Investment management firms manage the portfolios of individuals, partnerships, corporations, corporate and public retirement plans, non-profit entities and endowments.
These portfolios can be invested in individual stocks and bonds, mutual funds, outright ownership of property or commodities, foreign exchange and the futures markets. Deciding the mix, scope and concentration of a portfolio under management is one of the most crucial responsibilities of investment management.
In recent years, investment managers have had to face the additional challenges of major losses by investors in a bear market environment, lack of confidence by investors due to mutual fund scandals, and a host of resulting legislation such as the Sarbanes-Oxley Act. This has resulted in a shift in philosophy of the investment management community from edgy and “top gun” management styles to analytical styles emphasizing client involvement and understanding, computation, more sensible risk management, and more humility in seeking investment performance at acceptable risk/reward levels. It is this analysis of investment risks/rewards in a portfolio, that is, measuring the tolerance for risk against the desire for reward of each individual or company that an investment company manages, that determines the composition of that portfolio.
Each individual or company that uses an investment management firm should have a clear concept of its investment philosophy, and must clearly communicate it to the management firm. In general, companies will have clear, written statements of investment policies and guidelines that have been approved by the board of directors. Individuals tend not to be as formal in their approach, but any reputable investment manager will make sure his individual clients have done an exercise outlining the kinds of risk they are willing to accept for a certain level of reward. It is in these documents that the company or individual will assign a level of “discretion” that the investment manager will have. Levels of discretion may range from full discretion over all purchases and sales in the portfolio, as long as they are within pre-ordained guidelines, to the requirement that every acquisition and divestiture needs direct approval. Within these two extremes, levels may be set according to size of investment or quality of investment.
A critical feature of proper investment management is continual review by the individual or, for a company, by its top management or board. Needs change, investment environments change, the amount under management changes, and therefore concentrations shift. All of these conditions have to be periodically examined, new investment policies have to be developed and the portfolio has to be adjusted to maintain compliance with the new policies.
To these tools (investment guidelines of the company and the underlying philosophy, and understanding the risk mentality and management style of the client), the investment manager will add the technical tools of his trade such as assessing markets, pricing capital assets, fundamental analysis to valuate stocks and bonds, cash flow analysis and various technical analyses to develop a tailored portfolio for each client.