Ultimate Guide to Learning Investment Management6 mins - Introduction
Investment management is referred to as the management and handling of investments and financial assets, their allocation and many other things including the decision to buy and sell. Fund managers who supervise investment management devise strategies in order to acquire or dispose off financial assets. Investment management also includes budgeting, taxation, banking, asset allocation, and corporate finance to name a few.
Basics of investment management
The underlying objective of investment management is to achieve a specific objective. Investment management is also known as wealth management, portfolio management, and money management. Managers aim to meet certain objectives for the clients whose financial assets they’re responsible and make sure they get the best possible return out of them.
Asset allocation, Analysis of financial statements, selection of stocks, analyzing current portfolio selection, portfolio strategy, and its implementation are services that come under the umbrella of investment management. Financial advisory and financial planning are also taken into consideration when dealing with a particular client’s portfolio in order to make sure it matches with other asset’s and the client’s life goals.
Fund managers deal in a variety of financial assets such as bonds, securities, equities, real estate and commodities. In order to meet the client’s requirements, managers might also include gold, silver, and platinum or precious artworks in their client’s portfolio. Fund managers are also responsible for investment decisions regarding estate planning, retirement and asset allocation in a portfolio holding.
In corporations, investment banking can help deal with various types of assets, be it tangible or intangible, their accountability, their utilization and their maintenance.
Investment banking is a growing industry. Approximately 94 trillion dollars of assets are under management up from around 80 trillion dollars last year.
Principles of Investment Management
In order to run an investment management firm, one must oversee a great deal of responsibility. The organization must recruit talent and skilled professionals who are able to deal, settle market and prepare necessary reports for the clients of the firm. Various other responsibilities may include conducting an internal audit, conducting thorough researches on various asset classes, sectors or whole financial markets altogether.
Moreover, asset management companies (AMCs) must also ensure that they remain inside the legal constraints of the state, which means the assistance of a lawyer or a legal firm. AMCs must also recruit technical experts, who oversee marketing, internal controls, cash flows, verification and recording of financial transactions and most importantly valuation of assets and liabilities.
Fund managers are usually paid a management fee as a means of compensation for their work. The fee is usually a percentage of the client’s portfolio. The fee usually ranges from 0.5%-2% on a per annum basis. A good thing for investors is that the more assets they have, they will be able to negotiate a lesser rate. On an average basis, AMCs usually charge 1%.
In the USA, AMCs who have more than 25 million dollars of assets under their management are supposed to be registered with the SEC; the securities and exchange commission. This also includes companies who provide advice to AMCs, who offer mutual funds. This registration with the state authorities means that the firms accept advisory duties to their clients. As an advisor, the firms are responsible to act in the best interest of their clients otherwise they’ll face a charge and be liable in court.
Pros and Cons of Investment Management
Even the asset management industry is an ever-growing one. There are various problems associated with these firms. The top line (revenues) of asset management companies usually rely on market behavior. This indicates that the company’s profit is directly associated with market valuations. A huge dig in the market valuation is most likely to cause a decline in the firm’s profits. This hurts most when the operations are costing you on a steady basis. Moreover, clients are most likely to be agitated and frustrated when markets are not providing decent returns and when the market is bearish. Most funds can’t sustain a client with an average return and the client begins looking for other options to maximize his/her wealth. And the firms charge a hefty fee for their services.
If a firm is managed with due diligence and by personnel of certified professionals, the firm will most likely perform better than its competitors. The firm will make accurate forecasts and will perform even when the market is not performing. Moreover, with good investment decisions, managers might save your portfolio from possible losses too.
The investment management industry is now facing two challenges
1) The induction of Robo-advisors, these are digital platforms which aim to provide algorithm-driven, automated investment strategies and investment decisions.
2) The usage of exchange-traded funds, whose aim is to perform in line with the benchmark index.
Even though the second challenge seems hindering but these passive decisions are made by human fund managers. The first challenge does not take human beings into account, at all, other than the person who developed the program or wrote the algorithm. The result is, both these challenges pose a serious threat to the revenues of investment management firms as these are seen as lower-cost alternatives. Sometimes these lower-cost firms might even outperform human-managed funds due to the solemn fact that they charge less and tend to perform better because of it.
These challenges have pressurized firms to hire intelligent and highly qualified professionals. Investors check the performance of the individual manager and sometimes they even consider the overall performance of the firm. One way to find out if a company is capable of handling your assets or not is to check how much money they lose in bad times, rather than focusing on how much they make when the market is flourishing.
Most finance graduates or professionals are judged based on how successfully they manage investments. Efficiency in investment management sets the firm apart from average performers in the industry. Therefore, if you have a knack of numbers, can handle pressure, have an understanding of financial markets and their trends, investment management can be a pretty rewarding career path for you.