Business, Legal & Accounting Glossary
Investment management (also called fund management, asset management or portfolio management) is the process of investing a portfolio on an ongoing basis. While the term and its synonyms can be applied broadly, they are usually reserved for instances where the investing is performed by one or more professionals. The professionals are called investment managers. Synonyms are fund managers, asset managers or portfolio managers. They are also called investment advisers (especially in US statutes).
There are typically three ways investors can employ investment managers:
An investment management firm may be called a fund management firm or asset management firm. It may simply be called an investment manager or any of the synonyms of investment manager. So, for example, “fund manager” might refer to a person or a firm. One of the largest investment management firms is Barclays Global Investors in the UK. In the US, there are Fidelity Investments, State Street Global Advisors, Legg Mason or The Vanguard Group. Investment management firms and pooled investment vehicles are collectively referred to as the investment management industry.
Investors fall broadly into two categories. There are individual investors (also called retail investors) who are individuals or perhaps families investing their own funds. They may manage their own investments without investment managers, directly investing through a brokerage account, bank savings account, government savings bonds or certificates of deposit. If they do utilize investment managers, it is usually through the third of the above three options: investing in pooled investment vehicles such as mutual funds.
The second category of investors is institutional investors. These include pension funds, insurance companies, endowments or foundations. These may use any of the above three options for employing investment managers or some combination of the three. Institutional investors also include pooled investment vehicles, such as mutual funds or limited partnerships, mentioned in the third of the above three options. How do these invest the assets they pool? Some have their own management team, comprising investment managers who are officers, general partners or employees of the pooled investment vehicle. Venture capital funds, hedge funds and private equity funds typically have management teams. Other pooled investment vehicles turn to an investment management firm to manage their assets. This is typically how mutual funds operate. A few pooled investment vehicles invest their assets in other pooled investment vehicles. For example, some hedge funds are structured as funds of funds, investing in other hedge funds.
Ultimately, a significant component of retail investments and essentially all institutional investments are entrusted to investment managers of one sort or another. Because different portfolios have different investment objectives, investment managers need guidance as to how a portfolio is to be invested. A defined benefit pension plan will generally want to be invested for the long term, perhaps in equities or bonds. An auto insurer, on the other hand, will have a shorter horizon and be largely invested in money market instruments. Investment objectives are communicated as investment policies.
Investment policies are typically specified by the investor in situations where a portfolio manager is an employee of the investor or an investment management firm hired by the investor. Pooled investment vehicles generally set their own investment policies, so it is up to would-be investors to invest in pooled investment vehicles whose investment policies conform to their needs.
Investment policies can be specific about how a portfolio is to be invested or grant the portfolio manager broad discretion. They indicate what asset classes are acceptable and impose constraints, perhaps related to the investor’s risk aversion, regulatory restrictions or tax status.
Investing a portfolio entails both strategic and tactical decisions. Asset allocation is a strategic decision about what fraction of assets should be invested in given asset classes, such as domestic equities, foreign equities, corporate bonds, etc. This decision can be made by the investor, in which case the investor might hire separate investment managers to manage each asset class. Or the decision can be left to a single investment manager who then manages the entire portfolio.
On a tactical level, individual investments must be made—what in equity markets is called stock picking. Market timing is a tactic of getting in or out of a particular market—or even going short that market—to take advantage of anticipated rises or declines in that market. In fixed income markets, an investment manager might tactically decide to lengthen or shorten the duration of a portfolio or to increase or decrease its credit risk.
There are two fundamentally different approaches to the tactical aspects of investment management. With active investing the portfolio manager actively picks investments or otherwise adjusts the portfolio in ways that he anticipates will enhance its returns. With passive investing, the manager passively manages a portfolio of investments with holdings that match those of some benchmark index, or he otherwise manages a portfolio to have returns that closely match those of the benchmark index.
There is a vast scholarly literature on topics related to investment management. One field of research is portfolio theory, which explores how asset allocation and investment selection should be performed so that portfolios are in some sense optimal. Efficient markets theory explores the relative merits of active vs. passive investing. Results have generally supported the conclusion that active managers as a group fail to outperform passively managed portfolios. Because active managers charge higher fees and generally incur higher transaction costs, this has prompted many investors to opt for passively managed portfolios.
Active managers’ performance is assessed by investors using techniques of performance assessment. The factors that contributed to a manager’s performance can then be determined using techniques of performance attribution.
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This glossary post was last updated: 16th April, 2020 | 238 Views.