Investment management is the professional management of various securities (shares, bonds etc) assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds) . Securities are tradeable interests representing financial value. ... In business and accounting an asset is anything owned which can produce future economic benefit, whether in possession or by right to take possession, by a person or a group acting together, e. ... Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. ... Funds financial information A collective investment scheme is a way of investing money with a large number of people to participate in a wider range of investments that may not be feasible for an individual investor hence many investors share the costs of doing so. ... The central idea of a mutual fund is to enable investors to pool their money and place it under professional investment management. ...

The term asset management is often used to refer to the investment management of collective investments, whilst the more generic fund management may refer to all forms of institutional investment as well as investment management for private investors. Investment managers who specialize in advisory or discretionary management on behalf of (normally wealthy) private investors may often refer to their services as wealth management or portfolio management often within the context of so-called "private banking". A collective investment scheme is a way of investing money with other people to participate in a wider range of investments than may be feasable for a individual investor and to share the costs of doing so. ...

The provision of 'investment management services' includes elements of financial analysis, asset selection, stock selection, plan implementation and ongoing monitoring of investments. Financial analysis refers to an assessment of the viability, stability and profitability of a business, sub-business or project. ...

Outside of the financial industry, the term "investement management" is often applied to investments other than financial instruments. Investments are often meant to include projects, brands, patents and many things other than stocks and bonds. Even in this case, the term implies that rigorous financial and economic analysis methods are used. Applied Information Economics is one approach developed to apply statistically and economically sound optimization methods to portfolios of other types of investments. Applied Information Economics (AIE) is a specific decision analysis method developed by Douglas W. Hubbard[1]. It builds on several methods from the decision theory and risk analysis including the use of the Monte Carlo method. ...

Investment management is a large and important global industry in its own right responsible for caretaking of trillions of dollars, euro, pounds and yen. Coming under the remit of financial services many of the world's largest companies are at least in part investment managers and employ millions of staff and create billions in revenue. One million million (1,000,000,000,000) is the natural number following 999,999,999,999 and preceding 1,000,000,000,001. ... Financial services is a term used to refer to the services provided by the finance industry. ...

Fund manager (or investment advisor in the U.S.) refers to both a firm that provides investment management services and an individual(s) who directs 'fund management' decisions. An investment advisor is an individual or firm that advises their client on investment matters on a professional basis. ... Wall Street, Manhattan is the location of the New York Stock Exchange and is often used as a symbol for the world of business. ...

Industry scope

The business of investment management has several facets, including the employment of professional fund managers, research (of individual assets and asset classes), dealing, settlement, marketing, internal auditing, and the preparation of reports for clients. The largest financial fund managers are firms that exhibit all the complexity their size demands. Apart from the people who bring in the money (marketers) and the people who direct investment (the fund managers), there are compliance staff (to ensure accord with legislative and regulatory constraints), internal auditors of various kinds (to examine internal systems and controls), financial controllers (to account for the institutions' own money and costs), computer experts, and "back office" employees (to track and record transactions and fund valuations for up to thousands of clients per institution). An asset class is a way of classifying investment securities. ... Internal auditing is a profession and activity involved in advising organizations regarding how to better achieve their objectives. ...

Key problems of running such businesses

Key problems include:

• revenue is directly linked to market valuations, so a major fall in asset prices causes a precipitous decline in revenues relative to costs;
• above-average fund performance is difficult to sustain, and clients may not be patient during times of poor performance;
• successful fund managers are expensive and may be headhunted by competitors;
• above-average fund performance appears to be dependent on the unique skills of the fund manager; however, clients are loath to stake their investments on the ability of a few individuals- they would rather see firm-wide success, attributable to a single philosophy and internal discipline;
• evidence suggests that size of an investment firm correlates inversely with fund performance, i.e., the smaller the firm the better the chance of good performance;^{[citation needed]}
• analysts who generate above-average returns often become sufficiently wealthy that they eschew corporate employment in favor of managing their personal portfolios.

The most successful investment firms in the world have probably been those that have been separated physically and psychologically from banks and insurance companies. That is, the best performance and also the most dynamic business strategies (in this field) have generally come from independent investment management firms.

Representing the owners of shares

Institutions often control huge shareholdings. In most cases they are acting as agents (intermediaries between owners of the shares and the companies owned) rather than principals (direct owners). The owners of shares theoretically have great power to alter the companies they own...via the voting rights the shares carry and the consequent ability to pressure managements, and if necessary out-vote them at annual and other meetings. This article does not cite any references or sources. ...

In practice, the ultimate owners of shares often do not exercise the power they collectively hold (because the owners are many, each with small holdings); financial institutions (as agents) sometimes do. There is a general belief that shareholders - in this case, the institutions acting as agents - could and should exercise more active influence over the companies in which they hold shares (e.g., to hold managers to account, to ensure Boards effective functioning). Such action would add a pressure group to those (the regulators and the Board) overseeing management. An advocacy group, interest group or lobbying group is a group, however loosely or tightly organized, doing advocacy: those determined to encourage or prevent changes in public policy without trying to be elected. ...

However there is the problem of how the institution should exercise this power. One way is for the institution to decide, the other is for the institution to poll its beneficeries. Assuming that the institution polls should it then vote the entire holding as directed by the majority of votes cast, split vote (where this is allowed) according to the proportions of the vote or respect the abstainers and only vote the respondants holding.

The price signals generated by large active managers holding or not holding the stock contribute to management change.

Some institutions have been more vocal and active in pursuing such matters; for instance, some firms believe that there are investment advantages to accumulating substantial minority shareholdings (i.e, 10% or more) and putting pressure on management to implement significant changes in the business. In some cases, institutions with minority holdings work together to force management change. Perhaps more frequent is the sustained pressure that large institutions bring to bear on management teams through persuasive discourse and PR. On the other hand, some of the largest investment managers - such as Barclays Global Investors and Vanguard - advocate simply owning every company, reducing the incentive to influence management teams. Look up Management in Wiktionary, the free dictionary. ...

The national context in which shareholder representation considerations are set is variable and important. The USA is a litigious society and shareholders use the law as a lever to pressure management teams. In Japan it is traditional for shareholders to be low in the 'pecking order,' which often allows management and labor to ignore the rights of the ultimate owners. Whereas US firms generally cater to shareholders, Japanese businesses generally exhibit a stakeholder mentality, in which they seek consensus amongst all interested parties (against a background of strong unions and labour legislation). Lady Justice or Justitia is a personification of the moral force that underlies the legal system (particularly in Western art). ... A trade union or labor union is a continuous association of wage-earners for the purpose of maintaining or improving the conditions of their employment. ... Legislation (or statutory law) is law which has been promulgated (or enacted) by a legislature or other governing body. ...

Size of the global fund management industry

Assets of the global fund management industry increased for the third year running in 2006 to reach a record $55.0 trillion. This was up 10% on the previous year and 54% on 2002. Growth during the past three years has been due to an increase in capital inflows and strong performance of equity markets.

Pension assets totalled $20.6 trillion in 2005, with a further $16.6 trillion invested in insurance funds and $17.8 trillion in mutual funds. Merrill Lynch also estimates the value of private wealth at $33.3 trillion of which about a third was incorporated in other forms of conventional investment management.

The US was by far the largest source of funds under management in 2005 with 48% of the world total. It was followed by Japan with 11% and the UK with 7%. The Asia-Pacific region has shown the strongest growth in recent years. Countries such as China and India offer huge potential and many companies are showing an increased focus in this region.^[1]

10 largest asset management firms

Global Investor’s 2005 top 10 asset managers by assets under management. (Source: BGI)

Pensions & Investments Magazine lists UBS first, with more than $2 trillion under management (Source: P&I) The United States dollar is the official currency of the United States. ... Barclays Global Investors is a division of British based Barclays Bank which specialises in asset management. ... State Street Global Advisors (SSgA) is the investment management division of State Street Corporation and the world’s largest institutional asset manager[1]. As of December 31, 2006, SSgA had $1. ... Fidelity Investments is a group of privately held companies in the financial services industry. ... The Capital Group Companies is one of the world’s largest and most successful investment management organizations. ... Legg Mason, which is headquartered in Baltimore, is a global asset management firm with $969 billion in assets under management around the world. ... Vanguard is an American investment management company that offers mutual funds and other financial products and services to individual and institutional investors in the United States and abroad. ... Allianz AG, (NYSE: AZ; IPA pronunciation: [alliˈanʦ]) is a large financial service provider headquartered in Munich, Germany. ... JPMorgan Chase & Co. ... Mellon Financial Corporation, NYSE: MEL based in Pittsburgh, Pennsylvania, is engaged in the business of institutional and high-net-worth-individual asset management, including the Dreyfus family of mutual funds; business banking; and shareholder and investor services. ... Deutsche Bank AG NYSE: DB (German for German Bank) is a multinational bank operating worldwide and employing almost 64,000 people (Dec. ...

Philosophy, process and people

The 3-P's (Philosophy, Process and People) are often used to describe the reasons why the manager is able to produce above average results.

• Philosophy refers to the over-arching beliefs of the investment organisation. For example, does the manager buy growth or value shares (and why), does he believe in market timing (and on what evidence), does he rely on external research or does he employ a team of researchers. It is helpful if any and all of such fundamental beliefs are supported by proof-statements.
• Process refers to the way in which the overall philosophy is implemented. For example, which universe of assets is explored before particular assets are chosen as suitable investments; how does the manager decide what to buy and when; how does the manager decide what to sell and when; who takes the decisions and are they taken by committee; what controls are in place to ensure that a rogue fund (one very different from others and from what is intended) cannot arise;
• People refers to the staff, especially the fund managers. The question is who are they, how are they selected, how old are they, who reports to whom, how deep is the team (and do all the members understand the philosophy and process they are supposed to be using), and most important of all how long has the team been working together. This last question is vital because whatever performance record was presented at the outset of the relationship with the client may or may not relate to (have been produced by) a team that is still in place. If the team has changed greatly (high staff turnover), then arguably the performance record is completely unrelated to the existing team (of fund managers).

Investment managers and portfolio structures

At the heart of the investment management industry are the managers who invest and divest client investments.

A certified company investment advisor should conduct an assessment of each client's individual needs and risk profile. The advisor then recommends appropriate investments.

Asset allocation

The different asset classes are stocks, bonds, real-estate, derivatives, and commodities. The exercise of allocating funds among these assets (and among individual securities within each asset class) is what investment management firms are paid for. Asset classes exhibit different market dynamics, and different interaction effects; thus, the allocation of monies among asset classes will have a significant effect on the performance of the fund. Some research suggests that allocation among asset classes has more predictive power than the choice of individual holdings in determining portfolio return. Arguably, the skill of a successful investment manager resides in constructing the asset allocation, and separately the individual holdings, so as to outperform certain benchmarks (e.g., the peer group of competing funds, bond and stock indices). Spes or Hope; engraving by Sebald Beham, German c1540 The stocks are a device used since medieval times for public humiliation, corporal punishment, and torture. ... In finance, a bond is a debt security, in which the issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. ... Real estate or immovable property is a legal term (in some jurisdictions) that encompasses land along with anything permanently affixed to the land, such as buildings. ... In mathematics, the derivative of a function is one of the two central concepts of calculus. ... The word commodity has a different meaning in business than in Marxian political economy. ...

Long-term returns

It is important to look at the evidence on the long-term returns to different assets, and to holding period returns (the returns that accrue on average over different lengths of investment). For example, over very long holding periods (eg. 10+ years) in most countries, equities have generated higher returns than bonds, and bonds have generated higher returns than cash. According to financial theory, this is because equities are riskier (more volatile) than bonds which are themselves more risky than cash.

Diversification

Against the background of the asset allocation, fund managers consider the degree of diversification that makes sense for a given client (given its risk preferences) and construct a list of planned holdings accordingly. The list will indicate what percentage of the fund should be invested in each particular stock or bond. The theory of portfolio diversification was originated by Markowitz and effective diversification requires management of the correlation between the asset returns and the liability returns, issues internal to the portfolio (individual holdings volatility), and cross-correlations between the returns. Diversification is a measure of the commonality of a population. ... In statistics, the term cross-correlation is sometimes used to refer to the covariance cov(X, Y) between two random vectors X and Y, in order to distinguish that concept from the covariance of a random vector X, which is understood to be the matrix of covariances between the scalar...

Investment styles

There are a range of different styles of fund management that the institution can implement. For example, growth, value, market neutral, small capitalisation, indexed, etc. Each of these approaches has its distinctive features, adherents and, in any particular financial environment, distinctive risk characteristics. For example, there is evidence that growth styles (buying rapidly growing earnings) are especially effective when the companies able to generate such growth are scarce; conversely, when such growth is plentiful, then there is evidence that value styles tend to outperform the indices particularly successfully. An investor profile or style defines an investor preferences in money decisions, for example: Short term trading or Long term holding Risk averse or risk tolerant / seeker All classes of assets or just one (stocks for example) Value or growth stocks, big cap or small cap stocks, defensive or cyclical... An investment strategy or portfolio is considered market neutral if it seeks to entirely avoid some form of market risk, typically by hedging. ...

Performance measurement

Fund performance is the acid test of fund management, and in the institutional context accurate measurement is a necessity. For that purpose, institutions measure the performance of each fund (and usually for internal purposes components of each fund) under their management, and performance is also measured by external firms that specialise in performance measurement. The leading performance measurement firms (e.g. Frank Russell in the USA) compile aggregate industry data e.g showing how funds in general performed against given indices and peer groups over various time periods. Downtown Tacoma - Russell Investment Group building, far right, building in the back, maroon and glass Russell Investment Group is an investment services company based in Tacoma, Washington. ...

In a typical case (let us say an equity fund), then the calculation would be made (as far as the client is concerned) every quarter and would show a percentage change compared with the prior quarter (e.g. +4.6% total return in US dollars). This figure would be compared with other similar funds managed within the institution (for purposes of monitoring internal controls), with performance data for peer group funds, and with relevant indices (where available) or tailor-made performance benchmarks where appropriate. The specialist performance measurement firms calculate quartile and decile data and close attention would be paid to the (percentile) ranking of any fund.

Generally speaking it is probably appropriate for an investment firm to persuade its clients to assess performance over a longer periods (e.g. 3 to 5 years) to smooth out very short term fluctuations in performance and the influence of the business cycle. This can be difficult however and, industrywide, there is a serious pre-occupation with short-term numbers and the effect on the relationship with clients (and resultant business risks for the institutions).

An enduring problem is whether to measure before-tax or after-tax performance. After-tax represents the benefit to the investor, but investors tax positions vary. Before tax measurement can mislead, especially in regimens that tax realised capital gains (and not unrealised). A successful active manager, measured before tax, can thus produce a miserable after tax result. One possible solution is to report the after-tax position of some standard tax-payer.

Absolute versus relative performance

In the USA and the UK, two of the world's most sophisticated fund management markets, the tradition is for institutions to manage client money relative to benchmarks. For example, an institution believes it has done well if it has generated a return of 5% when the average manager generates a 4% return.

Risk-adjusted performance measurement

Performance measurement should not be reduced to the evaluation of fund returns alone, but must also integrate other fund elements that would be of interest to investors, such as the measure of risk taken. Several other aspects are also part of performance measurement: evaluating if managers have succeeded in reaching their objective, i.e. if their return was sufficiently high to reward the risks taken; how they compare to their peers; and finally whether the portfolio management results were due to luck or the manager’s skill. The need to answer all these questions has led to the development of more sophisticated performance measures, many of which originate in modern portfolio theory.

Modern portfolio theory established the quantitative link that exists between portfolio risk and return. The Capital Asset Pricing Model (CAPM) developed by Sharpe (1964) highlighted the notion of rewarding risk and produced the first performance indicators, be they risk-adjusted ratios (Sharpe ratio, information ratio) or differential returns compared to benchmarks (alphas). The Sharpe ratio is the simplest and best known performance measure. It measures the return of a portfolio in excess of the risk-free rate, compared to the total risk of the portfolio. This measure is said to be absolute, as it does not refer to any benchmark, avoiding drawbacks related to a poor choice of benchmark. Meanwhile, it does not allow the separation of the performance of the market in which the portfolio is invested from that of the manager. The information ratio is a more general form of the Sharpe ratio in which the risk-free asset is replaced by a benchmark portfolio. This measure is relative, as it evaluates portfolio performance in reference to a benchmark, making the result strongly dependent on this benchmark choice.

Portfolio alpha is obtained by measuring the difference between the return of the portfolio and that of a benchmark portfolio. This measure appears to be the only reliable performance measure to evaluate active management. In fact, we have to distinguish between normal returns, provided by the fair reward for portfolio exposure to different risks, and obtained through passive management, from abnormal performance (or outperformance) due to the manager’s skill, whether through market timing or stock picking. The first component is related to allocation and style investment choices, which may not be under the sole control of the manager, and depends on the economic context, while the second component is an evaluation of the success of the manager’s decisions. Only the latter, measured by alpha, allows the evaluation of the manager’s true performance.

Portfolio normal return may be evaluated using factor models. The first model, proposed by Jensen (1968), relies on the CAPM and explains portfolio normal returns with the market index as the only factor. It quickly becomes clear, however, that one factor is not enough to explain the returns and that other factors have to be considered. Multi-factor models were developed as an alternative to the CAPM, allowing a better description of portfolio risks and an accurate evaluation of managers’ performance. For example, Fama and French (1993) have highlighted two important factors that characterise a company's risk in addition to market risk. These factors are the book-to-market ratio and the company's size as measured by its market capitalisation. Fama and French therefore proposed a three-factor model to describe portfolio normal returns. Carhart (1997) proposed to add momentum as a fourth factor to allow the persistence of the returns to be taken into account. Also of interest for performance measurement is Sharpe’s (1992) style analysis model, in which factors are style indices. This model allows a custom benchmark for each portfolio to be developed, using the linear combination of style indices that best replicate portfolio style allocation, and leads to an accurate evaluation of portfolio alpha.

Education or Certification

Increasingly, international business schools are incorporating the subject into their course outlines and some have formulated the title of 'Investment Management' conferred as specialist bachelors degrees. (i.e. Cass Business School, London). Due to global cross-recognition agreements with the 2 major accrediting agencies AACSB and ACBSP which accredit over 560 of the best business school programs, the Certification of MFP Master Financial Planner Professional from the American Academy of Financial Management is available to AACSB and ACBSP business school graduates with finance or financial services related concentrations. For people with aspirations to become an investment manager, further education may be needed beyond a B.S. in business, finance, or economics. A graduate degree or an investment certification such as Chartered Financial Analyst (CFA) or Chartered Alternative Investment Analyst (CAIA) may be required to move up in the ranks of investment management.^{[citation needed]} A business school is a university-level institution that confers degrees in Business Administration. ... A bachelors degree is usually an undergraduate academic degree awarded for a course that generally lasts three or four years. ... The Cass Business School of London (officially Sir John Cass Business School, City of London) is a business school located in the City of London, England, and is part of The City University, London. ... The Association to Advance Collegiate Schools of Business (AACSB) - is the USA based body which awards accreditation following a review of the quality of Scotts site can be found at Degree programmes delivered by Management Schools. ... The Association of Collegiate Business Schools and Programs was founded in 1988 to create an organization and an accreditation process designed to fit the needs of business programs focused on teaching and learning. ... The American Academy of Financial Management, or AAFM as it is known, is a professional association dedicated to the finance sector and finance professionals. ... Chartered Financial Analyst (CFA) is a professional designation offered by the CFA Institute (formerly known as AIMR) to financial analysts who complete a series of three examinations and work for at least four years in the investment decision making process. ... Chartered Alternative Investment Analyst (CAIA) is a designation offered by the CAIA Association to investment professionals who complete two examinations in succession. ...

See also

• Corporate governance
• Investment
• Portfolio
• personal information managers
• List of asset management firms
• Active management
• Passive management
• Exchange Fund
• Government financial reports
• Transition Management

Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. ... Invest redirects here. ... Look up portfolio in Wiktionary, the free dictionary. ... A personal information manager (PIM) is a type of application software that functions as a personal organizer. ... This is a list of corporations that provide financial asset management. ... Active management (also called active investing) refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming a benchmark index. ... Passive management (also called passive investing) is a financial strategy in which a fund manager makes as few portfolio decisions as possible, in order to minimize transaction costs, including the incidence of capital gains tax. ... An Exchange Fund or Swap Fund is a mechanism specific to the U.S.A, first introduced in 1999 that allows holders of large amount of a single stock to diversify into a basket of other stocks without directly selling their stock. ... Government financial reports are an important part of democracy ( or a consititutionally limited republic) but often not widely read or discussed. ... Transition management is a systematic, controlled process that utilizes all available sources of liquidity to simultaneously minimize the total cost while managing the overall risk of the transition. ...

References

This financial article is missing citations and/or footnotes. This financial article contains insufficiently sourced phrases. Using inline citations helps guard against copyright violations and factual inaccuracies. You may improve the article or discuss this issue on its talk page. Help on using footnotes is available. This article has been tagged since February 2007. For the Manfred Mann album, see 2006 (album). ... is the 213th day of the year (214th in leap years) in the Gregorian calendar. ... Portable Document Format (PDF) is a file format created by Adobe Systems in 1993 for desktop publishing use. ... International Financial Services, London (IFSL) is a private sector organisation, with more than 30 years experience of promoting the UK-based financial services industry. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era. ... February 1 is the 32nd day of the year in the Gregorian calendar. ... Image File history File links Information. ...

Further reading

• David Swensen, "Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment," New York, NY: The Free Press, May 2000.
• Rex A. Sinquefeld and Roger G. Ibbotson, Annual Yearbooks dealing with Stocks, Bonds, Bills and Inflation (relevant to long term returns to US financial assets).
• Harry Markowitz, Portfolio Selection: Efficient Diversification of Investments, New Haven: Yale University Press
• S.N. Levine, The Investment Managers Handbook, Irwin Professional Publishing (May 1980), ISBN 0-87094-207-7.
• V. Le Sourd, 2007, “Performance Measurement for Traditional Investment – Literature Survey”, EDHEC Publication.

David Swensen is the Chief Investment Officer at Yale University since 1985, where he is responsible for managing and investing more than $15 billion of the universitys endowment assets and investment funds. ... Roger R. Ibbotson is professor of finance at Yale School of Management and is an expert on capital market returns, cost of capital, and international investing. ...

External links

• Investment Company Institute - US industry body
• Investment Management Association - UK industry body