Brief about Investment Management

Introduction

Every individual saves some part of his or her income for any unforeseen
situation. In addition to this, saving is also important for every person as adequate
amount of money in the account after retirement will ensure a better and tension free
life. But putting money just in locker is considered as dead investment as the saved
amount will not grew. Further, it is also a well known fact that human being is a greedy
animal (Pihlman, et. al., 2011). He wants to see his money growing in leaps and bounds
and for this purpose only, instead of putting money just in the lockers, now day people
are more interested in investing their capital in certain areas which gives good returns
(Pihlman, et. al., 2011). In order to make quick bucks, people are investing their savings
in different schemes which delivers good returns. In this regards, stock market has
come up as one of the most popular areas in which people are readily investing their
money on different-different stocks for getting higher returns. Putting money in savings
accounts does not reap higher returns, so now day people are more interested in share
market as it has generated better returns in recent past (Focardi and Fabozzi, 2004). But
before investing money in the stocks of different companies, it is essential for every
investor to have adequate knowledge regarding the investment management.

Investment management can be defined as purchase and sale of investments

within a portfolio. The area of investment management is quite wide which includes
banking, budgeting activities and taxes; but in general perspective investment
management refers to trading of securities and portfolio management to attain some
desired goals (Pihlman, et. al., 2011). Major activities involved in investment
management are:

 Analyzing financial statements of the companies

 Selection of stocks
 Selection of assets
 Implementing desired plan, and
 Continuous monitoring of investment activities (Fabozzi, 2008).

Investment Objectives and Philosophy

Objectives

Below mentioned are main objectives of all the investors depending on their risk taking
capabilities and stage of life:

 Income: The main motive behind making investment of all the investors is generating income.
They consider share market as alternative source of income and invest in securities which deliver
higher returns (Focardi and Fabozzi, 2004).
  Growth and income: Another investment object of an investor is both; capital gain and income.
Most of the people don’t only want extra income; rather they also want appreciation of their
capital. Capital appreciation is associated with the risk taking capability of an investor.
 Safety: Investments are never considered to be safe as some kinds of risks are always
associated with them. Still there are some investment products such as government bonds, fixed
deposits which deliver low but continuous returns. People who invest in such instrument have
main objective of security of their invested capital (Fabozzi, 2008).
 Growth: Unlike growth and income, an objective of some of the investors is only growth, that
is, they do not want any income from their investment, rather just want to see their capital
growing. Such investors invest in commodities, property market, gold, mutual funds, etc.
 Active trading / speculation: Another objective of investors is active trading or speculation of
the market activities (Focardi and Fabozzi, 2004).

Apart from above stated objectives, some of the other objectives of investment are tax
exemption and liquidity.

Philosophy

Different people have different motive behind making investment in any form of
instrument. Thus, investment philosophy defines certain principles on the basis of
which an individual makes decision of investment (Swensen, 2009). These philosophies
may vary from people to people such as:

 Fundamental Investing: With this philosophy, an individual or group evaluate the earnings
prospects of the firm and on the basis of that makes their investment decision.
 Value Investing: In such kind of philosophy, investor analyzes all the stocks and identifies the
companies whose stocks are undervalued. Further, such individuals believe that there are higher
chances of these stocks to deliver better returns (Brentani, 2003).
 Growth Investing: Investors with such philosophy believe that it is beneficial to invest in those
stocks which are form the emerging sectors. Products and services which are from emerging
sectors have higher growth prospects and are expected to deliver returns at higher rates
(Smithson, 2003).
 Technical Investing: These are the individuals who invest on the basis of past performance of
the stock and neglect its current standing. Such investors evaluate the past data of the companies
and on the basis if analysis of the data makes sell or buy decision (Kendall and Rollins, 2003).
 Socially Responsible Investing: Investors with such kind of philosophy looks for those stocks
which actively participate in corporate social activities. They feel those companies which follows
ethical business standards and stick to moral standards will produce better results in comparison
to other companies (Focardi and Fabozzi, 2004).
 Contrarian Investing: Investors with this kind of philosophy are handful in the market. They
perform just opposite kind of activity in relation to the rest of the market. There trading decisions
are contradict to the majority of the market. For example, if the other investors will go for buying of
certain stocks, they will go for its selling and vice versa (Pihlman, et. al., 2011).

Portfolio Strategy and Asset Allocation

Portfolio Strategy

Investors invest in more than one stock on the basis of performance of particular
stocks. Thus, combination of all the stocks is known as portfolio of stock. Portfolio
strategies are not but general guidelines that help investors in strategically investing in
stocks of different companies so as to meet their financial goals. It deals with designing
of optimal portfolio and asset pricing. In this regards, risk return trade off is the best
tool which is widely used by the investors in selection of optimal portfolio (Kendall and
Rollins, 2003). Further, the Capital Asset Pricing Model (CAPM) shows that measure of
sensitivity (β) is in proportion to the asset’s risk premium.

Asset Allocation

While putting money in any investment instrument, it is essential to properly allocate

the funds in different assets. Thus asset allocation can be termed as investment
strategy that helps in adequately investing money into different stocks or instruments
so that the portfolio can achieve a balance between risk and reward. In other words it
can be said that this strategy deals in adjusting the percentage of different assets in the
portfolio as per the investment time frame, goals and risk tolerance capacity of an
investor (Kendall and Rollins, 2003). Basically this strategy is adopted by the investor for
diversifying its investment portfolio so that overall risk from the investment can be
reduced. Return of an investment is majorly dependent on the allocation of the assets
in the portfolio. Characteristics of different assets are different from each other and
they perform differently in different economic scenario and market conditions. Further,
different investment instruments deliver different returns and these different returns
are not perfectly correlated (Kendall and Rollins, 2003). Thus, an optimal portfolio is one
which is quite diversified, that is which consists of different-different investment
instrument with varied characteristics so that overall risk from the investment can be
reduced and still the investment reaps higher returns. Here are some of the strategies
that can be used for achieving optimum assets allocation:

Strategic Asset Allocation: this is the most common method of asset allocation and
focuses on the concept of basic policy mix. That it, it includes stocks form each asset
class based on their expected rate of returns. For example, the portfolio may consist of
fifty per cent bonds with annual return of five per cent and fifty per cent stock with
annual return of ten per cent so as to achieve a return of about seven and half per cent
(Focardi and Fabozzi, 2004).

Constant Weighting Asset Allocation: The above focus on buy and hold concept. Thus,
even if the scenario changes, the portfolio remains the same. To overcome from this,
one may adopt a constant weighting asset allocation approach. In this approach, the
investor keeps on rebalancing the portfolio as per the changes in the economic and
market conditions. For example, if some stock is not performing well and its prices are
going down, investor can invest on it and other the other hand, if price of any particular
stock is going up, the investor can sell that stock (Focardi and Fabozzi, 2004). As such
there is not thumb rule for time of rebalancing the portfolio in strategic and constant
weighting assets allocation, but generally it is advice to rebalance the portfolio when the
actual value of the portfolio changes five per cent from its original value.

Tactical Asset Allocation: If an investor invests for longer time duration, in such cases the
above stated allocation strategies proves to be rigid (Pihlman, et. al., 2011). Therefore,
sometimes it is beneficial to invest in some securities for shorter time period to practice
tactical deviation and to benefit from exceptional investment opportunities. Further,
this strategy brings flexibility. This is regarded as moderately active strategy but in this
the investor must have knowledge of short term investment opportunity, so that later
on he can again rebalance the portfolio (Pihlman, et. al., 2011).

Dynamic Asset Allocation: Next strategy adopted by some of the investors is dynamic
asset allocation strategy. It is also an active asset allocation strategy in which investor
keeps on adjusting the proportion of different investment instruments with the rise and
fall of market. Further changes in the economic conditions also force an investor to
change this asset mix (Pihlman, et. al., 2011). Dynamic asset allocation strategy is just
opposite of constant weighing strategy as in this strategy investors buys or hold those
assets which are rising and sell those assets which are declining. For example, due to
certain reasons if stock market starts declining, an investor starts selling his assets
assuming that the market will fall further and similarly if stock market starts performing
well, investor buys stocks with a hope that the market will continue to perform well
(Focardi and Fabozzi, 2004).

Insured Asset Allocation: Another asset allocation strategy which is practiced by many
investors is insured asset allocation strategy. Under this strategy an investor set the
base value of the stock and tries that the portfolio value does not go below the base
level. As long as the value of portfolio is above the base value or is increasing, investor
practices active management and tries to keep on increasing the value of the portfolio
(Focardi and Fabozzi, 2004). On the other hand, if the value of the portfolio, due to some
reason starts declining, investor starts investing in risk free assets such as government
bonds, fixed deposit, etc. so as to limit the base level. This type of strategy is practiced
by investors who want secured returns and are involved in limited active portfolio
management (Pihlman, et. al., 2011).

Integrated Asset Allocation: Last in this series is the integrated asset allocation strategy.
Under this strategy, while deciding the elements of the portfolio, investor considers
both the parameter; his economic expectation and his risk taking capabilities (Kendall
and Rollins, 2003). All the above stated asset allocation strategy only considers future
economic expectations of an investor and does not focus on his risk taking capacity or
his investment risk tolerance. But in case of integrated asset allocation strategy, it
considers various aspects of all the above stated strategies. In addition to economic
expectation, it also accounts for rise and fall in stock market and risk tolerance
capabilities (Focardi and Fabozzi, 2004). Among all the strategies, integrated asset
allocation strategy is the broadest asset allocation strategy, but it allows investor to
practice only one asset allocation strategy at a time, either dynamic asset allocation
strategy or constant weighting asset allocation strategy (Kendall and Rollins, 2003).