This article focuses on investment management. It provides an overview of the history of investment management and the investment management industry. Active investment management, passive investment management practices, and management services in different investment environments such as corporations, endowments, and households, are discussed. Investment portfolios, pension funds, performance fees, and assets are described. The issues associated with the U.S. government's regulation of the investment management industry are also addressed.
Keywords Active Investment Management; Assets; Benchmark Return; Employee Retirement Income Security Act; Endowments; Exceptional Return; Face-Amount Certificate Company; Federal Government; Fiduciaries; Information Ratio; Investment Management; Management Company; Objective Value; Opportunity Loss.; Passive Investment Management; Pension Funds; Pension Surplus; Performance Fees; Portfolios; Transaction Cost
Finance: Investment Management
Investment management, also called money management and asset management, refers to the process of investment analysis involving portfolio management, budget making, banking, tax planning, and investment risk assessment. Investment managers work for pension funds, corporations, governments, institutions, endowments, foundations, and high net worth individuals. Investment managers help grow and mange assets through multiple products and services including analysis, research, and risk management. Investment management is divided into two main types: Active investment management and passive investment management.
- Active investment management is an approach based on informed and independent investment decisions. Active investment management generally involves the frequent buying and selling of bonds. Active investment management has as its primary goal to outperform benchmark returns.
- Passive investment management, also referred to as indexing, involves investing in a wide range of assets classes and working to match the overall performance of the market. Passive investment management generally involves holding bonds to the point at which they mature.
Investment managers, both active and passive money managers, work to control and balance investment return, risk, and cost. Investment managers control return, risk, and cost by analyzing the following variables within a client's portfolio (Grinold, 2005):
- Exceptional return: Exceptional return refers to the residual return plus benchmark timing return.
- Benchmark return: Benchmark return refers to the standard value against which the performance of a security, index, or investor can be measured.
- Opportunity loss: Opportunity loss refers to the estimated lost resulting from not choosing the best option or solution.
- Transaction cost: Transaction cost refers to the cost resulting from buying or selling assets including commissions.
- Objective value: Objective value refers to the prevailing value established by the market.
- Information ratio: Information ratio refers to the expected exceptional return divided by the amount of risk assumed in pursuit of that exceptional return.
The following sections provide an overview of the history of investment management and the investment management industry. This overview will serve as the foundation for later discussion of investment management practices and services in corporations, endowments, and households. The issues associated with the U.S. government's regulation of the investment management industry are also addressed.
The History of Investment Management
The field of investment management began in the United States on a large scale following the Great Depression of the 1930s. Following the Great Depression, the public and private sectors, in an effort to rebuild and stabilize the economy, began to actively manage investment portfolios through analysis, research, and risk management. The history of investment management during the twentieth century is characterized by shifting paradigms. The field of investment management has experienced paradigm shifts during the twentieth century regarding the role and purpose of organization and management. The organization and management paradigm in investment management has changed in the following ways over the last century (Ellis, 1992):
- 1940s: Investment management in the 1940s was characterized by insurance plan dominated pension funds.
- 1950s: Investment management in the 1950s was characterized by the growth of corporate pension funds. Pension funds refer to a category of funds that are collected and reserved to pay employees' pensions when they retire from active employment.
- 1960s: Investment management in the 1960s was characterized by a growth in overall pension fund assets.
- 1970s: Investment management in the 1970s was characterized by the multi-manager concept of pension fund investing in which plans divide the control of their funds among multiple investment managers. Pension plans and endowments began to prioritize the role of investment managers and compensate investment managers with high salaries.
- 1980s: Investment management in the 1980s was characterized by an increasingly diversified asset and manager classification system. The categories of value manager, growth manager, and sector rotator emerged. Investment manager consultants became common. Investment products and options increased.
- 1990s: Investment management in the 1990s was characterized by a growth in investment management fees. Performance fees, also referred to as investment management fees, became common practice. Performance fees are an amount paid to the investment manager of a hedge fund once positive performance has been achieved or reached. In addition, investment managers in the 1990s became ever-more specialized and classified according to an ever-expanding set of categories. As a result of the changes in management categories that occurred in the 1990s, investment managers today may be immunized, dedicated, structured, or indexed. Managers are considered to be either value managers or growth managers. Managers can specialize in private placements or extended markets.
Ultimately, the changes in the field of investment management throughout the twentieth century were related to changes in the structure and operations of the market. The structure of the investment management industry has changed from concentrated to increasingly diversified or fragmented to capitalize on the increasingly efficient market (Ennis, 1997). In the twenty-first century, investment managers, who are often mobile and independent agents, are swiftly responsive to market changes.
The Investment Management Industry
The primary professional investment management association is the CFA Institute. The CFA Institute, which reports 90,000 members in 134 societies, is the association of investment professionals that awards the Chartered Financial Advisers (CFA) and the Certificate in Investment Performance Measurement (CIPM) designations and certificates. Corporations, such as Citigroup, Mellon Financial Corporation, Ashland Partners, State Street, ING, Morgan Stanley, Nicholas Applegate, SS & C Technologies, UBS, and the AIG Global Investment Group, seek out investment managers with CFA Institute certification. The Chartered Financial Advisers (CFA) certification program is a three-year program with three levels of exams. The Certificate in Investment Performance Measurement (CIPM) certification program is designed to train performance professionals to meet investment industry needs.
Development of the CFA Institute
The CFA Institute has its origins in the investment societies of the early twentieth century such as the Investment Analyst Society of Chicago, established in 1925 to promote investment education and professionalism, and the New York Society of Security Analysts (NYSSA) established in 1937. In 1947, the National Federation of Financial Analysts Societies (NFFAS) formed. In 1959, the NFFAS board formed the Institute of Chartered Financial Analysts (ICFA) to provide a certification of competence. In 1961, the ICFA was formally incorporated and in 1963 the first investment manager certification examination was offered. In 2004, the ICFA changed its name to CFA Institute to better express its identity and strengthen brand recognition.
CFA Institute Code of Ethics
The CFA Institute promotes a code of ethics and standards of professional investment management conduct. The Code of Ethics and Standards of Professional Conduct includes a code of ethics, research objectivity standards, trade management guidelines, asset manager code, and soft dollar standards. The CFA Institute's Code of Ethics concerns ethical management behavior in the following areas:...
(The entire section is 4039 words.)