Who are Fund Managers?
Fund Managers, aka Investment Managers, Money Managers, are the institutional investors that manage money on behalf of their clients, which may include individuals and groups. Often referred to as Smart Money, they are perceived to be equipped with better resources and information.
Investment management industry is huge and includes a range of asset classes and products like equity, fixed income, global, country-specific, multi-asset, commodity, money markets, IPOs, fund of funds, real estate.
A firm seeks to fulfil investment goals of the clients, which may include pension funds, insurance companies, endowment funds, charity, corporations. When you go shopping for funds, you will find a range of products from different businesses.
Investment Management (IM) refers to the complete management of funds, which are invested in securities. IM professionals devise an investment strategy for the fund and raise money from the public to implement the strategy.
They are not just involved in buying and selling of securities but a broader range of processes, including research, strategy implementation, development of strategy, income distribution of funds, banking, performance evaluation.
Investment Management is also referred to as Funds Management, Asset Management. IM companies are traditionally known as buy-side firms since these firms mostly purchase securities, whereas sell-side include institutions that are selling the research, providing research facilities.
Buy-side firms include IM companies, pension funds, insurance funds, endowment funds, sovereign wealth funds, mutual funds. These institutions invest in a significant amount of funds and invest for the purpose of funds management.
Sell-side firms are more into insights, research, advisory, promotion, market-making for the companies. These firms may also provide services like broking, investment banking, advisory, and deal in transactions like IPOs, capital raising, investment research, trading and settlement.
IM businesses are regulated by a market regulator in most of countries. Regulators also ensure that investor interests are protected, market ethics are maintained, and necessary disclosures and regulations are honoured by the companies.
Fund Management companies charge fees to their clients, which is expressed as a percentage of money invested in the fund. The revenue earned by funds managers tends to fluctuate due to market movement in funds/assets under management. Sometimes IM companies also charge performance fees depending on the stated performance hurdles.
Active Management: In this type of IM, the manager seeks to invest in asset classes in an index-agnostic approach by actively picking stocks based on proprietary or sourced research rather than a benchmark.
Passive Management: Passive Investing vehicles have gained a lot of demand over the past two decade, largely due to lower fees. Investment Managers benchmark portfolio to an index and try to replicate the performance of the benchmark.
More on passive investing approach: What Is Passive Investing?
Type of Fund Managers/Funds
Equity: They invest in equity or stocks, which happen to be among leading asset classes in the history of mankind. Equity funds are relatively riskier but boast better return potential as well. Investment Managers can further segregate these funds into sectors, countries, market capitalisation.
Bonds: Also known as Fixed Income Funds, the money is invested in fixed income instruments like Government Bonds, Corporate Bonds, Perpetual Bonds, Asset-backed Securities, Mortgage-backed Securities etc.
Good read: Fixed Income Securities – A look Into Bonds
Multi-asset: In this strategy, the objective is to invest in multiple asset classes, including commodity, equity, bonds, currencies, derivatives. These funds seek to deliver risk-adjusted returns based on the prevailing investment climate.
Index: Index Funds are one of the passive investing vehicles seeking to match the performance of the underlying benchmark. These funds are available at relatively lower fee expense and provide exposure to only a group of asset classes based on the benchmark index.
Real Estate: Real Estate funds invest in real assets like property and land. These funds further segregated into a type of the properties under management like commercial, retail, office, residential, industrial.
Must read: Australian Real Estate Investment Trusts
Global: A global fund is allocated across geographies and provides exposure to industries of other nations. These funds also provide currency exposure to the investor as well as diversification.
Speciality: Speciality managers can run a range of funds based on their belief, such as e-commerce fund, agriculture fund, e-vehicle fund, disruptive or innovation fund, cannabis fund, country-specific fund, ESG fund, automated vehicle fund.
Hedge Funds: Hedge funds have grown extremely popular over the past decades because of their high returns, which come with similar scale of risks. These funds invest in a range of asset classes, including commodity, equity, bonds. Investment managers charge a relatively high fee.
What is an investment philosophy?
An investment philosophy is something you apply when constructing an investment strategy. It is your perception of market and the wide variety of asset classes available in markets. It also reflects how investor behaviour has evolved over time. Understanding a fund managers investment philosophy is paramount. Some investment philosophies:
Value Investing: Value investing is perceived as picking stocks that are available at a discount to current market price. Investors prefer businesses that are underestimated by large sections of markets, thus undervalued.
Growth Investing: Growth investors chase companies that are exhibiting better-than-average in earnings. The expectations from growing enterprises are generally higher due to stage of business, target market, product, disruptive products. Growth Stocks have delivered substantial return over the last decade and continue to be market darlings.
Related: How To Identify A Growth Stock?
Arbitrage Investing: In this philosophy, investors seek to benefit from the existing inefficiency of asset prices. This practice in markets also ensures that price of asset classes do not stay diverted from fair-value for a long time. Arbitrage strategies can be applied on almost every liquid asset classes that are available to trade.
Market Timing: Investors seek to maximise their returns by undertaking investment decisions based on a future prediction of the asset class. Market Timing predictions can be based on Fundamental Analysis, Technical Analysis, Economic Conditions etc.