@investment Management 01

INTRODUCTION:
Do you like following the financial marketswhether it be reading The Wall Street Journal, watching CNBC, or checking stock prices on the Internet? Imagine an industry that rewards individuals for working independently, thinking on their feet and taking calculated risks. Additionally, how many industries can you think of that broadly impact households all over the world? Very few. That is one of the many exciting aspects of the investment management industry. The investment management community seeks to preserve and grow capital, and generate income for individuals and institutional investors alike. Investment management is the professional management of various securities (shares, and assets (e.g., real be institutions bonds in and order other to meet pension securities) specified funds, estate)
investment goals for the benefit of the investors. Investors may (insurance and companies, more corporations etc.) or private investors (both directly via investment investment funds).
Investment Management Page 1
contracts
commonly
via collective
schemes e.g. mutual
funds or exchange-traded
Investment Management vs. Asset Management A quick note about the terms investment management and asset management: these terms are often used interchangeably. They refer to the same practice-the professional management of assets through investment. Investment management is used a bit more often when referring to the activity or career (i.e., Im an investment manager or That firm is gaining a lot of business in investment management), whereas asset management is used more with reference to the industry itself (i.e., The asset management industry).
Investment Management
Page 2
EVOLUTION:
To better understand why asset management has become such a critical component of the broader financial services industry, we must first become acquainted with its formation and history. The beginnings of a separate industry While the informal process of managing money has been around since the beginning of the 20th century, the industry did not begin to mature until the early 1970s. Prior to that time, investment management was completely relationship-based. Assignments to manage assets grew out of relationships that banks and insurance companies already had with institutionsprimarily companies or municipal organizations with employee pension fundsthat had funds to invest. (A pension fund is set up as an employee benefit. Employers commit to a certain level of payment to retired employees each year and must manage their funds to meet these obligations. Organizations with large pools of assets to invest are called institutional investors.) These asset managers were chosen in an unstructured way assignments grew organically out of pre-existing relationships, rather than through a formal request for proposal and bidding process. The actual practice of investment management was also unstructured. At the time, asset managers might simply pick 50 stocks they thought
Page 3
were good investmentsthere was not nearly as much analysis on managing risk or organizing a fund around a specific category or style. (Examples of different investment categories include small cap stocks and large cap stocks. We will explore the different investment categories and styles in a later chapter). Finally, the assets that were managed at the time were primarily pension funds. Mutual funds had yet to become broadly popular. The rise of the mutual fund In the early to mid-1980s, the mutual fund came into vogue. While mutual funds had been around for decades, they were only generally used by almost exclusively financially sophisticated investors who paid a lot of attention to their investments. However, investor sophistication increased with the advent of modern portfolio theory. Asset management firms began heavily marketing mutual funds as a safe and smart investment tool, pitching to individual investors the virtues of diversification and other benefits of investing in mutual funds. Many specialists responded by expanding their product offerings and focusing more on the marketing of their new services and capabilities.
Page 4
BUY-SIDE
V/S
SELL-SIDE
OF
INVESTMENT
MANAGEMENT:
If youve ever spoken with investment professionals, youve probably heard them talk about the buy-side and the sell-side. What do these terms mean, what are the differences in the job functions, and how do the two sides of the Street interact with one another? Whats the difference? The sell-side refers to the functions of an investment bank. Specifically, this includes investment bankers, traders and research analysts. Sell-side professionals issue, recommend, trade and sell securities to the investors on the buy-side to buy. The sell-side can be thought of primarily as a facilitator of buy-side investmentsthe sell-side makes money not through a growth in value of the investment, but through fees and commissions for these facilitating services. Simply stated, the buy-side refers to the asset managers who represent individual and institutional investors. The buy-side purchases investment products (such as stocks or bonds) on behalf of their clients with the goal of increasing its assets On the surface, the roles of buy-side and sell-side analysts sound remarkably similar. However, the day-to-day job is quite different. Sell-side analysts not only generate investment recommendations, they also need to market their ideas. This involves publishing
Page 5
elaborate and lengthy investment reports and meeting with their buyside clients. In contrast, the buy-side analyst focuses entirely on investment analysis. Also, the buy-side analyst works directly with portfolio managers at the same firm, making it easier to focus on the relevant components of the analysis. The sell-side analyst is writing not for a specific team of professionals, but for the buy-side industry as a whole.
Page 6
Positions in sell-side
The hierarchy in a research department can be quite confusing since the nomenclature differs with traditional investment banking. The senior role in research is analyst (which is confusing since it is the most junior role in investment banking).
RESEARCH DEPARTMENT Analyst
INVESTMENT BANKING DEPARTMENT Management Director
Vice President Associate Analyst (Junior Analyst)
Associate Associate Analyst
Page 7
Positions in buy-side
In general, buy-side firms have a three-segment professional staff consisting of: Portfolio managers who invest money on behalf of clients Research analysts who provide portfolio managers with potential investment recommendations and in some cases invest money in their respective sectors Account and product and managers the who manage client to
relationships
distribute
investment
products
individual and institutional investors
Client
Portfolio Manager Portfolio Analyst/ Associate Account/ Project Manager Account Management Associate Product Management Associate
Research Analyst
Research Associate Research Assistant

Page 8
Investment Banking vs. Investment Management There are several differences between the two careers. The primary difference is that investment bankers work in the primary markets, structuring and issuing various securities, while investment managers work in the secondary markets, making decisions on which securities to invest in.
Page 9
The Clients of Investment Managers:

Typically, asset management firms are categorized according to the kind of clients they serve. Clients generally fall into one of three categories: (1) mutual funds (or retail), (2) institutional investors, or (3) high net worth. Some firms specialize in one of the three components, but most participate in all three. Asset management firms usually assemble these three areas as distinct and separate divisions within the company. It is critical that you understand the differences between these client types; job descriptions vary depending on the client type. For instance, a portfolio manager for high-net-worth individuals has an inherently different focus than one representing institutional clients. A marketing professional working for a mutual fund has a vastly different job than one handling pensions for an investment management firm.
1. Mutual Funds Mutual funds are investment vehicles for individual investors who are typically below the status of high net worth (we will discuss individual high net worth investing later in this chapter). Mutual funds are also sometimes known as the retail division of asset management firms.
Page 10
Mutual funds are structured so that each investor owns a share of the fund investors do not maintain separate portfolios, but rather pool their money together. Their broad appeal can generally be attributed to the ease of investing through them and the relatively small contribution needed to diversify investments. Investment gains from mutual funds are taxable unless the investment is through an retirement plan. (If you take some money youve saved and invest in a mutual fund, youll have to pay capital gains taxes on your earnings.) In the past 10 years, mutual funds have become an increasingly integral part of the asset management industry. They generally constitute a large portion of a firms assets under management (AUMs) and ultimate profitability. There are three ways that mutual funds are sold to the individuals that invest in them(1) through third-party brokers or fund supermarkets; (2) direct to customer or (3) through company 401(k) plans. The size and breadth of the asset management company typically dictates whether one or two of the methods are used. Third-party brokers and fund supermarkets: Over the past five years, an increasingly popular distribution platform for mutual funds has been to sell them through brokerage firms or fund supermarkets. By selling through these channels, asset
management companies can leverage the huge access to the clients that the brokers maintain. In a classic broker relationship, a company with a sales force partners with several investment management firms to offer their investment products. Then, for instance, Merrill Lynch and Morgan Stanley not only sell their own mutual funds, but offer their clients access to mutual funds from Vanguard, Putnam and AIM as well. This additional access to multiple mutual fund products helps the brokers win business; brokers earn a commission from the asset management companies they recommend. Brokers develop relationships with individual investors not only by executing trades, but also by dispensing advice and research. Fund supermarkets, such as Charles Schwab, became increasingly popular in the late 1990s. These firms are set up similarly to brokerage houses, but the supermarkets carry virtually every major asset management firms products, dont expend as much energy on providing advice and other relationship building activities, and take lower commissions. The rise of the fund supermarkets has forced conventional brokerage firms to open up their offerings to include more than a few select partners. It has also influenced the way mutual funds market themselves. Previously, funds marketed to brokers, and expected brokers to then push their products to individual investors. Now, mutual fund companies increasingly must appeal directly to investors themselves. Direct to customer:
Page 12
Through an internal sales force, asset management companies offer clients access to the firms entire suite of mutual funds. This type of sales force is very expensive to maintain, but some companies, such as have been extremely successful with this method. Prior to the rise of brokers and fund supermarkets, direct to customer was the primary vehicle for investment in many mutual fundsif you wanted a Fidelity fund, you had to open an account with Fidelity. 401(k) plans: An increasingly popular sales channel for mutual funds is the 401(k) retirement plan. Under 401(k) plans, employees can set aside pre-tax money for their retirements. Employers hire asset management firms to facilitate all aspects of their employees 401(k) accounts, including the mutual fund options offered. By capturing the management of these 401(k) assets, the firms dramatically increase the sale and exposure of their mutual fund products. In fact, many asset management companies have developed separate divisions that manage the 401(k) programs for companies of all sizes.
2. Institutional Investors Institutional investors are very different from their mutual fund brethren.
Page 13
These clients represent large pools of assets for government pension funds, corporate pension funds, endowments and foundations. Institutional investors are also referred to in the industry as sophisticated investors and are usually represented by corporate treasurers, CFOs and pension boards. More conservative: Given their fiduciary responsibility to the people whose retirement assets they manage, institutional clients are usually more conservative and diversified than mutual funds. Unlike investors in mutual funds, institutional clients have separately managed portfolios that, at a minimum, exceed $10 million. Also unlike mutual funds, they are all exempt from capital gains and investment income.
3. High Net Worth High-net-worth individuals represent the smallest but fastest growing client type. Individual wealth creation and financial sophistication over the past decade has driven asset managers to focus heavily in this area. What is high net?
Page 14
What is a high-net-worth investor? Definitions differ, but a good rule of thumb is an individual with minimum investable assets of $5 to $10 million. These investors are typically taxable (like mutual funds but unlike institutional investors), but their portfolio accounts are managed separately (unlike mutual funds, but like institutions). High-net-worth investors also require high levels of client service. Those considering entering this side of the market should be prepared to be as interested in client relationship management as in portfolio management, although the full force of client relations is borne not by a portfolio manager but a sell-side salesperson in a firms private client services (PCS) or private wealth management (PWM) division. Says one investment manager about PCS sales, If [clients] tell them theyre out of paper towels, theyll probably go to their houses and bring them. Clients and consultants: An investment management firms internal relationship management sales force typically sells high-net-worth services in one of two ways: either directly to wealthy individuals or to third parties called investment consultants who work for wealthy individuals. The first method is fairly straightforward. An investment managers sales force, the PCS unit, pitches services directly to the individuals with the money. In the second method, a firms internal sales force does not directly pitch those with the money, but rather pitches representatives, often called investment consultants, of high-netInvestment Management Page 15
worth clients. In general, investment consultants play a much smaller role in the high-net-worth area than the institutional side; only extremely wealthy individuals will enlist investment consultant firms to help them decide which investment manager to go with.
The Investment Consultant Not to be confused with retail brokers, investment consultants are third party firms enlisted by institutional investors, and to a lesser extent by high-net-worth individuals, to aid in the following: devising appropriate asset allocations, selecting investment managers to fulfill these allocations, and monitoring the chosen investment managers services. An investment consultant might be hired by a client to assist on one or all of these functions depending on certain variables, such as the clients size and internal resources. For example, McKinsey & Company.
Page 16
Financial Research Breakdown:

For this, there is research required. Here, there are several distinctions between types of researchbreaking it down by style, capital structure and firm. While the main focus will be on fundamental equity and fixed income research, it will also discuss the other types of research as well as the functional roles analysts play at different types of firms.
1. Research Styles
Fundamental research: Fundamental research takes a deep dive into a companys financial statement as well as industry trends in order to extrapolate buy and sell investment decisions. There is no clear cut way in conducting fundamental research but it normally includes building detailed financial models, which project items such as revenue, earnings, cash flows and debt balances. Some asset managers may focus solely on earnings growth while others may focus on returns on invested capital (ROIC). It is important for the candidate to understand the firms investment philosophy. This can usually be achieved by doing research on the companys web site. It is important to note that while some firms have clear cut investment philosophies, others may not. Aside from building a financial model, the
Page 17
fundamental research analyst will talk to company management as well as sell-side analysts, and visit company facilities in order to get a complete perspective of the potential investment. Again, the way analysts go about this often differs. Some researchers feel comfortable with only the resources at their desktheir computer, internet, and phonewhile others refuse to make investment decisions without face-to-face management meetings and visiting manufacturing facilities (which is often referred to as kicking the tires). Quantitative research: Quantitative research is built on algorithms and models, which seek to extrapolate value The from various market between discrepancies fundamental or and inefficiencies. key difference
quantitative research is where the analyst puts in the work. The majority of work for a quantitative analyst rests within choosing the parameters, inputs, and screens for the computer generated model. These models can take on a multitude of forms. For example, a simple model that seeks to take advantage of price discrepancies in the S&P 500 may split the 500 stocks between those that are undervalued as determined by a low price-to-book multiple from those that are overvalued as determined by a high price-to-book multiple. The quantitative analyst would build a model that would screen for these parameters and would buy (or go long) the undervalued stocks while simultaneously sell (or short) the overvalued stocks. In reality, quantitative models are much more
complex than the example provided and often screen for thousands of securities across a multitude of exchanges. It is not a surprise to learn that the brains behind these models often have PhDs in fields such as finance and physics. Technical research: Technical research or analysis is the practice of using charts and technical indicators to predict future prices. Technical indicators include price, volume and moving averages. Technical analysts are sometimes known as chartists because they study the patterns in technical indicator charts in order to extrapolate future price movements. Over time, technical analysts try to identify patterns and discrepancies in these charts and use that knowledge to place trades. While fundamental analysts believe that the underlying fundamentals (revenue, earnings, cash flow) of a company can predict future stock prices, technical analysts believe that technical indicators can predict future stock prices. The skill set for technical research is very different than fundamental research. Some technical analysts rely solely on their eyes to spot trading opportunities while others use complex mathematical indicators to identify market imbalances.
2. Capital Structure: Equity vs. Fixed Income

Across the buy-side and sell-side, fundamental analysts often focus on either equities or fixed income (debt). What are the differences
between a fundamental equity and fixed income investor? The differences primarily lie within the fundamental financial analysis and breadth of coverage. Fundamental financial analysis: Fundamentals affect equity prices and bond prices in similar fashions. If a company is generating strong revenue and earnings growth, improving its balance sheet, and is gaining market share in its industry, both its stock and bond prices will likely increase over time. Most equity analysts and stock investors are focused on net income per share or earnings per share (EPS), as this represents the amount a company earns and is available per share of common stock. Another factor that equity investors are concerned about is how management deploys its excess cash. Analysts are constantly looking for earnings accretion, or the ability to increase earnings per share. If company management uses excess cash to make a smart acquisition or repurchase its own stock, equity investors are generally pleased as the transaction increases EPS. For fixed income analysts and bond investors, the emphasis is not necessarily on earnings but more so on earnings before interest and taxes or EBIT. Bond holders are primarily focused with receiving interest payments and the return of principal. Therefore, they often only follow the income statement up until the point where interest is paid. Another key focus for fixed income investors is the amount of debt (or leverage) a company has on its balance sheet. Since debt
holders have claims on a firms assets, the more debt there is, the less of a claim each debt holder may have on a given amount of assets. Fixed income analysts and investors are often focused on two metrics the leverage ratio (debt/EBITDA) and interest coverage ratio (EBITDA/interest expense). EBITDA stands for earnings before interest taxes depreciation and amortization, and is generally used as a proxy for cash flow. Fixed income analysts like a decreasing leverage ratio as it signifies less debt on the balance sheet and a greater ability to repay it, and an increasing interest coverage ratio as it signifies the greater ability to service the outstanding debt. Breadth of coverage: Breadth of coverage refers to the amount of companies and securities an analyst covers. Most companies usually issue only one type of equity security but could have several pieces of debt outstanding. The fixed income analyst usually would cover all of these debt instruments, which may each have separate and distinct provisions that could alter their individual performances. Additionally, a company may have convertible bonds, which the fixed income analyst would typically cover. Sell-side equity analysts typically cover between 15 and 20 stocks and are expected to know even the most minutiae of details about each company. Buy-side equity analysts typically follow 40 to 70 companies. While they may not know as much detail as a sell-side
analyst, if they make a sizable investment in a stock, they are expected to know just as much if not more detail than their sell-side counterpart. While coverage for equity analysts is typically broken down into industry subsectors (for example, airlines would be a subsector of the transportation industry), fixed income analysts often cover the entire industry (which could equate to over 100 companies). So while there can be several equity analysts covering the transportation industry, there may only be one fixed income analyst. Debt markets are often less liquid than equity markets and do not trade on small pieces of information. Therefore, the fixed income analyst does not need to know as much detail about each particular company. However, should the buy-side fixed income analyst make a sizable investment in a company, it would not be surprising for him to know as much detail as an equity analyst.
3. Research Roles: Traditional vs. Alternative Asset Managers

While fundamental analysts generally perform the same function regardless of the type of firm, the role can be slightly different and is mainly driven by the investment time horizon. Traditional:
Page 22
Traditional asset managers often hire analysts and put them in charge of becoming experts in certain industries. Achieving this status takes years of diligent research and the traditional asset managers are often patient with their analysts as they build up industry knowledge. The research process for a particular company could take months before an investment is made. However, since both analysts and clients at traditional asset managers are typically long-term investors, they are very patient and will often wait years to capitalize on certain themes. Alternative: Alternative asset managers typically have a shorter time horizon as their clients depend on positive returns every year. They often do not have the luxury of waiting several years for investments to pay off as do traditional asset managers. Therefore, analysts at hedge funds often have to act quickly and decisively. They are not always categorized by industry but may cover several industries (and are then referred to as generalists). Oftentimes, a portfolio manager at a hedge fund may tell his analyst to research a particular industry in the morning and get back to him with the best investments by the afternoon. The day is often intense. One hedge fund analyst remarked, I spent the early morning looking at airline stocks, the afternoon looking at retail stocks, and finished the day looking at credit card processors.
Page 23
Investment Styles:
Investment style is often a loosely used term in the industry and is a reference to how a portfolio is managed. These styles are typically classified in one of three ways: 1) The type of security (i.e., stocks vs. bonds) 2) The risk characteristics of the investments (i.e., growth vs. value stocks) 3) The manner in which the portfolio is constructed (i.e., active vs. passive funds) It is important to note that each of these styles is relevant to all the client types covered in the previous chapter (mutual fund, institutional and high net- worth investing).
The drive for diversification The investment industrys maturation over the last 20 years has been led by the power of portfolio theory and investors desire for diversification of investments. During this period, investors have grown more sophisticated, and have increasingly looked for multiple investment styles to diversify their wealth.
Page 24
Typically, investors (whether they are individual or institutional) allocate various portions of their assets to different investment styles. If you think of the overall wealth of an individual or institution as a pie, you can think of each slice as investing in a different portfolio of securitiesthis is whats called diversification. The style of a portfolio, such as a mutual fund, is clearly indicated through its name and marketing materials so investors know what to expect from it. Adherence to the styles marketed is more heavily scrutinized by institutions and pension funds than by mutual fund customers. Institutional investors monitor their funds every day to make sure that the asset manager is investing in the way they said they would.
Types of Security
Type of security is the most straightforward category of investment style. For the most part, investment portfolios invest in either equity or debt. Some funds enable portfolio managers to invest in both equity and debt while other funds focus on other types of securities, such as convertible bonds. However, for the purpose of this analysis, we will focus on straightforward stocks and bonds. Stocks Equity portfolios invest in the stock of public companies. This means that the portfolios are purchasing a share of the companythey are actually becoming owners of the company and, as a result, directly
benefit if the company performs well. Equity investors may reap these benefits in the form of dividends (the distribution of profits to shareholders), or simply through an increase in share price. Bonds Fixed income portfolios invest in bonds, a different type of security than stocks. Bonds can be thought of as loans issued by organizations like companies or municipalities. (In fact, bonds are often referred to simply as debt.) Like loans, bonds have a fixed term of existence, and pay a fixed rate of return. For example, a company may issue a five-year bond that pays a 7 percent annual return. This company is then under a contractual obligation to pay this interest amount to bondholders, as well as return the original amount at the end of the term. While bondholders arent owners of the bond issuer in the same way that equity shareholders are, they maintain a claim on its assets as creditors. If a company cannot pay its bond obligations, bondholders may take control of its assets (in the same way that a bank can repossess your car if you dont make your payments). Although bonds have fixed rates of return, their actual prices fluctuate in the securities market just like stock prices do. (Just like there is a stock market where investors buy and sell stocks, there is a bond market where investors buy and sell bonds.) In the case of bonds, investors are willing to pay more or less for debt depending on how
Page 26
likely they think it is that the bond issuer will be able to pay its obligations. Types of Stocks and Their Risk Profiles Most equity portfolios are classified in two ways: 1) By size, or market capitalization, of the companies whose stocks are invested in by the portfolios 2) By risk profile or valuation of the stocks Market capitalization of investments The market capitalization (also known as market cap) of a company refers to the companys total value according to the stock market. It is simply the product of the companys current stock price and the number of shares outstanding. For example, a company with a stock price of $10 and 10 million outstanding shares has a market cap of $100 million. Companies (and their stocks) are usually categorized as small-, midor large capitalization. Most equity portfolios focus on one type, but some invest across market capitalization. While definitions vary, small-capitalization typically means any company less than $2 billion, mid-capitalization constitutes $2 to $10 billion, and large-capitalization is the label for firms in excess of $10 billion. As would be expected, large capitalization stocks primarily constitute well-established companies with longstanding track
records. While this is generally true, the tremendous growth of new technology companies over the past decade has propelled many fledgling companies into the ranks of large-capitalization. For instance, Google has a market-capitalization of around $200 billion and is one of the largest companies in the world. In the same way, small- and medium-capitalization stocks not only include new or under-recognized companies, but also sometimes include established firms that have struggled recently and have seen their market caps fall. Some good examples of this would be Ford or Eastman Kodak, both of which use to be some of the largest companies, but are now much smaller in size. Most recently, there has been the advent of the micro-cap (under $200 million) and mega-cap (over $50 billion) funds, each with the stated objective of investing in these very small or very large companies. Risk profiles: value vs. growth investing Generally, equity portfolios are defined as investing in either value or growthterms that attempt to express expected rates of return and risk. There are many ways that investors define these styles, but most explanations center on valuation. Value stocks can be characterized as relatively well established, high dividend paying companies with low price to earnings and price to book ratios. Essentially, they are diamonds in the rough that typically have undervalued assets and earnings potential. Classic value stocks include pharmaceutical companies like Pfizer and banks such as J.P.
Morgan Chase. Growth stocks (or glamour stocks) are companies that investors believe will expand at rates that exceed their respective industries or market. These companies have above average revenue and earnings growth and their stocks trade at high price to earnings and price to book ratios. Technology companies such as Yahoo! and Apple are good examples of traditional growth stocks. Types of Bonds and Their Risk Profiles Just like stock portfolios, fixed income (bond) portfolios vary in their focus. The most common way to classify them is as follows 1) Government bonds 2) Investment-grade corporate bonds 3) High-yield corporate bonds Government bonds Government bond portfolios invest in the debt issues from the U.S. Treasury or other federal government agencies. These investments tend to have low risk and low returns because of the financial stability of the U.S. government.
Page 29
Investment-grade corporate bonds Investment-grade corporate bond portfolios invest in the debt issued by companies with high credit standings. They rate debt based on the likelihood that a company will meet the interest obligations of the debt. The returns and risks of these investments vary along this rating spectrum. Many corporate bond portfolios invest in company debt that ranges the entire continuum of high-grade debt. High-yield corporate debt In contrast to investment grade debt, high-yield corporate debt, also called junk bonds, is the debt issued by smaller, unproven, or highrisk companies. Consequently, the risk and expected rates of return are higher. Many variations of growth and value portfolios exist in the marketplace today. For instance, aggressive growth portfolios invest in companies that are growing rapidly through innovation or new industry developments. These investments are relatively speculative and offer higher returns with higher risk. Many biotechnology companies and new Internet stocks in the late 1990s would have been classified as aggressive growth. Another classification is a core stock portfolio, which is a middle ground that blends investment in both growth and value stocks.
Also, there are other types of risks influencing the portfolio:
Systematic Risk - Systematic risk influences a large number of assets. A significant political event, for example, could affect several of the assets in your portfolio. It is virtually impossible to protect yourself against this type of risk.
Unsystematic Risk - Unsystematic risk is sometimes referred to as "specific risk". This kind of risk affects a very small number of assets. An example is news that affects a specific stock such as a sudden strike by employees. Diversification is the only way to protect yourself from unsystematic risk. (We will discuss diversification later in this tutorial).
Now that we've determined the fundamental types of risk, let's look at more specific types of risk, particularly when we talk about stocks and bonds.
Credit or Default Risk - Credit risk is the risk that a company or individual will be unable to pay the contractual interest or principal on its debt obligations. This type of risk is of particular concern to investors who hold bonds in their portfolios. Government bonds, especially those issued by the federal government, have the least amount of default risk
Page 31
and the lowest returns, while corporate bonds tend to have the highest amount of default risk but also higher interest rates. Bonds with a lower chance of default are considered to beinvestment grade, while bonds with higher chances are considered to be junk bonds. Bond rating services, such as Moody's, allows investors to determine which bonds are investment-grade, and which bonds are junk.
Country Risk - Country risk refers to the risk that a country won't be able to honor its financial commitments. When a country defaults on its obligations, this can harm the performance of all other financial instruments in that country as well as other countries it has relations with. Country risk applies to stocks, bonds, mutual funds, options and futures that are issued within a particular country. This type of risk is most often seen in emerging markets or countries that have a severe deficit.
Foreign-Exchange Risk - When investing in foreign countries you must consider the fact that currency exchange rates can change the price of the asset as well. Foreign-exchange risk applies to all financial instruments that are in a currency other than your domestic currency. As an example, if you are a resident of America and invest in some Canadian stock in Canadian dollars, even if the share value appreciates, you may lose money if the Canadian dollar depreciates in relation to the American dollar.
Page 32
Interest Rate Risk - Interest rate risk is the risk that an investment's value will change as a result of a change in interest rates. This risk affects the value of bonds more directly than stocks.
Political Risk - Political risk represents the financial risk that a country's government will suddenly change its policies. This is a major reason why developing countries lack foreign investment.
Market Risk - This is the most familiar of all risks. Also referred to as volatility, market risk is the the day-to-day fluctuations in a stock's price. Market risk applies mainly to stocks and options. As a whole, stocks tend to perform well during a bull market and poorly during a bear market - volatility is not so much a cause but an effect of certain market forces. Volatility is a measure of risk because it refers to the behavior, or "temperament", of your investment rather than the reason for this behavior. Because market movement is the reason why people can make money from stocks, volatility is essential for returns, and the more unstable the investment the more chance there is that it will experience a dramatic change in either direction.
Page 33
Portfolio Construction
All portfolios, whether they are stock or bond portfolios, are compared to benchmarks to gauge their performance; indices or peer group statistics are used to monitor the success of each fund. As composites, the indices can be thought of as similar to polls: a polling firm that seeks to understand what a certain population thinks about a certain issue will ask representatives of that cross-section of the population. Similarly, a stock or bond benchmark that seeks to measure a certain portion of the market will simply compile the values of representative stocks or bonds. Portfolio construction refers to the manner in which securities are selected and then weighted in the overall mix of the portfolio with respect to these indices. Portfolio construction is a fairly recent phenomenon, and has been driven by the advent of modern portfolio theory. Passive investors or index funds Portfolios that are constructed to mimic the composition of various benchmarks are referred to as index funds. Investors in index funds are classified as passive investors, and investment managers who manage index funds are often called indexers. These funds are continually tinkered with to ensure that they match the performance of
Page 34
the index. For equities, the S&P 500 is the benchmark that is most commonly indexed. Active investors Portfolios that are constructed by consciously selecting securities without reference to the index are referred to as active portfolios. Active portfolios adhere to their own investment discipline, and investment managers actually invest in what they think are the best stocks or bonds. They are then compared, for performance purposes only, to the pre-selected index that best represents their style. For instance, many large-capitalization active value portfolios are compared to either the S&P 500 Value index.(It is important to note that while active portfolios are still compared to indices, they are not designed specifically to mimic the indices.) Alternative methods Variations of active and passive portfolios are present throughout the marketplace. There are enhanced index funds that closely examine the benchmark before making an investment. These portfolios mimic the overall characteristics of the benchmark and make small bets that differentiate the portfolio from its index. Another type of popular portfolio construction method is sector investing. This is essentially a portfolio that is comprised of companies that operate in the same industry. Common sector portfolios include technology, health care, biotechnology and financial services.
Summary of Investment Styles

Ultimately, the various investment styles discussed above translate into various investment products. Mutual fund, institutional and highnet-worth investors select the appropriate product that best matches their risk and diversification needs.
Page 36
Therefore, in this way,
the Functions involved in

can be summarized in the
investment Management
following way (Using the Modern Portfolio Theory)
Modern Portfolio Theory (MPT) is also called portfolio theory or portfolio management theory. MPT is a sophisticated investment approach first developed by Professor Harry Markowitz of the University of Chicago, in 1952. Thirty-eight years later, in 1990, he shared a Nobel Prize with Merton Miller and William Sharpe for what has become the frame upon which institutions and savvy investors construct their investment portfolios!
Modern Portfolio Theory allows investors to estimate both the expected risks and returns, as measured statistically, for their investment portfolios. In his article Portfolio Selection (in the Journal of Finance, in March 1952), Markowitz described how to combine assets into efficiently diversified portfolios. He demonstrated that investors failed to account correctly for the high correlation among security returns. It was his position that a portfolios risk could be reduced and the expected rate of return increased, when assets with dissimilar price movements were combined. Holding securities that tend to move in concert with each other does not lower your risk. Diversification, he concluded reduces risk only when assets are
Page 37
combined whose prices move inversely, or at different times, in relation to each other.
Diversification reduces volatility more efficiently than most people understand: The volatility of a diversified portfolio is less than the average of the volatilities of its component parts.
There are four basic steps involved in portfolio construction: -Security valuation -Asset allocation -Portfolio optimization -Performance measurement
Page 38
THE CAPITAL ASSET PRICING MODEL:

Birth of a Model
The capital asset pricing model was the work of financial economist (and, later, Nobel laureate in economics) William Sharpe, set out in his 1970 book "Portfolio Theory And Capital Markets". His model starts with the idea that individual investment contains two types of risk: Systematic Risk Unsystematic Risk
Modern portfolio theory shows that specific risk can be removed through diversification. The trouble is that diversification still doesn't solve the problem of systematic risk; even a portfolio of all the shares in the stock market can't eliminate that risk. Therefore, when calculating a deserved return, systematic risk is what plagues investors most. CAPM, therefore, evolved as a way to measure this systematic TheFormula risk.
Sharpe found that the return on an individual stock, or a portfolio of stocks, should equal its cost of capital. The standard formula remains
the CAPM, which describes the relationship between risk and expected Here is the return. formula:
CAPM's starting point is the risk-free rate - typically a 10-year government bond yield. To this is added a premium that equity investors demand to compensate them for the extra risk they accept. This equity market premium consists of the expected return from the market as a whole less the risk-free rate of return. The equity risk premium is multiplied by a coefficient that Sharpe called "beta". Beta
Page 40
According to CAPM, beta is the only relevant measure of a stock's risk. It measures a stock's relative volatility - that is, it shows how much the price of a particular stock jumps up and down compared with how much the stock market as a whole jumps up and down. If a share price moves exactly in line with the market, then the stock's beta is 1. A stock with a beta of 1.5 would rise by 15% if the market rose by 10%, and fall by 15% if the market fell by 10%. Beta is found by statistical analysis of individual, daily share price returns, in comparison with the market's daily returns over precisely the same period. In their classic 1972 study titled "The Capital Asset Pricing Model: Some Empirical Tests", financial economistsFischer Black, Michael C. Jensen and Myron Scholes confirmed a linear relationship between the financial returns of stock portfolios and their betas. They studied the price movements of the stocks on the New York Stock Exchange between 1931 and 1965.
Page 41
Beta, compared with the equity risk premium, shows the amount of compensation equity investors need for taking on additional risk. If the stock's beta is 2.0, the risk-free rate is 3% and the market rate of return is 7%, the market's excess return is 4% (7% - 3%). Accordingly, the stock's excess return is 8% (2 X 4%, multiplying market return by the beta), and the stock's total required return is 11% (8% + 3%, the stock's excess return plus the risk-free rate).
What this shows is that a riskier investment should earn a premium over the risk-free rate - the amount over the risk-free rate is calculated by the equity market premium multiplied by its beta. In other words, it's possible, by knowing the individual parts of the CAPM, to gauge whether or not the current price of a stock is
consistent with its likely return - that is, whether or not the investment is a bargain or too expensive.
Conclusion The capital asset pricing model is by no means a perfect theory. But the spirit of CAPM is correct. It provides a usable measure of risk that helps investors determine what return they deserve for putting their money at risk.
Page 43
Investment Management and India:

According to the latest report, asset management business in India is going to increase at least 33% annually. And without wasting any time, Indian asset management companies are getting prepared to cash in the scenario. The main growth is expected in the retail segment (an estimated growth of 36%). Also in the list is investor segment (as estimated growth of 29%). According to the McKinsye study, this growth will lead AUM (Assets Under Management) to US$ 440 billion.
List of Top Asset Management Companies in India
UTI Asset Management Company Ltd. Name Income / Debt Oriented Schemes Growth / Equity Oriented Schemes Balanced Schemes Exchange Traded Funds Fund of Funds Investing Overseas Grand Total UTI Asset Management Company Ltd. 1,935,985 6,817,477 1,028,613 29,046 9,811,121
Reliance Capital Asset Management Ltd. Name Reliance Capital Asset Management Ltd.
Page 44
Income / Debt Oriented Schemes
172,612
Growth / Equity Oriented Schemes 6,389,925 Balanced Schemes Exchange Traded Funds Fund of Funds Investing Overseas Grand Total 1,074,839 41,343 7,678,719
SBI Funds Management Private Ltd. Name Income / Debt Oriented Schemes Growth / Equity Oriented Schemes Balanced Schemes Exchange Traded Funds Fund of Funds Investing Overseas Grand Total SBI Funds Management Private Ltd. 87,184 5,730,085 72,437 2 5,889,708
HDFC Asset Management Co. Ltd. Name Income / Debt Oriented Schemes Growth / Equity Oriented Schemes Balanced Schemes Exchange Traded Funds Fund of Funds Investing Overseas Grand Total HDFC Asset Management Co. Ltd. 247,240 3,097,662 308,655 55 2,448,913
Page 45
ICICI Prudential Asset Management Co. Ltd. ICICI Prudential Asset Management Co. Ltd.
Name
Income / Debt Oriented Schemes 276,928 Growth / Equity Oriented Schemes Balanced Schemes Exchange Traded Funds Fund of Funds Investing Overseas Grand Total 2,660,902 16,862 899 2,955,591
Franklin Templeton Asset Management (India) Pvt. Ltd. Franklin Templeton Asset Management (India) Pvt. Ltd. 193,977 2,231,995 22,886 55 2,448,913
Name Income / Debt Oriented Schemes Growth / Equity Oriented Schemes Balanced Schemes Exchange Traded Funds Fund of Funds Investing Overseas Grand Total
Page 46
Birla Sun Life Asset Management Co. Ltd. Name Income / Debt Oriented Schemes Birla Sun Life Asset Management Co. Ltd. 158,366
Growth / Equity Oriented Schemes 2,140,298 Balanced Schemes Exchange Traded Funds 36,831 -
Fund of Funds Investing Overseas Grand Total 2,335,495
Sundaram BNP Paribas Asset Management Co. Ltd. Sundaram BNP Paribas Asset Management Co. Ltd. 26,749 2,155,301 8,890 42,319 2,233,259
Tata Asset Management Ltd.
Page 47
Tata Asset Management Ltd. 39,745 1,617,471 94,576 1,751,792
DSP BlackRock Investment Managers Pvt. Ltd. DSP BlackRock Investment Managers Pvt. Ltd. 37,081 1,370,767 28,052 136,300 1,572,200
Page 48
Asset Management in India A roundtable discussion

By Spencer Stuart
Spencer Stuart is one of the worlds leading executive search consulting firms. Privately held since 1956, Spencer Stuart applies its extensive knowledge of industries, functions and talent to advise select clients ranging from major multinationals to emerging companies to nonprofit organisations and address their leadership requirements. Through 51 offices in 27 countries and a broad range of practice groups, Spencer Stuart consultants focus on senior-level executive search, board director appointments, depth senior executive management assessments. succession planning and in-
2008 gained a permanent place in the history of financial markets, albeit not a good one.
Once admired financial institutions disappeared, economies of entire countries were shaken and, in the blink of an eye, the world became a different place. As the year drew to a close, uncertainty over the future cast a shadow over the aspirations of individuals, companies and countries. Despite this grim picture and the anxieties of the present, businesses must focus on the long term. This is easy to say but extremely difficult
Page 49
to do in an environment where there is really only one goal survival. But history has shown that the savviest leaders realised that a period of great uncertainty, with sudden changes in the financial and competitive landscape, can be the ideal time to make important strategic gains. The discussion at the Spencer Stuart roundtable on asset management was directed towards the future. It revealed ideas and solutions that could enable companies to draft a blueprint for the next phase of growth growth that may not be around the corner but is inevitable in a country like India, where assets under management (AUM) are a mere eight percent of GDP, compared with 79 per cent in the US and 39 per cent in Brazil1. This one statistic speaks volumes about the opportunities that abound in this industry and it would be imprudent to lose sight of this even in the current extremely challenging environment.
The transformation of an industry

The asset management industry in India is a prime example of the success of free competition in the country. From an industry that had one dominant player in the early 1990s, there are now over 30 active players, reflecting how the world of asset management in India has changed. Today, it is an industry of choice for customers and employees, with a range of products available, the presence of
Page 50
almost every large global player and a growing focus on investor education. It is also a highly dynamic industry, where significant change is commonplace. What contributed to this sea change in India? Without doubt, the primary driver has been deregulation, coupled with free competition. The worlds best brands were given an entry ticket with majority ownership if they so wanted, the result of which was the creation of a high-quality industry that incorporated global best practices. Regulatory support in the initial crucial years was also exceptional, with a focus on continuous dialogue and openness to change. A big driver of growth in the late 1990s was institutional business, which has grown to become a major contributor to profit margins of mutual fund companies as well as playing a large role in product innovation and growth of AUM. Most recently, financial advisory and retail distribution have attractedthe attention of the sector. However, according to Vimal Bhandari, Aegon India, more recently the Indian asset management industry has been grappling with the challenges of becoming an international business both through feeder funds in India for investing in offshore funds and mobilising funds offshore for investing in India. This twoway flow is likely to increase in the coming years and could become a serious component in the industry in India. It will act as a valuable buffer to augment the AUMs which are mobilised from the domestic market for investing in the local market. The key challenge would principally be to create a robust framework of governance and management, given the multiple
country jurisdiction which such business would necessarily entail. Key management personnel would need to be well versed in developing this business on an international platform. In many ways, the huge opportunity that the industry foresaw in the 1990s is still there. Only 45 per cent of household assets are in mutual funds and the top eight cities in terms of households penetrated account for 75 per cent of retail AUMs./. The industry should be asking what it has done to capitalise on earlier opportunities, what the new opportunities are and what can be done to capitalise them?
Competitive landscape
With its potential for high growth, asset
management in India has been an attractive sector for Indian and foreign companies. According to research by McKinsey & Co, the asset management business has grown 47 per cent annually since 2003, taking the total AUM in India in 2008 to USD 92 billion. However, as Sanjay Sachdev of Shinsei Bank pointed out, there are only about 35 fund families in India, as compared to the global numbers like
Page 52
700-odd fund familes in the US, 60 fund families in China and around 70 in Japan. As more people come into this industry, the opportunity is there to expand the pie rather than cut it into smaller slices thats the attitude existing players in the industry need to take.
Ajay Srinivasan, Aditya Birla Group
The Indian landscape is highly dynamic and is set to remain so in the near future. Competitive advantage lasted for six months a few years back; today the time frame is less than 90 days. Ajay Srinivasan, Aditya Birla Group, explains: As more people come into this industry, the opportunity is there to expand the pie rather than cut it into smaller slices thats the attitude existing players in the industry need to take. However, this expansion will take time and a lot will depend on how the industry and regulators tackle key issues, such as awareness, education, distribution and product positioning. Furthermore, barriers to entry have also become increasingly high, with Boston Consulting Group estimating that a firm would need at least USD 2.5 billion under management to break even now, twice as much as was needed two or three years ago. Technology is also set to become
a key differentiating factor. It will be interesting to observe what happens to the market share of the top 10 or the top 12 players over the next few years. In spite of some exits and the current challenging environment, global players still find India an attractive market, and this bodes well for the industry. As Simon Fenton, Spencer Stuart, pointed out: If you are sitting outside India and considering the prospects for a long-term asset management business, you will find them here in India, and in China, because of the fantastic demographic situation in both countries. The asset management industry will have to brace itself for more competition. However, according to Vijai Mantri, DLF Pramerica, what may tip the scales in favour of Indian companies is that they have a clear advantage in understanding the Indian market. The critical success factor will be the long-term objective of the players that enter the asset management industry. Vimal Bhandari says, In competition, there are three categories those who want to build a sizable business, those who only want to have a presence in India, and those who are coming as price warriors, to create value in the business. Good business practices will only get
reinforced by the entry of long-term players who are driven by asset enhancement and market growth rather than by a focus on valuations. The one major difference between the competitive landscape in India and Europe is the absence of banks with asset management interests such as Dresdner. In competition, there are three categories those who want to build a sizable business, those who only want to have a presence in India, and those who are coming as price warriors, to create value in the business.
Vimal Bhandari, AEGON N.V.
Being competitive in India has been characterised as being everywhere, doing everything. Although no player can afford to neglect any aspect of the business in the current environment, true competitive advantage will only be possible through excellence in three main areas execution of strategy, distribution and investment performance and this is where companies will need to focus their efforts.
Page 55
The Key Issues

As we enter a period of realistic valuations in the asset management market, it would serve companies well to analyse past performance and identify the key issues that will determine success in the future. Some of these are discussed below:
Distribution focus
Ajay Srinivasan points out: There are probably two options for turbocharging growth of this industry. One is the regulatory approach, such as in the US where the 401k led to a change in the growth of the industry. The other option is what you have seen in countries like Japan and Korea where the focus has been on areas such as distribution and product innovation. The market in Japan changed when banks got into distribution, especially since this was a distribution channel that customers could trust, after years of mistrust with the broking industry. In an environment where competition is stiff and margins are tight, the tied agency channel is no longer the most profitable one, whether for mutual funds, insurance or anything else
Page 56
Anjali Bansal, Spencer Stuart
Indias
unique
demographic
and
geographic
characteristics make distribution a key focus issue for asset management companies. The industrys expansion has commenced only in the last few years and has been driven by advances in distribution. With the enormous potential of the market and the continued entry of new players, one can expect significant change in the way investors are provided for. At the same time, the fact remains that the Indian asset having management much industry has grown on the tremendously over the past few years in spite of not constructive regulation distribution side. In recent years, one of the most debated issues has been the tied agency concept. In an environment where competition is stiff and margins are tight, the tied agency channel is no longer the most profitable one, whether for mutual funds, insurance or anything else, says Anjali Bansal, Spencer Stuart. In many parts of the world where there has been insurance reform Europe or Asia, for example there has been a move away from the tied agency channel. For growth to be taken to the next level, the gaps in distribution will need to be addressed.
Creating a long-term growth strategy

Challenging market conditions have also brought into focus the need for a long-term growth strategy, especially for new entrants. Given the new valuation expectation, equity buybacks could outstrip the initial commitment made for a venture, especially since a company might need 810 years before it becomes an entity that drives growth in the market. Add in the effects of changes in revenue structure (margins have reduced considerably over the last few years), account inflation and capital expenditure and an effective strategy for the next 10 years becomes imperative. As Ved Chaturvedi, Tata Mutual Fund, says: There needs to be some reflection on the fact that we have not been able to scale up effectively despite superior fund performance, superior returns, increase in investors and high-quality service. The strategy will also need to address the impact on talent retention through stock options, especially if the payback were to get further delayed.
There needs to be some reflection on the fact that we have not been able to scale up effectively despite
Page 58
superior fund performance, superior returns, increase in investors and high-quality service.
Ved Chaturvedi, Tata Mutual Fund
Another critical component of strategy will have to be product innovation, especially since the asset management industry is now competing with bank deposits, insurance plans and even postal savings for disposable income. Creating and marketing the right products for customers that are oriented towards long-term financial planning will be essential. Introducing more internationally- oriented products could broaden revenue streams and positioning products effectively will be essential if competitive advantage is to be achieved.
Understanding the consumer

Over the past few years, institutional business has been a significant contributor to the profitability of asset management companies. However, growth is expected to come from retail investors in future. Sanjay Sachdev, Shinsei Bank, attributes this to the high average aging of the assets that investors invest in an equity fund. Average aging of assets, from what I understand, is about nine years in India, which is substantially high compared to the rest of
the world, he says. Thus, while deals maybe done on the basis of 15 years or so, the fact remains that if someone sticks with a company for nine years on average, it builds a highly positive picture for the future. Establishing a long-term retail platform can therefore be a key success factor. In 2000, a study revealed that 67 per cent of people felt that their children would take care of them. By 2008, that number had reduced to 33 per cent.
Vijai Mantri, DLF Pramerica
Asset management companies will also need to take into account the changing consumer mindset in India. On the one hand, the younger generation is far more aggressive about investments, which means there is now a large part of the countrys population with an increasing appetite for risk wanting higher returns along with effective risk management. On the other hand, the older generation is actively looking towards independent planning for retirement. Vijai Mantri, DLF Pramerica, shares an interesting statistic: In 2000, a study revealed that 67 per cent of people felt that their children would take care of them. By 2008, that number had reduced to 33 per cent.
Page 60
How
effectively
companies
capitalise
on
these
opportunities will be a function of a number of things awareness, reach and distribution, product evolution over a period of time, and above all else, experience. Ved Chaturvedi says: If people understand these products, and companies come up with new products that give investors the appropriate returns, the rewards will be tremendous.
Investor education
One of the biggest drivers for growth in the asset management industry will be the comparatively low real rate of return from the usual investment products. Today, when individuals look at the safety of capital, they immediately turn to bank deposits and insurance products. Capital markets are usually looked upon as avenues for high-yields and are therefore considered high-risk. This is why mutual funds turn into a transitory rather than a long-term investment product for many people. This is a mindset that needs to change and investor education is the only way to achieve this Given the potential for growing the investor base, the need for education becomes critical, more so since a large part of the retail investor population in
India still equates mutual funds with equities. This was a key finding of a DLF Pramerica survey of 125,000 investors over 80 towns, who were asked about where they would direct their investments: 70 per cent said houses, 40 per cent said credit cards, 40 per cent said life insurance products, 38 per cent said bank deposits, and only 6 per cent chose dematerialised (demat) accounts and/or mutual funds. So what needs to be done? Advisory services will need to address customer education in order to be of value. Companies will need to rise above selling their own products to sell asset management products, thus communicating to the investor the benefits of different product categories, whether for retirement, children, family and so on. The key challenge for us is to sell products that are outward-looking, rather than just talking about absolute performance, meeting the benchmark or being the top-performing fund, says Vijai Mantri. The important thing is to present mutual funds as a category of products rather than defining them by the end benefits. There needs to be a conscious effort to avoid selling on the basis of dayto-day performance, shifting the focus instead to the
Page 62
long term, be it a 3-year, 6-year or 10-year horizon just as the insurance industry is doing. Financial advisory services also need to be marketed and communicated effectively to the retail investor. In real terms, India needs 1.5 million IFAs (independent financial advisors) who need to take on the mantle of creating awareness among retail investors of the benefits of asset management products. This will be the first step towards creating an industry that has the recognition of the regulators, policymakers and the government. The regulator can also play a role here, by supporting initiatives that include financial services as part of school curriculums. This would help children understand their savings needs and how they could achieve them. The first generation of regulation in the asset management industry was extremely farsighted and built the foundation of the industry. In order to take this growth to the next level, companies will need to maintain a dialogue with the regulator, set a clear vision (much like the IT industry did for 20152020) and create a blueprint for the future.
Page 63
A Question of Leadership
Turbulent environments are perfect testing grounds for leadership. Successful leaders harvest the benefits of the highs but always plan for the lows. For the asset management industry in India, the biggest challenge is to find mature CEOs. As Vimal Bhandari points out: We find sufficient professionals, but not professional leaders. Being 10 years old, this industry should have nurtured a pipeline of CEOs who could take over new leadership positions. Unfortunately, this pipeline does not exist. As a result, finding people who can lead businesses is difficult; there are plenty of excellent people operating on the ground, but those with the ability to take on leadership roles are few and far between. Nevertheless, a good management cadre is being created; many universities now offer specific financial planning and wealth management courses and there are some high-quality training programmes within organisations. As a result, better talent is coming into the industry and new leaders
Page 64
will emerge from that group. At the present moment, though, broader leadership talent is scarce in India. How will companies be able to create leadership advantage? A primary factor will be the ability to attract, retain, nurture and employ high-quality talent. Investing in globalising the business will also be important for both Indian and international players. Companies will need to create an effective growth strategy in the face of extreme price competition and find ways to capture value. They will also need to be at the cutting edge of innovation in terms of product, technology and service. Last but not the least will be a consistent focus on risk management, where one failure can significantly erode faith in the entire system a loss that the industry would find difficult to recover from. It is a responsibility of senior leadership to make sure that the business has strong risk management practices.
The Role of Culture in Leadership

While leadership development should be a critical area of focus for asset management companies, there is a growing appreciation that there is a direct
Page 65
correlation between company culture and talent retention more so today when uncertainty and poor communication can cause talented people to walk away from organisations where they have had successful careers. A lot of things contribute to culture everyone is inclined to think that their experience is the norm, but its not until you start looking at other businesses that you realise how different they are.
Simon Fenton, Spencer Stuart
What exactly is a culture and how is it created? Simon Fenton, says: A lot of things contribute to culture values, career progression, hierarchy, attitude, compensation. What is interesting is that everyone is inclined to think that their experience is the norm, but its not until you start looking at other businesses that you realise how different they are. It can become more complicated in the case of mergers and acquisitions, since one needs to figure out which culture to adopt, or whether a completely new culture needs to be created. As Rajan Krishnan says: Time is critical. You need time to create culture because you can import policies that have been done well, but the local leadership/ founding team needs to support that with a lot of home-grown
wisdom. The successful global businesses are the ones that recognise this and do have some overarching themes, but allow different cultures in different offices. You need time to create culture because you can import policies that have been done well, but the local leadership/founding team needs to support that with a lot of home-grown wisdom.
Rajan Krishnan , Baroda Pioneer Asset Management Company
Companies are thus realising that, at a certain level, compensation is only one factor in attracting and retaining talent. The real attraction is the profile of the role, the quality of leadership, growth potential, openness in decision making and, importantly, organisational culture.
Conclusion
In the past couple of years, the asset management industry has seen more movements, more growth and perhaps more new entrants than any other sector. It is a cautious environment and business has only now started to scale up in terms of competition and products. It will be interesting to see how the dynamic shifts -whether it is leadership,
scaleability or brand that will drive the change at the top five. The leadership challenge in the Indian market will remain for some time. However, the ability to think about the future, the need to innovate profitably and the focus on teams and culture will be the factors that provide companies with the much required competitive advantage. Without doubt, the opportunity is huge and the best is yet to come for the asset management industry in India. The key to success will be finding the best people and developing high-quality leaders who have the vision to take the industry to new heights.
Page 68
BIBLIOGRAPHY:
Investopedia.com Wikipedia.com Vault Career Guide to Investment Management- Adam Epstein Asset Management in India (2009 Report)- Spencer Stuart
Page 69

@investment Management 01

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

@investment Management 01

Uploaded by

Copyright:

Available Formats

INTRODUCTION:

schemes e.g. mutual

RESEARCH DEPARTMENT Analyst

INVESTMENT BANKING DEPARTMENT Management Director

Vice President Associate Analyst (Junior Analyst)

Associate Associate Analyst

individual and institutional investors

Research Associate Research Assistant

The Clients of Investment Managers:

Financial Research Breakdown:

2. Capital Structure: Equity vs. Fixed Income

3. Research Roles: Traditional vs. Alternative Asset Managers

Also, there are other types of risks influencing the portfolio:

Summary of Investment Styles

Therefore, in this way,

the Functions involved in

following way (Using the Modern Portfolio Theory)

THE CAPITAL ASSET PRICING MODEL:

Investment Management and India:

List of Top Asset Management Companies in India

Income / Debt Oriented Schemes

Fund of Funds Investing Overseas Grand Total 2,335,495

Tata Asset Management Ltd.

Tata Asset Management Ltd. 39,745 1,617,471 94,576 1,751,792

Asset Management in India A roundtable discussion

The transformation of an industry

The Key Issues

Anjali Bansal, Spencer Stuart

Creating a long-term growth strategy

Understanding the consumer

The Role of Culture in Leadership

You might also like