<body onLoad="MM_checkPlugin('Shockwave Flash','','http://www.riskglossary.com/default_nofl.htm',false);return document.MM_returnValue" stylesrc="../_private/template.htm" bgcolor="#FFFFFF" link="#669933" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table4"> <tr> <td width="740"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" height="37" id="table5"> <tr> <td height="35" width="100%"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table6"> <tr> <td width="100%" align="left" valign="top"> <p class="header_gold">Investment Management</td> <td width="45" align="right" valign="bottom"> <map name="FPMap6"> <area href="http://www.contingencyanalysis.com" shape="rect" coords="1, 0, 44, 11" target="_top"> </map> <img border="0" src="../images/home.gif" usemap="#FPMap6" width="45" height="12"></td> </tr> </table> </td> </tr> <tr> <td width="100%" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td width="0%" valign="top" bgcolor="#FFFFCC"> <table border="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" cellspacing="1" id="table7"> <tr> <td width="2%" align="left" valign="top"> <p class="header2_black">Explained:<br> <img border="0" src="../images/blank_1x100.gif" width="100" height="1"></td> <td width="35%" align="left" valign="top"><p class="word_list"> <a href="#asset_management">asset management</a><p class="word_list"> <a href="#asset_mangers">asset manager</a><p class="word_list"> <a href="#asset_management_firm">asset management firm</a><p class="word_list"> <a href="#fund_management">fund management</a><p class="word_list"> <a href="#fund_managers">fund manager</a><p class="word_list"> <a href="#fund_management_firm">fund management firm</a><p class="word_list"> <a href="#individual_investors">individual investor</a><p class="word_list"> <a href="#institutional_investors">institutional investor</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> <td width="63%" align="left" valign="top"> <p class="word_list"> <a href="#Investment_management">investment management</a><p class="word_list"> <a href="#investment_management_industry">investment management industry</a><p class="word_list"> <a href="#investment_management_firm">investment management firm</a><p class="word_list"> <a href="#investment_managers">investment manager</a><p class="word_list"> <a href="#portfolio_management">portfolio management</a><p class="word_list"> <a href="#portfolio_managers">portfolio manager</a><p class="word_list"> <a href="#retail_investors">retail investor</a><p class="word_list"> <a href="#stock_picking">stock picking</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> </tr> </table> </td> </tr> </table> <p class="body"><b><a name="Investment_management">Investment management</a></b> (also called <b><a name="fund_management">fund management</a></b>, <b> <a name="asset_management">asset management</a></b> or <b> <a name="portfolio_management">portfolio management</a></b>) 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 <b><a name="investment_managers">investment managers</a></b> (<b><a name="fund_managers">fund managers</a></b>, <b> <a name="asset_mangers">asset mangers</a></b> or <b> <a name="portfolio_managers">portfolio managers</a></b>). There are typically three ways investors can employ investment managers:</p> <p class="bullet_line_space"><img border="0" src="../images/bullet.gif" width="20" height="10">They can hire investment managers as employees or contractors. </p> <p class="bullet_line_space"><img border="0" src="../images/bullet.gif" width="20" height="10">They can become a client of a firm called an <b> <a name="investment_management_firm">investment management firm</a></b> that will manage the portfolio for a fee.</p> <p class="bullet_line_space"><img border="0" src="../images/bullet.gif" width="20" height="10">They can purchase shares of a mutual fund, join a limited partnership or otherwise invest in some pooled investment vehicle.</p> <p class="body">An investment management firm may be called a <b> <a name="fund_management_firm">fund management firm</a></b> or <b> <a name="asset_management_firm">asset management firm</a></b>. 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. Some well known investment management firms are Barclays Global Investors in the UK, and Fidelity Investments, State Street Global Advisors or The Vanguard Group in the US. Investment management firms and pooled investment vehicles are collectively referred to as the <b><a name="investment_management_industry"> investment management industry</a></b>.</p> <p class="body">Investors fall broadly into two categories. There are <b> <a name="individual_investors">individual investors</a></b> (also called <b><a name="retail_investors">retail investors</a></b>) 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 <a href="../articles/certificate_of_deposit.htm"> certificates of deposit</a>. 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.</p> <p class="body">The second category of investors is <b> <a name="institutional_investors">institutional investors</a></b>. 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 rely on investment managers who are officers, senior partners or employees of the pooled investment vehicle. Venture capital funds, <a href="../articles/hedge_fund.htm"> hedge funds</a> and private equity funds typically follow this model. 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 <a href="../articles/hedge_fund.htm">funds of funds</a>, investing in other hedge funds.</p> <p class="body">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 <a href="../articles/common_stock.htm">equities</a> or <a href="../articles/coupon_bond.htm">bonds</a>. 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. </p> <p class="body">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. </p> <p class="body">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 <a href="../articles/risk_aversion.htm">risk aversion</a>, regulatory restrictions or tax status. </p> <p class="body">Investing a portfolio entails both strategic and tactical decisions. Asset allocation is a strategic decision about what fraction of assets should be invested in a given asset classes, such as domestic equities, foreign equities, <a href="../articles/corporate_bond.htm">corporate bonds</a>, 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.</p> <p class="body">On a tactical level, individual investments must be made—what in equity markets is called <b><a name="stock_picking">stock picking</a></b>. <a href="../articles/directional_strategy.htm">Market timing</a> is a tactic of getting in or out of a particular market—or even going <a href="../articles/short_sale.htm">short</a> 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 <a href="../articles/duration_and_convexity.htm"> duration</a> of a portfolio or to increase or decrease its <a href="../articles/credit_risk.htm">credit risk</a>. </p> <p class="body">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 <a href="../articles/return.htm">returns</a>. 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.</p> <p class="body">There is a vast scholarly literature on topics related to investment management. One field of research is <a href="../articles/portfolio_theory.htm">portfolio theory</a>, which explores how asset allocation and investment selection should be performed so that portfolios are in some sense optimal. <a href="../articles/efficient_market_hypothesis.htm">Efficient markets theory</a> 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 <a href="../articles/transaction_costs.htm">transaction costs</a>, this has prompted many investors to opt for passively managed portfolios.</p> <p class="body">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.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table8"> <tr> <td height="30" valign="bottom"> <p class="header2_black">Related Internal Links</td> </tr> <tr> <td bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table10"> <tr> <td width="100%"> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/custodian.htm">custody</a> The safekeeping of securities and related services.</strong></p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/efficient_market_hypothesis.htm">efficient market hypothesis</a> A financial theory that markets are efficient in the sense that <strong style="font-weight: 400"> prices </strong>reflect all available information.<p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/hedge_fund.htm">hedge fund</a> A largely unregulated investment fund that specializes in taking leveraged speculative positions.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/managed_futures.htm">managed futures</a> Portfolios of forwards or futures managed as an "alternative asset category."<p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/portfolio_theory.htm">portfolio theory</a> A body of theory relating to how investors optimize portfolio selections.</strong></p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/securities_lending.htm">securities lending</a> The lending of securities, usually for a fee.<p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/soft_dollars.htm">soft dollars</a> A sometimes controversial inducement brokers offer investment managers to place trades through them.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/transaction_costs.htm">transaction costs</a> Direct costs associated with transacting trades.</p> </td> </tr> </table> </td> </tr> <tr> <td height="30" valign="bottom"> <p class="header2_black">Footnotes</td> </tr> <tr> <td bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table21"> <tr> <td width="100%"> <p class="explanatory_text"> [1] XXXX. [return]</td> </tr> </table> </td> </tr> <tr> <td bgcolor="#FFFFCC"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table22"> <tr> <td width="100%" bgcolor="#FFFFFF"> <p align="center" style="margin-top: 18"><map name="FPMap365"> <area target="_top" href="http://www.riskglossary.com" shape="rect" coords="0, 0, 164, 102"> </map><img border="0" src="../images/logo.jpg" usemap="#FPMap365" width="165" height="103"></p> <p align="center"><span class="verdana10"> <a href="http://www.riskglossary.com/main/disclaimer.htm" target="_self"> Disclaimer</a></span></p> <p align="center">website: <span class="verdana10"> <a target="_top" href="http://www.contingencyanalysis.com"> http://www.contingencyanalysis.com</a></span><br> glossary direct link: <span class="verdana10"> <a target="_top" href="http://www.riskglossary.com"> http://www.riskglossary.com</a></span><br> copyright © Contingency Analysis, 2006<p align="center"><map name="FPMap1"> <area target="_top" href="http://www.contingencyanalysis.com" shape="rect" coords="0, 0, 240, 88"> </map><img border="0" src="../images/logo_glossary_white.gif" usemap="#FPMap1" width="241" height="89"></td> </tr> </table> </td> </tr> </table> </td> <td>  </td> </tr> </table> </div> </body>