Investment Management

What It Means

Investment management is the activity of overseeing and making decisions regarding the investments of an individual, company, or other institution. Individuals having personal investments in the form of either physical assets (such as real estate) or paper assets (such as bonds and stock shares) may take on the tasks of managing their investments on their own, or they may use an investment manager to make decisions about their investments. Usually companies and other large organizations employ investment managers to guide and oversee all aspects of the company’s investments. In addition to corporations, institutions such as insurance companies and pension funds may rely on professionals to handle their investments. The investment manager may be an individual or a firm.

One reason companies regard investment management as important is that they often rely on investments to help expand their business. For example, if an airline desires to expand operations into a new market, it will need a large amount of ready cash to pay for building a new customer base, advertising, and other requirements. In this situation, the airline’s investment manager will examine the company’s investment portfolio (the collection of investments held by the company) to determine which investments, when converted to cash, could provide the funding the firm needs for the new operation. The company may own stocks or bonds and may have invested in certain funds such as mutual funds.

Investment management goes by a variety of names that can depend on the type of investors and investments involved. Private individuals with investments of large value usually refer to the investment management services they use as wealth management or portfolio management. When financial firms such as banks and insurance companies manage investments, it is usually called fund management. Asset management is the name for the management of mutual funds, managed funds, and other funds that allow large numbers of shareholders (investors) to participate in a range of investment opportunities. As an industry, investment management is a crucial part of the global corporate culture.

When Did It Begin

Investment management in the United States has developed rapidly in the few decades it has existed. Until the 1970s, most wealth in the United States was managed by money managers in Europe or by private trust companies. Families in possession of wealth that required management typically employed private portfolio managers.

The Employee Retirement Income Security Act of 1974 required a new process for the statistical measurement of retirement portfolios, which resulted in the emergence of investment management firms to oversee such corporate investments as employee-benefit-fund assets. In the late 1980s these management firms, which until then had served only institutions, started providing services to individual investors. In 1985 the Investment Management Consultants Association (IMCA) was established, which advocated high standards for the education of professional investment managers.

More Detailed Information

Growth in the amount and value of assets is important to the overall worth of a company and the wealth of its stockholders. Among the various types of assets a company may possess, most require investment management. Fixed assets (also known as long-term assets) are generally forms of physical property that are held for a long time (for instance, buildings, equipment, and heavy machinery) and that are used to generate revenue. Most fixed assets lose their value over time due to wear and tear, a process called depreciation. Bonds are another kind of fixed asset. A bond is a long-term loan an investor makes to the entity that issues the bond, for example, the United States government. Current assets (also called liquid assets) are held by an investor for relatively short time spans, typically less than 12 months, and they can be easily converted to cash, sold, or consumed. Examples of a company’s current assets are cash, tradable stock, and inventory.

When a group of assets have similar characteristics, generally perform similarly when invested in, and are regulated in the same way by laws, they are said to be in the same asset class. Equities, which are public stocks, are in one such asset class. Fixed-income bonds are in another, and cash equivalents such as bank certificates of deposit are in yet another.

Investment portfolios are typically managed through decisions about purchases and sales of assets. Investment managers must be able to analyze the finances of investors, understand how to select different types of assets, set realistic investment goals, and know how to monitor investments and make adjustments when changing economic situations require them.

When an investment manager is first engaged by an investor, the manager generally begins by analyzing the investor’s current financial situation to create a profile. This activity involves assessing the net worth of the investor, which is the value of all property owned (assets), less any debts or obligations (liabilities). It also involves determining the cash flow of the investor, which is the amount of cash earned in a certain time period after paying all expenses and taxes.

After the investment manager has established the investor’s financial profile, the manager and the investor work together to identify and define investment goals. Goals depend on many factors, including the percentage of wealth the investor wants to commit, the level of investment risk appropriate to the investor, the desired rate of return (the earnings expected from an investment over a specific time period), and the relative percentages of the total investment that should be put long-term and short-term assets.

Next, the investment manager employs financial models that assess the likelihood of achieving the investment goals. These models, which are run on a computer, use statistics, mathematics, logic, economic information, and other resources to construct a representation of a particular investment strategy over time. Results from the models give the investor and the manager and idea of how realistic the investment goals are. If they have concerns about realizing these goals, they can adjust their overall strategy.

Recent Trends

The field of investment management has become increasingly complex beginning in the last decades of the twentieth century due to such factors as the development of new kinds of investments, advances in communications networks, and the ability of individuals and companies to access financial information quickly through the use of the Internet. Also over that time, investment management has become so established that many business schools incorporate investment management in their course outlines for students, while some offer masters’ degrees in the field.

Within investment management several subcategories of tasks and activities have developed. Professional fund managers, for example, are individuals or firms governmentally licensed to manage a fund, most commonly a mutual fund, pension fund, or insurance fund. In general the manager of the fund invests money on behalf of the fund owners. Mutual fund managers oversee funds that have been given to an investment company by shareholders, and they invest the funds in a range of assets that can include stocks, bonds, options, commodities, and money market securities. The investments, which are made on the basis of the investment company’s objectives, gives shareholders ways to put money into a diverse set of investment opportunities.

Increasing numbers of investors have turned to relatively new investment products such as separate accounts. A separate account uses money collected from numerous sources to buy individual assets. The investor then owns the assets (such as stocks and bonds) instead of a portion of a larger pool of assets, as would be the case for a mutual fund. Most separate accounts have a minimum investment level of $100,000.