Investment Management

By 
JAMES CHEN
 

Updated April 30, 2021

Reviewed by 
GORDON SCOTT

What Is Investment Management?

Investment management refers to the handling of financial assets and other

investments—not only buying and selling them. Management includes devising a short-
or long-term strategy for acquiring and disposing of portfolio holdings. It can also
include banking, budgeting, and tax services and duties, as well.

The term most often refers to managing the holdings within an investment portfolio, and
the trading of them to achieve a specific investment objective. Investment management
is also known as money management, portfolio management, or wealth management.

The Basics of Investment Management

Professional investment management aims to meet particular investment goals for the
benefit of clients whose money they have the responsibility of overseeing. These
clients may be individual investors or institutional investors such as pension funds,
retirement plans, governments, educational institutions, and insurance companies.

Investment management services include asset allocation, financial statement analysis,

stock selection, monitoring of existing investments, and portfolio strategy and
implementation. Investment management may also include financial planning and
advising services, not only overseeing a client's portfolio but coordinating it with other
assets and life goals. Professional managers deal with a variety of
different securities and financial assets, including bonds, equities, commodities, and
real estate. The manager may also manage real assets such as precious metals,
commodities, and artwork. Managers can help align investment to match retirement
and estate planning as well as asset distribution.

In corporate finance, investment management includes ensuring a company's tangible

and intangible assets are maintained, accounted for, and well-utilized.

According to an annual study by research and advisory firm Willis Towers Watson and
the financial newspaper Pensions & Investments, the investment management industry
is growing. When based on the combined holdings of the 500 biggest investment

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managers, the global industry had approximately US$93.8 trillion assets under
management (AUM) in 2018. This figure was over US $100 Trillion by year end 2019.

KEY TAKEAWAYS

 Investment management refers to the handling of financial assets and other

investments by professionals for clients
 Clients of investment managers can be either individual or institutional investors.
 Investment management includes devising strategies and executing trades
within a financial portfolio.
 Investment management firms handling over $25 million in assets must register
with the SEC and accept fiduciary responsibility toward clients.

Running an Investment Management Firm

Running an investment management business involves many responsibilities. The firm

must hire professional managers to deal, market, settle, and prepare reports for clients.
Other duties include conducting internal audits and researching individual assets—or
asset classes and industrial sectors.

Aside from hiring marketers and training managers who direct the flow of investments,
those who head investment management firms must ensure they move within
legislative and regulatory constraints, examine internal systems and controls, account
for cash flow and properly track record transactions and fund valuations.

In general, investment managers who have at least $25 million in assets under
management (AUM) or who provide advice to investment companies offering mutual
funds are required to be registered investment advisors (RIA). As a registered advisor,
they must register with the Securities and Exchange Commission (SEC) and  state
securities administrators. It also means they accept the fiduciary duty to their clients.
As a fiduciary, these advisors promise to act in their client's best interests or face
criminal liability. Firms or advisors managing less than $25 million in assets typically
register only in their states of operation.

Investment managers are usually compensated via a management fee, usually a

percentage of the value of the portfolio held for a client. Management fees range from
0.35% to 2% annually. Also, fees are typically on a sliding scale—the more assets a
client has, the lower the fee they can negotiate. The average management fee is
around 1%.

Pluses and Minuses of Investment Management

Though the investment management industry may provide lucrative returns, there are
also key problems that come with running such a firm. The revenues of investment
management firms are directly linked to the market's behavior. This direct connection
means that the company's profits depend on market valuations. A major decline in

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asset prices can cause a decline in the firm's revenue, especially if the price reduction
is great compared to the ongoing and steady company costs of operation. Also, clients
may be impatient during hard times and bear markets, and even above-average fund
performance may not be able to sustain a client's portfolio.

Pros
 Professional analysis
 Full-time diligence
 Ability to time or outperform market
 Ability to protect portfolio in down times

Cons
 Sizeable fees
 Profits fluctuate with market
 Challenges from passively managed vehicles, robo-advisors

Since the mid-2000s, the industry has also faced challenges from two other sources.

1. The increase of robo-advisors—digital platforms that provide automated,

algorithm-driven investment strategies and asset allocation
2. The availability of exchange-traded funds, whose portfolios mirror that of a
benchmark index

The latter hinderance exemplifies passive management since few investment decisions
have to be made by human fund managers. The former challenge does not use human
beings at all—other than the programmer writing the algorithm. As a result, both can
charge far lower fees than human fund managers can charge. However, according to
some surveys, these lower-cost alternatives will often outperform actively managed
funds—either outright or in terms of overall return—primarily due to them not having
heavy fees dragging them down.

The pressure from this dual competition is why investment management firms must
hire talented, intelligent professionals. Though some clients look at the performance of
individual investment managers, others check out the overall performance of the firm.
One key sign of an investment management company's ability is not just how much
money their clients make in good times—but how little they lose in the bad.

Real World Example of Investment Management

The top 20 investment management firms control a record 43% of all the global assets
under management, according to the Willis Towers Watson report mentioned earlier—
some $40.6 trillion worth. In the U.S., the five leading firms include, in descending
order:

1. Bank of America Global Wealth & Investment Management which, as of 2008,

includes Merrill Lynch ($1.25 trillion in AUM)

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2. Morgan Stanley Wealth Management ($1.1 trillion in AUM)
3. J.P. Morgan Private Bank ($677 billion in AUM)
4. UBS Wealth Management ($579 billion in AUM)
5. Wells Fargo ($564 billion in AUM)

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Investment Management

Investment Management: in this article you will find a practical explanation

of investment management. After reading, you will understand the importance of
effective financial management in companies.
Investment management is the process of managing investment portfolios, typically for
large institutions such as pension funds, endowments, and insurance companies.
Investment managers are often called portfolio managers or asset allocators.
What is Investment Management?
Investment management is a process, not a product. It includes the creation of an
investment policy and strategy followed by continuous monitoring to ensure that the
objectives set out in it are being met. Many variables have to be considered when
formulating an investment policy for a pension fund. In broad terms, these include:

Desired rate of return

A long-term view will focus on capital appreciation while a shorter-term view may
require income generation as well.
Investment horizon
Since pension funds have deferred liabilities, their time horizon tends to be longer than
other financial institutions.
Risk tolerance
Factors such as a company’s existing obligations and its projected cash flow play a in
deciding how much risk is appropriate.
Currency risk
A fund that invests in securities denominated in a foreign currency has exchange rate
risk. The degree of this risk is a function of both the assets and liabilities of the fund. For
example, if a Canadian company funds its pension plan with U.S.-dollar assets but has
most of its employees based in Canada, it will have significant exposure to changes in
relative value between the two currencies.
Liquidity
Some types of investments (such as commodities) are not very liquid and may be
subject to wide daily price fluctuations.
Type of investor
Individuals vs. institutions; public vs. private; equity vs. debt; short term vs long term.
Definition of Investment Management
Investment management is the management of money or any kind of assets owned by
investors. It is the process through which the investment manager seeks to accomplish
defined investment objectives by deploying capital in an appropriate mix of financial
instruments and other assets.
There are two major types of investments: publically traded securities (stocks) and fixed
income products, including bonds.
The investment management process begins with a thorough understanding of client
needs, guidelines, policies and restrictions. As market conditions constantly change, so
do asset allocation strategies. Communication is key throughout the entire process as
well as ongoing monitoring to ensure that portfolios are on track towards meeting their
objectives.

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Investment managers typically manage endowments for educational institutions or
pension funds for corporations on behalf of employees. However, many mutual funds
and brokerage firms offer investment management services more accessible to
individual investors.
The process of managing investments that is carried out by investment managers. The
investment manager aims to accomplish defined investment objectives by deploying
capital in an appropriate mix of financial instruments and other assets.
Investment Management is a service provided by mutual fund companies, wealth
management companies , brokers & financial planners which enables them to build
customized portfolios for their customers .
Investment Management: Investment managers and portfolio structures
Investment managers and portfolio structures play a major role in the world of
investments. The investment managers take control of investments, which entails a lot
of risk, and invests them in a way that meets a certain financial objective.
There are different types of investment managers that play a role in the world of
investments, but they all have one main objective which is to invest funds in the market
and turn the initial capital into more money. Some of these types include:
Fund manager
This type of investment manager manages fund assets and allocates them in various
securities, such as stocks and bonds.
Portfolio manager
A portfolio manager invests clients’ assets across assets classes such as equities, fixed
income, etc., by investing directly or through managed products such as mutual funds,
ETFs, hedge funds, etc.
Financial adviser
This type of investment manager provides financial advice to their clients regarding the
right strategies for investing and other related services.
Advisory director or portfolio consultant
Advisory directors and portfolio consultants provide independent advice on portfolios,
asset allocation strategies, performance reporting, etc. to institutions with typically over
US$100 million in assets under management.
An investment may be made in public securities such as common stocks, preferred
stocks, bonds, mutual fund shares, or by direct investment with a company or entity
acting as an originator or sponsor of the funds being put up for investment. The
originator/sponsor is usually paid in fees by investors in return for providing capital.
Investment managers are compensated through one of two methods– either by
charging fees based on the total value of the capital invested, or by charging fees as a
percentage of profits earned. Investment managers may also be compensated with
investment products, including stocks, warrants, options, and derivatives.
Investment management is divided into two separate parts: discretionary and advisory.
The difference between them boils down to whether or not the manager has discretion
to make trades without consulting their client. In an advisory relationship, investment
advice is provided but no trades are executed without approval from the investor.
In general, asset-management companies manage money for individual investors as
well as institutions such as pension funds and labor unions. They offer a wide variety of
services that include stock picking and market timing; assembling diversified portfolios

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that reflect combinations of strategies, including growth, income and value investing;
managing money based on the risk profiles of investors; providing investment advice on
direct investments in real estate or other assets outside of stocks and bonds; designing
insurance products; etcetera.
Asset managers typically charge for their services according to a pricing grid that’s
usually expressed as an annual management fee. This is generally between 0.5% and
2% of the total amount invested with them, although some may even exceed 5%. High
asset-management fees are particularly onerous for investors who have small amounts
to invest or who aren’t able to contribute any more capital once they’ve reached the
maximum level of wealth allowed by their financial advisers or brokerage firms.
The greatest draw of asset-management companies is their ability to deliver better rates
of return than investors might be able to find on their own.
Investment styles in Investment Management
The style of investment management that you choose for your portfolio is based on the
wishes and needs of your clients.
Investment managers will often use a combination of these styles, as they offer different
benefits and limitations.
Core / Relative Value
Core / relative value managers are focused on finding undervalued or overvalued
securities. They spend most of their time researching individual securities using data
that ranges from price-to-earnings ratios to flow-of-funds statistics. Relative value is a
slightly different approach where managers use statistical analyses to identify
inefficiently priced assets, either through fundamental company analysis or statistical
methods.
Contrarian
Contrarian investment management is highly tactical. Like relative value managers,
contrarians look for inconsistencies in the market, but they’re also willing to bet against
them. These strategies can be divided into three categories – bottom up, top down and
macro.
Bottom-up investors conduct extensive fundamental research before they invest,
looking at a company’s financial statements, management, and competitive advantages.
Top-down managers use economic indicators to identify market trends that may affect
the future performance of companies in their portfolios.
In addition to these two styles, which are typically used by hedge funds, some large
mutual funds also take macro positions with their portfolio. Macro managers look for
broad market themes that will influence the economy as a whole and invest accordingly.
Managed Futures
Managed futures strategies include investing in futures contracts on the major
exchanges, including bonds, currencies, commodities, and equity indices. These
investors often employ a top-down approach but don’t conduct fundamental research
before making investment decisions. Instead, these funds rely on momentum indicators
such moving averages instead of using traditional valuation models.
Merger Arbitrage
Merger arbitrage investors attempt to take advantage of the price discrepancies that
often emerge after merger announcements. In a simplified example, an investor can
purchase a stock just before it’s taken over for $20 and resell it after the acquisition for

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$30. If this strategy earns 5% per month and the deal takes six months to finalize, then
you’ll double your money in 18 months.
Investment Management Pricing
The fees associated with these types of funds range from 0.75% (fixed income) to as
much as 3% (funds that use various strategies). This fee isn’t based on assets under
management but is instead charged as a percentage of profits earned. So, if one of
these funds earns no profits that month, there’s no fee.
Asset management companies often use a combination of several different styles,
tailoring their long-term investments to the needs of each client. By using this approach,
they can offer clients broad exposure to the market without taking unnecessary risks.
Investment Management Externalities
The key advantages for asset managers are having large amounts of capital and
superior expertise. This enables them to take advantage of anomalies in the financial
markets that are unavailable or too expensive for most individual investors.
What are the disadvantages?
Good investment returns must be balanced with low costs & high liquidity. So, if you’re
able to find an investment manager who offers excellent at reasonable levels you
should consider paying higher fees.
Successful asset managers can become so successful that they require high levels of
capital to satisfy the demands of their clients. At this point it often makes sense for them
to take on outside investors instead of limiting themselves to a specific group of people.
Some investment management companies use complicated strategies that even
experienced investors don’t understand. This approach may be acceptable if you can
find a manager with a long track record and an excellent performance history, but it
could also be dangerous if the company’s methods suddenly change or fail.
Performance measurement in Investment Management
Performance measurement in Investment Management is important because it helps to
measure when a fund manager or an asset manager has done well for their clients.
There are different ways to assess performance.
One way is by looking at the total value of assets under management and comparing it
to the total amount in fees charged. Another way is by looking at performance over time
and examining how someone has done against a benchmark that they set for
themselves.
There are many people in the financial world that try to come up with ways to improve
performance measurement. One such person was Harry Markowitz who came up with
the Modern Portfolio Theory which states that diversification can help reduce risk and
increase return by reducing volatility.
The high performance can also occur when two or more managers are working
together. This is achieved through the use of a fund of funds which invests in other
asset management companies.
Another way to achieve high returns with low risk is through the use of derivatives such
as futures, swaps, options and forwards. These tools are very popular among hedge
funds, but they also have their risks.

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