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Investment management is the professional
asset management#REDIRECT Asset management#REDIRECT Asset management {{R from other capitalisation ...
{{R from other capitalisation ...
of various
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any form ...
, including shareholdings, bonds, and other
asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can be ...
s, such as
real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
, in order to meet specified
investment To invest is to allocate money in the expectation of some benefit/return in the future. In other words, to invest means owning an asset or an item with the goal of generating income from the investment or the appreciation of your investment whic ...
goals for the benefit of investors. Investors may be institutions, such as insurance companies, pension funds, corporations, charities, educational establishments, or private investors, either directly via investment contracts or, more commonly, via
collective investment scheme200px, thumbnail, The values and performance of collective funds are listed in newspapers An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as re ...
s like
mutual fund A mutual fund is an open-end professionally managed investment fund that pools money from many investors to purchase securities. Mutual funds are "the largest proportion of equity of U.S. corporations." Mutual fund investors may be retail or institu ...
s,
exchange-traded fund An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold throughout the day on stock exchang ...
s, or
REIT A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping ce ...
s. The term
asset management#REDIRECT Asset management#REDIRECT Asset management {{R from other capitalisation ...
{{R from other capitalisation ...
is often used to refer to the management of
investment fund200px, thumbnail, The values and performance of collective funds are listed in newspapers An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as re ...
s, while the more generic term 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 consider some of their services within the context of "
private banking Private banking is banking, investment and other financial services provided by banks and financial services firms primarily to high-net-worth individuals (HNWIs) with high levels of income or sizable assets. Private banking forms a more exclusive ( ...
".
Wealth managementWealth management (WM) or wealth management advisory (WMA) provides solutions to a wide array of clients ranging from affluent to high-net-worth (HNW) and ultra-high-net-worth (UHNW) individuals and families. It is a discipline which incorporates str ...
by financial advisors takes a more holistic view of a client, with allocations to particular asset management strategies. The term fund manager, or
investment adviser A financial adviser or financial advisor is a professional who provides financial services to clients based on their financial situation. In many countries, financial advisors must complete specific training and be registered with a regulatory bo ...
in the United States, refers to both a firm that provides investment management services and to the individual who directs fund management decisions. According to a
Boston Consulting Group Boston Consulting Group (BCG) is an American management consulting firm founded in 1963, headquartered in Boston, Massachusetts. The firm is the second largest consulting firm by revenue and one of the most prestigious in the world. BCG has been ...
study, the assets managed professionally for fees reached a historic high of US$62.4 trillion in 2012, after remaining flat since 2007, and were then expected to reach US$70.2 trillion a year later. The five largest asset managers are holding 22.7 percent of the externally held assets. Nevertheless, the market concentration, measured via the Herfindahl-Hirschmann Index, could be estimated at 173.4 in 2018, showing that the industry is not very concentrated.


Industry scope

The business of investment has several facets, the employment of professional fund managers, research (of individual assets and
asset classes In finance, an asset class is a group of financial instruments which have similar financial characteristics and behave similarly in the marketplace. We can often break these instruments into those having to do with real assets and those having t ...
), dealing, settlement, marketing,
internal audit#REDIRECT Internal audit#REDIRECT Internal audit {{R from other capitalisation ...
{{R from other capitalisation ...
ing, 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).


Key problems of running such businesses

Key problems include: * revenue is directly linked to market valuations, so a major fall in asset prices can cause 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 a few individuals- they would rather see firm-wide success, attributable to a single philosophy and internal discipline; * analysts who generate above-average returns often become sufficiently wealthy that they avoid corporate employment in favor of managing their personal portfolios.


Representing the owners of shares

Institutions often control huge shareholdings. In most cases, they are acting as fiduciary agents rather than principals (direct owners). The owners of shares theoretically have great power to alter the companies 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 Board's effective functioning). Such action would add a
pressure group Advocacy groups, also known as special interest groups, use various forms of advocacy in order to influence public opinion and ultimately policy. They play an important role in the development of political and social systems. Motives for action ...
to those (the regulators and the Board) overseeing management. However, there is the problem of how the institution should exercise this power. One way is for the institution to decide, the other is for the institution to poll its beneficiaries. Assuming that the institution polls, should it then: (i) Vote the entire holding as directed by the majority of votes cast? (ii) Split the vote (where this is allowed) according to the proportions of the vote? (iii) Or respect the abstainers and only vote the respondents' holdings? The price signals generated by large active managers holding or not holding the stock may contribute to management change. For example, this is the case when a large active manager sells his position in a company, leading to (possibly) a decline in the stock price, but more importantly a loss of confidence by the markets in the management of the company, thus precipitating changes in the management team. 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 Management (or managing) is the administration of an organization, whether it is a business, a not-for-profit organization, or government body. Management includes the activities of setting the strategy of an organization and coordinating the ...
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
BlackRock BlackRock, Inc. is an American multinational investment management corporation based in New York City. Founded in 1988, initially as a risk management and fixed income institutional asset manager, BlackRock is the world's largest asset manager, ...
and
Vanguard The vanguard (also called the advance guard) is the leading part of an advancing military formation. It has a number of functions, including seeking out the enemy and securing ground in advance of the main force. History The vanguard derives fr ...
—advocate simply owning every company, reducing the incentive to influence management teams. A reason for this last strategy is that the investment manager prefers a closer, more open, and honest relationship with a company's management team than would exist if they exercised control; allowing them to make a better investment decision. 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 Law is a system of rules created and enforced through social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been variously descr ...
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 seek consensus amongst all interested parties (against a background of strong unions and labour
legislation Legislation is law which has been promulgated (or "enacted") by a legislature or other governing body or the process of making it. Before an item of legislation becomes law it may be known as a bill, and may be broadly referred to as "legislation", ...
).


Size of the global fund management industry

Conventional
assets under management In finance, assets under management (AUM), sometimes called funds under management (FUM), measures the total market value of all the financial assets which a financial institution—such as a mutual fund, venture capital firm, or depository institu ...
of the global fund management industry increased by 10% in 2010, to $79.3 trillion.
Pension A pension (, from Latin ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments. A ...
assets accounted for $29.9 trillion of the total, with $24.7 trillion invested in mutual funds and $24.6 trillion in insurance funds. Together with alternative assets (sovereign wealth funds, hedge funds, private equity funds, and exchange traded funds) and funds of wealthy individuals, assets of the global fund management industry totalled around $117 trillion. Growth in 2010 followed a 14% increase in the previous year and was due both to the recovery in equity markets during the year and an inflow of new funds. The US remained by far the biggest source of funds, accounting for around a half of conventional
assets under management In finance, assets under management (AUM), sometimes called funds under management (FUM), measures the total market value of all the financial assets which a financial institution—such as a mutual fund, venture capital firm, or depository institu ...
or some $36 trillion. The UK was the second largest centre in the world and by far the largest in Europe with around 8% of the global total.


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 overarching beliefs of the investment organization. For example: (i) Does the manager buy
growth Growth may refer to:"''Quantative increase in size''". Biology * Auxology, the study of all aspects of human physical growth * Bacterial growth * Cell growth * Growth hormone, a peptide hormone that stimulates growth * Human development (biology) ...
or value shares, or a combination of the two (and why)? (ii) Do they believe in market timing (and on what evidence)? (iii) Do they rely on external research or do they 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: (i) Which universe of assets is explored before particular assets are chosen as suitable investments? (ii) How does the manager decide what to buy and when? (iii) How does the manager decide what to sell and when? (iv) Who takes the decisions and are they taken by committee? (v) 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 questions are, 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 or changes to the team), then arguably the performance record is completely unrelated to the existing team (of fund managers).


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.


Asset allocation

The different asset class definitions are widely debated, but four common divisions are
stock Stock (also capital stock) is all of the shares into which ownership of a corporation is divided.Longman Business English Dictionary In American English, the shares are collectively known as "stock". A single share of the stock represents fra ...

stock
s,
bonds Bond or bonds may refer to: Common meanings * Bond (finance), a type of debt security * Bail bond, a commercial third-party guarantor of surety bonds in the United States * Chemical bond, the attraction of atoms, ions or molecules to form chemical ...
,
real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
, and
commodities In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a commodit ...
. The exercise of allocating funds among these assets (and among individual securities within each asset class) is what investment management firms are paid for. Asset classes exhibit different market dynamics, and different interaction effects; thus, the allocation of the money 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 separate individual holdings, so as to outperform certain benchmarks (e.g., the peer group of competing funds, bond, and stock indices).


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 (e.g. 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.


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 many others). 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-correlation In signal processing, cross-correlation is a measure of similarity of two series as a function of the displacement of one relative to the other. This is also known as a ''sliding dot product'' or ''sliding inner-product''. It is commonly used for ...
s between the returns.


Investment styles

There are a range of different
styles Style is a manner of doing or presenting things and may refer to: * Architectural style, the features that make a building or structure historically identifiable * Design, the process of creating something * Fashion, a prevailing mode of clothing s ...
of fund management that the institution can implement. For example,
growth Growth may refer to:"''Quantative increase in size''". Biology * Auxology, the study of all aspects of human physical growth * Bacterial growth * Cell growth * Growth hormone, a peptide hormone that stimulates growth * Human development (biology) ...
, value, growth at a reasonable price (GARP), 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 Growth may refer to:"''Quantative increase in size''". Biology * Auxology, the study of all aspects of human physical growth * Bacterial growth * Cell growth * Growth hormone, a peptide hormone that stimulates growth * Human development (biology) ...
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. Large asset managers are increasingly profiling their equity portfolio managers to trade their orders more effectively. While this strategy is less effective with small-cap trades, it has been effective for portfolios with large-cap companies.


Performance measurement

FundFund may refer to: * Funding is the act of providing resources, usually in form of money, or other values such as effort or time, for a project, a person, a business, or any other private or public institution ** The process of soliciting and gather ...
performance A performance is an act of staging or presenting a play, concert, or other form of entertainment. It is also defined as the action or process of carrying out or accomplishing an action, task, or function. Management science In the work place, j ...

performance
is often thought to be 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 specialize in performance measurement. The leading performance measurement firms (e.g.
Russell Investment Group London Stock Exchange Group plc (LSEG) is a United Kingdom-based stock exchange and financial information company headquartered in the City of London. It owns the London Stock Exchange (on which it is also listed), Refinitiv, LSEG Technology, ...
in the US or BI-SAM in Europe) compile aggregate industry data, e.g., showing how funds in general performed against given
performance A performance is an act of staging or presenting a play, concert, or other form of entertainment. It is also defined as the action or process of carrying out or accomplishing an action, task, or function. Management science In the work place, j ...

performance
indices and peer groups over various time periods. In a typical case (let us say an
equity fund A stock fund, or equity fund, is a fund that invests in stocks, also called equity securities. Stock funds can be contrasted with bond funds and money funds. Fund assets are typically mainly in stock, with some amount of cash, which is generally qu ...
), 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. It is probably appropriate for an investment firm to persuade its clients to assess performance over 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, industry wide, there is a serious preoccupation with short-term numbers and the effect on the relationship with clients (and resultant business risks for the institutions). An enduring problem is whether to measure Earnings before interest and taxes, before-tax or after-tax performance. After-tax measurement represents the benefit to the investor, but investors' tax positions may vary. Before-tax measurement can be misleading, especially in regimens that tax realised capital gains (and not unrealised). It is thus possible that successful active managers (measured before tax) may produce miserable after-tax results. One possible solution is to report the after-tax position of some standard taxpayer.


Risk-adjusted performance measurement

Performance measurement should not be reduced to the evaluation of fund returns alone, but must also integrate other fund elements that would be of interest to investors, such as the measure of risk taken. Several other aspects are also part of performance measurement: evaluating if managers have succeeded in reaching their objective, i.e. if their return was sufficiently high to reward the risks taken; how they compare to their peers; and finally, whether the portfolio management results were due to luck or the manager's skill. The need to answer all these questions has led to the development of more sophisticated performance measures, many of which originate in modern portfolio theory. Modern portfolio theory established the quantitative link that exists between portfolio risk and return. The capital asset pricing model (CAPM) developed by Sharpe (1964) highlighted the notion of rewarding risk and produced the first performance indicators, be they risk-adjusted ratios (Sharpe ratio, information ratio) or differential returns compared to benchmarks (alphas). The Sharpe ratio is the simplest and best known performance measure. It measures the return of a portfolio in excess of the risk-free rate, compared to the total risk of the portfolio. This measure is said to be absolute, as it does not refer to any benchmark, avoiding drawbacks related to a poor choice of benchmark. Meanwhile, it does not allow the separation of the performance of the market in which the portfolio is invested from that of the manager. The information ratio is a more general form of the Sharpe ratio in which the risk-free asset is replaced by a benchmark portfolio. This measure is relative, as it evaluates portfolio performance in reference to a benchmark, making the result strongly dependent on this benchmark choice. Portfolio alpha is obtained by measuring the difference between the return of the portfolio and that of a benchmark portfolio. This measure appears to be the only reliable performance measure to evaluate active management. In fact, we have to distinguish between normal returns, provided by the fair reward for portfolio exposure to different risks, and obtained through passive management, from abnormal performance (or outperformance) due to the manager's skill (or luck), whether through market timing, stock picking, or good fortune. The first component is related to allocation and style investment choices, which may not be under the sole control of the manager, and depends on the economic context, while the second component is an evaluation of the success of the manager's decisions. Only the latter, measured by alpha, allows the evaluation of the manager's true performance (but then, only if you assume that any outperformance is due to skill and not luck). Portfolio return may be evaluated using factor models. The first model, proposed by Jensen (1968), relies on the Capital asset pricing model, CAPM and explains portfolio returns with the market index as the only factor. It quickly becomes clear, however, that one factor is not enough to explain the returns very well and that other factors have to be considered. Multi-factor models were developed as an alternative to the Capital asset pricing model, CAPM, allowing a better description of portfolio risks and a more accurate evaluation of a portfolio's performance. For example, Fama and French (1993) have highlighted two important factors that characterize a company's risk in addition to market risk. These factors are the book-to-market ratio and the company's size as measured by its market capitalization. Fama and French therefore proposed three-factor model to describe portfolio normal returns (Fama–French three-factor model). Carhart (1997) proposed to add momentum as a fourth factor to allow the short-term persistence of returns to be taken into account. Also of interest for performance measurement is Sharpe's (1992) returns-based style analysis, style analysis model, in which factors are style indices. This model allows a custom benchmark for each portfolio to be developed, using the linear combination of style indices that best replicate portfolio style allocation, and leads to an accurate evaluation of portfolio alpha.


Education or certification

Increasingly, international business schools are incorporating the subject into their course outlines and some have formulated the title of 'Investment Management' or 'Asset Management' conferred as specialist bachelor's degrees (e.g. Cass Business School, London). For those with aspirations to become an investment manager, further education may be needed beyond a bachelors in business, finance, or economics. Designations, such as the Chartered Financial Analyst (CFA) , internationally, or the more local Chartered Investment Manager (CIM) in Canada, and the Certified International Investment Analyst (CIIA) in Europe and Asia, are increasingly required for practitioners in the investment management industry. A graduate degree, typically the MBA or Master of Finance, MSF may also assist, and is increasingly required, for a career in investment management. See . There is evidence that any particular qualification enhances the most desirable characteristic of an investment manager, that is, the ability to select investments that result in an above average (risk weighted) long-term performance.


Investment management certifications

* Chartered Alternative Investment Analyst (CAIA) * Chartered Financial Analyst (CFA) * Canadian Investment Manager, Chartered Investment Manager (CIM) * Chartered_Institute_for_Securities_%26_Investment#Qualifications, Chartered Wealth Manager (CWM)


Comparison to wealth management

Wealth managementWealth management (WM) or wealth management advisory (WMA) provides solutions to a wide array of clients ranging from affluent to high-net-worth (HNW) and ultra-high-net-worth (UHNW) individuals and families. It is a discipline which incorporates str ...
, where Financial adviser, financial advisors perform financial planning for clients, has traditionally served as an intermediary to investment managers in the United States and less so in Europe. However, as of 2019, the lines were becoming blurred.


See also

*Active management *Alpha capture system *Asset management company *Corporate governance *Exchange fund *Exchange-traded fund *Factor investing *Financial management *Fund governance *Investment *List of asset management firms *Passive management *Pension fund *Portfolio (finance), Portfolio *Quantitative investing *Securities lending *Separately managed account *Transition management *


References


Further reading

* * 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), . * V. Le Sourd, 2007, "Performance Measurement for Traditional Investment – Literature Survey", EDHEC Publication. * D. Broby, "A Guide to Fund Management", Risk Books, (Aug 2010), . * C. D. Ellis, "A New Paradigm: The Evolution of Investment Management." Financial Analysts Journal, vol. 48, no. 2 (March/April 1992):16–18. * *


External links


Investment Company Institute
– US industry body
Investment Management Association
– UK industry body {{Financial risk Investment management,