more frequent is the sustained pressure that large institutions bring to bear on management teams through persuasive discourse and PR. On the other hand, some of the largest investment managers - such as Barclays Global Investors and Vanguard - advocate simply owning every company, reducing the incentive to influence management teams.
The national context in which shareholder representation considerations are set is variable and important. The USA is a litigious society and shareholders use the law as a lever to pressure management teams. In Japan it is traditional for shareholders to be low in the 'pecking order,' which often allows management and labor to ignore the rights of the ultimate owners. Whereas US firms generally cater to shareholders, Japanese businesses generally exhibit a stakeholder mentality, in which they seeek consensus amongst all interested parties (against a background of strong unions and labour legislation).
[edit] Size of the global fund management industry
Assets of the global fund management industry increased for the second year running in 2004 to reach a record $45.9 trillion. This was up 6% on the previous year and 40% on 2002. Growth during the past two years has been due to an increase in capital inflows and strong performance of equity markets. Part of the increase in dollar terms was also a result of a 15% fall in the value of the dollar (USD index) during 2003 and a further 4% fall in its value in 2004. As shown in Chart 8, between 1999 and 2002 the value of assets under management fell as a result of declines in equity markets.
Pension assets accounted for $15.3 trillion of funds in 2004, with a further $16.2 trillion invested in mutual funds and $14.5 trillion in insurance funds. Merrill Lynch also estimates the value of private wealth at $30.8 trillion of which about a third was incorporated in other forms of conventional investment management.
The US was by far the largest source of funds under management in 2004 with 43% of the world total. It was followed by Japan with 14% and the UK with 7%. The Asia-Pacific region has shown the strongest growth in recent years. Countries such as China and India offer huge potential and many companies are showing an increased focus in this region. [1]
[edit] 10 largest asset management firms
Global Investor’s 2005 top 10 asset managers by assets under management. (Source: BGI)
| Rank | Company | Assets under management (US$million) | Country |
|---|---|---|---|
| 1. | Barclays Global Investors | 1,400,491 | UK |
| 2. | State Street Global Advisors | 1,367,269 | US |
| 3. | Fidelity Investments | 1,299,400 | US |
| 4. | Capital Group Companies | 1,050,435 | US |
| 5. | The Vanguard Group | 852,000 | US |
| 6. | Allianz Global Investors | 790,513 | Germany |
| 7. | JPMorgan Asset Management | 782,646 | US |
| 8. | Mellon Financial Corporation | 738,294 | US |
| 9. | Deutsche Asset Management | 723,366 | Germany |
| 10. | Northern Trust Global Investments | 589,800 | US |
[edit] Philosophy, process and people
The 3-P's (Philosophy, Process and People) are often used to describe the reasons why the manager is able to produce above average results.
- Philosophy refers to the over-arching beliefs of the investment organisation. For example, does the manager buy growth or value shares (and why), does he believe in market timing (and on what evidence), does he rely on external research or does he employ a team of researchers. It is helpful if any and all of such fundamental beliefs are supported by proof-statements.
- Process refers to the way in which the overall philosophy is implemented. For example, which universe of assets is explored before particular assets are chosen as suitable investments; how does the manager decide what to buy and when; how does the manager decide what to sell and when; who takes the decisions and are they taken by committee; what controls are in place to ensure that a rogue fund (one very different from others and from what is intended) cannot arise;
- People refers to the staff, especially the fund managers. The question is who are they, how are they selected, how old are they, who reports to whom, how deep is the team (and do all the members understand the philosophy and process they are supposed to be using), and most important of all how long has the team been working together. This last question is vital because whatever performance record was presented at the outset of the relationship with the client may or may not relate to (have been produced by) a team that is still in place. If the team has changed greatly (high staff turnover), then arguably the performance record is completely unrelated to the existing team (of fund managers).
[edit] Investment managers and portfolio structures
At the heart of the investment management industry are the managers who invest and divest client investments.
A certified company investment advisor should conduct an assessment of each client's individual needs and risk profile. The advisor then recommends appropriate investments.
[edit] Asset allocation
The different asset classes are stocks, bonds, real-estate, derivatives, and commodities. The exercise of allocating funds among these assets (and among individual securities within each asset class) is for what investment management firms are paid. Asset classes exhibit different market dynamics, and different interaction effects; thus, the allocation of monies among asset classes will have a significant effect on the performance of the fund. Some research suggests that allocation among asset classes has more predictive power than the choice of individual holdings in determining portfolio return. Arguably, the skill of a successful investment manager resides in constructing the asset allocation, and separately the individual holdings, so as to outperform certain benchmarks (e.g., the peer group of competing funds, bond and stock indices).
[edit] Long-term returns
It is important to look at the evidence on the long-term returns to different assets, and to holding period returns (the returns that accrue on average over different lengths of investment). For example, over very long holding periods (eg. 10+ years) in most countries, equities have generated higher returns than bonds, and bonds have generated higher returns than cash. According to financial theory, this is because equities are riskier (more volatile) than bonds which are themselves more risky than cash.
[edit] Diversification
Against the background of the asset allocation, fund managers consider the degree of diversification that makes sense for a given client (given its risk preferences) and construct a list of planned holdings accordingly. The list will indicate what percentage of the fund should be invested in each particular stock or bond. The theory of portfolio diversification was originated by Markowitz and effective diversification requires management of the correlation between the asset returns and the liability returns, issues internal to the portfolio (individual holdings volatility), and cross-correlations between the returns.
[edit] Investment styles
There are a range of different styles of fund management that the institution can implement. For example, growth, value, market neutral, small capitalisation, indexed, etc. Each of these approaches has its distinctive features, adherents and, in any particular financial environment, distinctive risk characteristics. For example, there is evidence that growth styles (buying rapidly growing earnings) are especially effective when the companies able to generate such growth are scarce; conversely, when such growth is plentiful, then there is evidence that value styles tend to outperform the indices particularly successfully.
[edit] Performance measurement
Fund performance is the acid test of fund management, and in the institutional context accurate measurement is a necessity. For that purpose, institutions measure the performance of each fund (and usually for internal purposes components of each fund) under their management, and performance is also measured by external firms that specialise in performance measurement. The leading performance measurement firms (e.g. Frank Russell in the USA) compile aggregate industry data e.g showing how funds in general performed against given indices and peer groups over various time periods.
In a typical case (let us say an equity fund), then the calculation would be made (as far as the client is concerned) every quarter and would show a percentage change compared with the prior quarter (e.g. +4.6% total return in US dollars). This figure would be compared with other similar funds managed within the institution (for purposes of monitoring internal controls), with performance data for peer group funds, and with relevant indices (where available) or tailor-made performance benchmarks where appropriate. The specialist performance measurement firms calculate quartile and decile data and close attention would be paid to the (percentile) ranking of any fund.
Generally speaking it is probably appropriate for an investment firm to persuade its clients to assess performance over a longer periods (e.g. 3 to 5 years) to smooth out very short term fluctuations in performance and the influence of the business cycle. This can be difficult however and, industrywide, there is a serious pre-occupation with short-term numbers and the effect on the relationship with clients (and resultant business risks for the institutions).
[edit] Absolute versus relative performance
In the USA and the UK, two of the world's most sophisticated fund management markets, the tradition is for institutions to manage client money relative to benchmarks. For example, an institution believes it has done well if it has generated a return of 5% when the average manager has achieved 4%. In other markets however, e.g. Switzerland, the mentality is different and clients and fund managers focus on absolute return management, i.e. returns relative to cash (e.g. Swiss franc or Yen cash) where (performance) fees are payable only if the return exceeds some absolute figure (e.g. 10% per annum).
[edit] Education or Certification
Increasingly, international business schools are incorporating the subject into their course outlines and some have formulated the title of 'Investment Management' conferred as specialist bachelors degrees. (i.e. Cass Business School, London). Due to global cross-recognition agreements with the 2 major accrediting agencies AACSB and ACBSP which accredit over 560 of the best business school programs, the Certification of MFP Master Financial Planner Professional from the American Academy of Financial Management is available to AACSB and ACBSP business school graduates with finance or financial services related concentrations.
[edit] Investment Management and Financial Theory
The vast majority of the investment management industry exists in direct contradiction to widely-held financial theory. In general, theory asserts the following: a portfolio that consists of assets that are traded in an efficient market will generate a return proportional to the 'riskiness' of the portfolio. 'Riskiness,' in this case, is generally defined as the covariance of the portfolio's return with the total market return (see efficient market hypothesis for more detail).
Of course, the business of asset management depends on investors' disbelief (or ignorance) of efficient market theory. To wit: financial theory holds that 'riskiness' is the only meaningful determinant of portfolio return; thus, a monkey throwing darts should have just a good a chance to pick a winning portfolio as the most highly-educated fund manager.
That said, some fund managers and investors (see Warren Buffet, Peter Lynch, Bill Miller (finance), among others) have consistently generated returns superior to the market for substantial periods of time. How do theorists explain this apparent empirical contradiction?
First, fund managers generally do not disclose the nature of their holdings during the year- they only disclose such information at year-end. Thus, it is impossible to determine the riskiness of their portfolios, which means we can't be sure that the 'superior' returns are in contradiction with theory.
Second, some of these fund managers control an incredible amount of wealth. As such, they can wield big sticks and offer big carrots, which means they are very likely to have substantially-greater access to firm information than the general public. Put simply, these managers might be using their clout to gather insider information; abnormal returns generated from trading on insider information does not refute EMT.
Third - and probably the most well reasoned - if enough people participate in a random activity, a few of them are bound to be 'successful.' This argument, put forth eloquently in Nassim Taleb's book Fooled by Randomness, is based on humankind's general inability to fully comprehend random processes. Consider the following game: you flip a coin... if it comes up heads, you win $10; tails, you lose $10. You're going to play the game 50 times in a row. In all likelihood, you will not flip 50 heads in a row, thus winning $500. Now consider 100,000 people playing the game. Someone is likely to flip 50 heads in a row; however, this outcome doesn't mean that the person is skilled at flipping a coin. It's simply the outcome of a random process. By extension: given the great number of fund managers who try to generate outstanding returns, we should naturally expect that some of them will succeed, even when such success is random.
The jury is still out on whether fund managers performance is in accord with financial theory or whether they are truly able to 'beat the market.' Given the continued growth of the industry, however, it certainly seems as though the investing public believes the latter.
[edit] References
- David Swensen, "Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment," New York, NY: The Free Press, May 2000.
- Rex A. Sinquefeld and Roger G. Ibbotson, Annual Yearbooks dealing with Stocks, Bonds, Bills and Inflation (relevant to long term returns to US financial assets).
- Harry Markowitz, Portfolio Selection: Efficient Diversification of Investments, New Haven: Yale University Press
- S.N. Levine, The Investment Managers Handbook, Irwin Professional Publishing (May 1980), ISBN 0-87094-207-7.
- Ahmed ELmi How to Invest!!, Elmi Publishing (June 2004), ISBN 0-458-77410-2
[edit] See also
- Corporate governance
- Investment
- Portfolio
- List of asset management firms
- Active management
- Passive management
- Exchange Fund
- Government financial reports
[edit] External links
- Investment Company Institute - US industry body
- Investment Management Association - UK industry body
- Institutional Investor - Industry flagship publication
- American Academy of Financial Management - Global Board of Standards
| Investment management |
|---|
|
Collective investment schemes: Common contractual funds • Fonds commun de placements • Investment trusts • Hedge funds • Unit trusts • Mutual funds • ICVC • SICAV • Unit Investment Trusts • Exchange-traded funds • Offshore fund • Unitised insurance fund Styles and theory: Active management • Passive management • Index fund • Efficient market hypothesis • Socially responsible investing • Net asset value Related Topics: List of asset management firms • Umbrella fund • Fund of funds • UCITS |
| General areas of finance |
|---|
| Financial markets • Investment management • Financial institutions • Personal finance • Public finance • Mathematical finance • Financial economics • Experimental finance • Computational finance |
lt:Investicijų valdymas nl:Vermogensbeheer pl:Zarządzanie aktywami
