Investment Management

Investment management, also called asset management or fund management, is the professional handling of money and securities on behalf of clients. An investment manager decides how a client's capital is split between shares, bonds, property, cash and other assets, selects specific holdings, monitors them and reports results, all within limits agreed with the client. Clients range from individual savers to pension funds, insurers, charities and governments.

The industry covers firms that run pooled vehicles such as mutual funds and exchange-traded funds, firms that run segregated accounts for large clients, and specialist managers of hedge funds, private equity and real estate. It is distinct from banking: managers invest clients' money at the clients' risk rather than lending their own balance sheet, which is why regulators treat them differently from a commercial bank.

Hiring an investment manager is a little like hiring a professional gardener. You own the garden and decide what you want from it, perhaps flowers, vegetables or something that needs little care. The gardener chooses the plants, waters, prunes and replaces what fails, and you pay them for their time and skill whether or not the season is good.

In the same way, the client owns the money and sets the goal, such as steady income for retirement or long-term growth. The manager makes the day-to-day choices within that goal and charges a fee, usually a small percentage of the money being looked after. A good manager cannot control the weather, meaning the markets, but should stick to the plan and keep costs sensible.

Most managers follow a broadly similar cycle:

1. Setting objectives. The client and manager agree an investment objective, a benchmark, risk tolerance, liquidity needs and any ethical or legal limits.
2. Asset allocation. The manager decides the broad mix of asset classes, which research suggests explains much of the variation in long-run results; see asset allocation.
3. Security selection. Within each asset class the manager picks holdings, either by trying to beat the market through active management or by tracking an index through passive management.
4. Monitoring and rebalancing. Positions are reviewed, risk is measured and the portfolio is brought back to target weights as prices move.
5. Reporting. Results are compared with the benchmark, usually after fees and on a risk-adjusted basis.

Behind the portfolio manager sit analysts, traders, risk and compliance staff. Client assets are normally held by an independent custodian bank, and a fund administrator calculates the net asset value, which protects investors if the manager fails or acts dishonestly.

The usual charge is a management fee calculated as a percentage of assets under management. Hedge funds and private equity funds often add a performance fee, traditionally described as "two and twenty": a 2 percent annual fee plus 20 percent of profits above a threshold, though average terms have fallen. Index funds charge far less. Because revenue grows with assets, the industry has strong economies of scale, and the largest firms, led by BlackRock and Vanguard, each manage trillions of dollars.

Fee-based pay creates a conflict: managers earn more by gathering assets than by producing returns. This is an example of the principal-agent problem, and regulators respond with disclosure rules and fiduciary duties.

Investment managers are regulated almost everywhere. In the United States, advisers register with the Securities and Exchange Commission under the Investment Advisers Act of 1940, and funds are governed by the Investment Company Act of the same year; see investment adviser and investment company. In the European Union, retail funds follow the UCITS directives and other funds the Alternative Investment Fund Managers Directive (AIFMD), while MiFID II covers portfolio management services. In the UK the Financial Conduct Authority supervises managers, and in Pakistan the Securities and Exchange Commission of Pakistan licenses asset management companies.

A central concept is fiduciary duty: the manager must act in the client's best interest, avoid or disclose conflicts and charge reasonable fees. Since the 2008 financial crisis, bodies such as the Financial Stability Board have also studied whether large funds could add to systemic risk, for example through runs on open-ended funds that hold hard-to-sell assets.

• Fee pressure. The steady move into index funds has cut average fees and forced consolidation among active managers.
• Private markets. Many managers have expanded into private credit, infrastructure and private equity, which charge higher fees but are less liquid and less transparent.
• Stewardship and ESG. Managers' votes at company meetings, and their approach to ESG investing, have become politically contested in the United States and closely regulated in the EU.
• Technology. Automated advice and fintech platforms have lowered the minimum amounts needed to get managed portfolios.

• Investor.gov: Working with an Investment Professional
• European Securities and Markets Authority (ESMA)