What do you think of an investment management? Have you ever hired an investment management service or do you manage the investment portfolio by yourself?
Investment
Investment is an instrument to reach financial goals just like a vehicle to get you to your office. Knowing how to maintain the machine keep your vehicle to perform well, and in turn get you to your destination.
Similar to investment, when someone decide to invest in the product of investment for long term, one of the best ways is by hiring a service of investment management.
Imagine if you don’t know how to manage the risk of the long-term investment in a stock, mutual funds, and precious metal where you have put millions of money, or you make decision based on a mass trend, or the opinion of majority. You may experience big loss, or caught in a fraud investment in turn.
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However with the help of a professional investment manager, he/she will make an informed, and right decision for your investment, manage your investment portfolio to obtain the best result, and avoid losses that comes from a bad decision.
People hire the service of an investment management for some reasons. You may ask: When should I hire a service of investment management? How does it works for me? Where can I find it?
Let’s read on to find out.
What Is Investment Management?
Terms of investment management can refer to money management, portfolio management, or wealth management. Briefly it refers to a strategy of investment to obtain financial goals.
Specifically, investment management is a way of managing assets of a portfolio, and ensuring that the portfolio will work out the best result, in line with the risk tolerance, and financial priorities of the clients.
The activity is rather board from buying & selling investment products, creating short-term or long-term strategy, obtaining, and arranging portfolio holdings, to banking, budgeting, tax services, and duties.
The assets varies from shares, bonds, real estate, and other securities.
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In investment management industry, the clients are investors who can be an individual person, or an institution that want to meet certain investment goals.
Institution investors are insurance companies, pension funds, corporations, charities, educational establishments, etc.
While for individual investors the investment is done via investment contracts, and collective investment schemes such as mutual funds, or exchange traded funds (ETF).
Total Assets of Global Funds Management Industry
According to the Willis Towers Watson, 43% of all assets in the world are from 20 investment management companies, and some worth $40.6 trillion.
In US, Merrill Lynch manage $1.25 trillion in AUM (Assets Under Management) in 2008, followed by Morgan Stanley Wealth Management ($1.1 trillion in AUM), J.P. Morgan Private Bank ($677 billion in AUM), UBS Wealth Management ($579 billion in AUM), Wells Fargo ($564 billion in AUM). AUM represents the total market value of the investments that a firm manage on behalf of its clients.
The total assets of global fund management industry in 2010 was around $117 trillion that consist of conventional funds (pension funds, mutual funds, and insurance companies) totaling 79.3% trillion at the end of 2010, alternative funds (sovereign wealth funds, hedge funds, private equity funds, and exchange traded funds) with nearly $10 trillion of assets, and private wealth funds with $42.7 trillion in assets.
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The conventional AUM of global fund management industry increase 10% in 2010 to $79.3 trillion comprised of $29.9 trillion of pension assets, $24.7 trillion in mutual funds, and $24.6 trillion in insurance funds.
In 2010, US had the biggest source of funds of around $36 trillion in AUM. While UK was the second largest in the world, and the largest in Europe with around 8% of the global total. Japan, and France followed with 7.5%, and 6% respectively.
These data present the important role of global investment management industry that handling global assets of trillion dollar, euro, pound, and yen of investors around the globe, from institutions to individual person include the individual wealthy person.
Why Need Investment Management Service
Investors have different reason to use a service of investment management for their portfolio.
But if you experience one of the following conditions, it is a sign that you might need an investment management service.
- Having doubt or no confidence on making a decision about your investment. You think you need other opinions, or more insights on the investment decision.
- You need someone who is able to monitor your portfolio, to ensure your assets are in line with the investment plan, and rebalance them when turn away from the original formula.
- You experience complex issues such as in an inheritance, retirement-income planning, tax strategies or legacy planning.
- You want someone who can also manage other financial needs, such as cash-flow planning, insurance or debt management, besides portfolio management.
- There is a major life event you experience such as getting married, having a child, or a significant change in income.
The Scope of Investment Management Business
The industry of investment management has many aspects since it manages funds of individual, and institutional investors in various assets. The complexity of this industry depends on the size of the firms. The larger the funds or the demands, the more complex the firm.
The industry comprises of the employment of professional fund managers, research of individual assets, asset classes, dealing, settlement, marketing, internal auditing, and the preparation of reports for clients.
Besides, there are marketers who bring money from the clients, and the fund managers who manage the investment, compliance staff to ensure the firm works under 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.
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How Investment Management Service Works
An investment management firm works to meet its clients’ investment targets. In the process it is supported mainly by 3 things, the beliefs of the organizations, strategy, and the people. These things enable fund managers to produce the optimal results for their clients.
By understanding these 3 parts you can understand how your fund are managed by a firm.
#1 Philosophy
Philosophy contains a set of beliefs that the firm holds in implementing its investment strategy. It includes the following questions:
- Does the manager buy growth or value shares, or a combination of the two, and why?
- Do they believe in market timing, and on what evidence?
- Do they rely on external research or do they employ a team of researchers?
Be sure that the firm’ fundamental beliefs are supported by proof-statements.
#2 Strategy
Strategy is the way of implementing the beliefs. These questions can help you to figure it out:
- Which group of assets is explored before particular assets are chosen as suitable investments? This one is related to how decision is made on choosing, and investing on assets.
- 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?
#3 People
People are the staff especially the fund managers. Ask questions such as:
- 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 is very crucial because a change in the team, such as staffs’ resigning or retiring will affect the relationship with the clients, and the overall process of managing clients’ funds.
What Does An Investment Manager Do?
To understand better the investment management, learn about the scope of a manager’ task in managing a client’ fund.
Here are some of them.
#1 Investment Managers And Portfolio Structures
The role of an investment manager is important. Because it is him/her who invest, and divest client investments.
The duty includes making an assessment of each client’s individual needs, and risk profile before recommending appropriate investments.
#2 Asset Allocation
There are four common assets in investment management namely stocks, bonds, real estate, and commodities.
Based on your risk profile, financial priorities, and risk tolerance, a manager of investment will allocate funds on these assets. Constructing the asset allocation to meet client’s need is the skill of an investment manager.
#3 Long-term returns
An investment should consider also the evidence on the long-term returns of different assets, and on the holding period returns (the returns that increase in number over a period of time from different lengths of investment).
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For example, over very long holding periods (e.g. 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.
#4 Diversification
A fund manager will consider the degree of diversification according to clients’ risk profile, and financial needs, and construct a list of planned shares accordingly. Diversification presents percentage of the fund that is invested in each particular stock or bond.
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.
#5 Investment Styles/Approach
Different approaches are applied by different investment management firm. Some of the approaches are growth, value, growth at a reasonable price (GARP), market neutral, small capitalization, indexed, etc.
Each of these approaches has its distinctive features, adherents, specific financial environment, and distinctive risk characteristics.
#6 Performance Measurement
A manager will measure each performance of the clients’ assets that work in different period of time.
The performance measurement will show percentage of return that the assets will produce. He/she is supported by his/her team particularly research team, and external institution that specialize in performance measurement.
The leading performance measurement firms (e.g. Russell Investment Group in the US or BI-SAM in Europe) compile aggregate industry data, e.g., showing how funds in general performed against given indices and peer groups over various time periods.
#7 Risk-Adjusted Performance Measurement
Besides measuring the return, a manager also measures the risk performance of each assets, and make adjustment accordingly.
Other consideration to measure the performance of assets is to see if the results is in line with clients’ goals, how they compare to their peers, and finally whether the portfolio management results were due to luck or the manager’s skill.
#8 Portfolio Optimization
Portfolio optimization is an effort to maximize the return of assets. An investment manager optimizes the portfolio through portfolio alpha.
Portfolio alpha is a measurement of active return on an investment. It is obtained by measuring the difference between the return of the portfolio, and that of a benchmark portfolio.
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This measure appears to be the only reliable performance measure to evaluate active management.
To do that we need to distinguish normal returns that is obtained by the fair reward for portfolio exposure to different risks, and the one that is gained through passive management, and abnormal performance (or out performance) due to the manager’s skill (or luck), whether through market timing, stock picking, or good fortune.
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Pros And Cons Of Investment Management Business
Although the investment management industry has a very decent return, there are issues that a firm faces when running this business. First is from the market’ behavior because the company’ profit depend on market valuations.
A major decline in 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.
The second issue is from clients’ behavior. During hard times, and bear markets clients may be impatient.
Below are the pros, and cons of an investment management service.
Pros
There are professional analysis, full-time diligence, ability to time or outperform market, ability to protect portfolio in down times.
Cons
There are sizeable fees, profits fluctuate with market, challenges from passively managed vehicles, robo-advisors. Besides, to hire a professional, and talented manager is very costly.
How To Find An Investment Management Service
You can obtain investment management service that covers other aspect of your financial life. Below are types of services you can choose based on your financial need.
#1 Robo-Advisors
Using robo-advisors are a simple, less expensive than traditional investment manager, and suitable for beginner investors.
Robo advisors are a sophisticated computer algorithm that determine the ideal investment mix of stocks, bonds, and cash based on information you provide about your investment goals, and risk profile.
Cost: Robo-advisors typically charge 0.25% to 0.50% of the assets the service manages for you.
#2 Online Financial Planning Services
If you need a service that not only manages your investment fund but also other aspect of your finance such as cash-flow management, taxes or insurance, you may go with an online financial planning services. The service comprises of individual, and team of a financial advisor.
Cost: A service that offers you access to a team of financial advisors will typically cost less, with fees that start at 0.30% of assets under management.
For a more holistic financial planning service you’ll have a dedicated certified financial planner, or CFP with more fee charges.
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#3 Traditional Financial Advisors
A service you can expect from traditional financial advisors is portfolio management, and financial planning services.
You’ll meet the advisor face to face to discuss your financial picture, inventory assets, and liabilities. You can request him/her to make a financial plan or to help you with one aspect of finance such as investing for higher education.
The office of the advisor may use the service from other company to do the task or robo-advisors to manage your investment accounts.
Cost: The fee of traditional advisors are more expensive than online advisor or robo-advisor. We recommend a fee-only financial advisor because they don’t earn commissions from the investments they use, which could introduce a conflict of interest.
The fee of traditional managers can be varied but most charge an assets under management, or AUM, fee — typically 1%; more for small accounts and less for larger ones. Other managers charge clients by the hour or an annual retainer.
Types Of Investment Management Company
An investment management company is a firm that deals with investment. In Indonesia an investment firm must have a legal license to operate from OJK (Financial Service Authority).
The investment management firm will collect funds from investors to reinvest them in assets that can be sold. And it is different from brokerage companies, insurance companies, or banks.
Here are 3 types of investment companies.
#1 Open-End Management Investment Companies (Mutual Funds)
This firm is also known as Mutual Funds Company.
It doesn’t have limit on funds unit, so investors can keep on buying or redeeming the stock on net asset value (NAV). Open-end mutual fund is more convenient for investors because they can buy as much stocks as they want, and redeem them.
#2 Closed-End Management Investment Companies (Closed-End Funds)
This firm is known as Trust Investment that issues number of fixed stocks through initial public offering. Basically it is a public company that wants to increase its fixed capital by issuing stocks that can be traded in an exchange.
Different from mutual funds, the stock of this firm is limited, and investors can only buy certain amount of stock from a stock exchange.
#3 UITs (Unit Investment Trusts)
It also refers to Unit Trusts that shares similarity with open-end, and close-end mutual funds. The firm holds stock portfolio, stock, obligation, and other assets or securities for investment purpose.
As to the open-end mutual funds, most of its securities can be sold directly from the firm that issues them, while in certain cases they can be traded in secondary market. Unit Trust often requires low minimum investment, and the stock can be bought, and sold anytime. This allows investors with minimum budget to invest in different assets.
Some of investment companies in Indonesia are Pacific Strategic Financial Tbk, Arthavest Tbk, Hanson International Tbk, PT MNC Investama Tbk, Global Mediacom Tbk, Matahari Department Store Tbk, and Sinar Mas Multiartha Tbk.
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Conclusion
Investment management is management of financial assets. In investment management industry this is done by a professional managers for their clients who are individuals and institutional investors.
The task includes creating strategies, and executing trades within a financial portfolio. The services can be done by robo-advisors, online financial advisors, or traditional financial managers.
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Hopefully after reading this article you understand more about investment management service, and how it works for you. Share your opinion or experience on having investment management service on the comment below.
Don’t forget to tag those who are looking for way to manage their investment portfolio.
References:
- Dayana Yochim & Alana Benson. June 18th, 2020. Nerdwallet.com – https://tinyurl.com/yy2w42v8
- James Chen. March 31st, 2020. Investopedia.com – https://tinyurl.com/y6qfl6hl
- April 1st, 2020. Manajemen Investasi: Pengertian Serta Bagaimana Cara Kerjanya. Glints.com – https://tinyurl.com/y2ymjr72
- Aris Kurniawan. January 29th, 2020. Pengertian Manajemen Investasi – Metode, Struktur, Teori, Kendala, Tipe, Industri. Gurupendidikan.co.id – https://tinyurl.com/y5r37xpd
- January 10th, 2019. Pengertian Perusahaan Investasi dan Daftar perusahaan Investasi di Indonesia. Situspendidikanpeluangbisnis.wordpress.com – https://tinyurl.com/y2vvo9gv
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