Investment Managers And Portfolio Structures

At the heart of the investment management industry are the managers who invest and divest client investments. An expert company investment advisor should conduct an appraisal of each client’s individual needs and risk profile. The advisor then advises appropriate investments.

Asset allocation: The different asset classes and the exercise of allocating funds among these assets is what investment management firms are paid for. Asset classes show different market dynamics, and different communication effects; thus, the allocation of monies among asset classes will have a important 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. Debatably, the skill of a successful investment manager resides in constructing the asset allocation, and separately the individual holdings, so as to outperform certain benchmarks.

Long-term returns: It is vital to look at the evidence on the enduring returns to different assets, and to holding period returns. For example, over very long holding periods 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 than bonds which are themselves more risky than cash.

Diversification: Against the background of the asset allocation, fund managers think the degree of diversification that makes sense for a given client and build a list of planned holdings as a result. The list will indicate what percentage of the fund should be invested in each exacting stock or bond. The theory of portfolio diversification was originated by Markowitz and effective diversification requires management of the connection between the asset returns and the liability returns, issues internal to the portfolio, and cross-correlations between the returns.

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