Investment management is the service provided by firms which professionally manage and invest funds on behalf of their clients and/or for their own account. Having its roots in the early days of the industrial revolution, by the early 21st century and throughout the developed world, it became a main category of the financial services sector. The progression of this industry was mainly led by the remarkable growth of the institutional investors starting from the 2nd half of the 20th century. During the 80’s and 90’s the industry grew even more, particularly due to an ongoing global economic expansion and the surge of wealthy individual investors. At the same time, the evolution of a scientific approach towards portfolio management known as modern portfolio theory (MPT) changed gradually the perspective on the professional management of portfolio holdings, by relying less on the intuitive sense of the markets and becoming more quantitative in nature. The tremendous technological developments in global communications and in computer science, assisted the industry on becoming more sophisticated both at the operational and at the decision-making level. The qualitative conventional practices are still an important feature of the investment management practice, although the industry every year tries to eliminate human error and evolve through new advanced algorithmic and artificial intelligence tools. In the 2nd decade of the 21st century, firms have started adapting to financial technology which grows at a very fast pace. Terms like big data, machine learning, natural language processing, predictive analytics and robotic process automation are becoming more and more popular within investment management firms which are operating on a very competitive landscape and in an industry that is becoming more concentrated.
The economic model of investment management companies is relatively straightforward. The revenues of these companies are fee driven, based primarily on the assets under management. Furthermore, the types of investment management contracts that the investment management companies have with their clients can also define additional fee structures and in a very detailed manner. Accordingly, the total assets under management of investment firms can define the size of these companies, but they do not guarantee their profitability which can be seriously impaired by the fluctuations of the market values of the managed assets. Whatever the case may be, these companies are mandated to optimize the performance of their managed portfolios on behalf of their clients. Investment management companies serve different types of clientele. These investors can be institutional investors (corporations, pension funds, insurance companies, non-profit organizations, universities or other educational establishments, etc.) or private/individual investors (either directly via investment management contracts and other governing documents or through the well-known collective investment schemes such as ETFs and mutual funds).
The investing styles and the objectives of various investment companies are different. An investor based on his needs, capabilities, and constraints, can select among firms which specialize on active or passive investing, small cap or large cap companies investing, growth investing, value Investing, indexing, etc. However, all investing styles employed by investment firms have extensive variations from firm to firm. Professional managers are trying to achieve as much profit as possible given the limitations of their investing strategies and the risk profiles of the different portfolios that they manage. As a result, they formulate their investment policy statements in such a way that they serve their clients’ needs in the most professional and legally protected way. By doing this, they minimize the potential tax and legal issues that may arise for their clients and comply with all regulatory requirements. At the same time, they will adjust their management on their client’s time horizon restrictions and their liquidity needs which if not managed properly could negatively affect both the investment management firm and the client/investor. Therefore, investment managers must analyze very thoroughly the financial standing of their investors by assessing their net worth, set realistic objectives, define an appropriate investment strategy and monitor the performance of their portfolio. This can be done by making all relevant adjustments due to changes in the economic factors that affect the value of the portfolio holdings. As an overview of the logic of the portfolio management process, we could summarize that it consists of three steps namely the planning step, the execution step and finally the feedback step. In the modern investment management business apart from the management of expected returns of a portfolio of investments, the management of risk has become of equivalent importance. Risk management which was initially focused on the step of planning nowadays is implemented at all steps of the portfolio management process.
An investment management firm has many different aspects that contribute to its success. Generally, these companies employ professional and certified portfolio managers, research analysts, traders, and of course personnel that markets the company’s investment products. Other departments like settlement, internal auditing, compliance, financial controllers, IT and the well-known “back office” altogether, play directly and indirectly an increasing role in today’s investment management business by ensuring that best practices and complex regulatory guidelines are promptly followed inside the investment management firm. At a global investment setting where investors demand more reporting transparency, regulations are becoming stricter, and technology shifts intensify competition, the modern investment management firm should take a strategic approach on matters such as the regulatory compliance, the risk management at an enterprise level, the information security and finally the management of data.