Managing External Municipal Investment Managers: Strategies For Success

Managing an external municipal investment manager involves overseeing a grouping of assets, such as municipal bonds, to achieve specific investment objectives. This process includes buying and selling assets, devising short- and long-term investment strategies, creating tax strategies, and managing asset allocation. It is essential to monitor the performance of the investment manager to ensure that the investments align with the client's financial goals and risk tolerance. Additionally, the manager must possess strong communication skills to effectively interact with internal partners and external clients. Regular rebalancing of the investment portfolio is crucial to maintain the target asset allocation. The external municipal investment manager should also have expertise in the field, with extensive knowledge of the market and various securities.

Understanding investment management

Investment management refers to the handling of an investment portfolio or a grouping of assets. It involves buying and selling assets, devising strategies, executing trades, creating a tax strategy, and managing asset allocation. It can also include banking, budgeting, and other financial duties.

The term most often refers to managing the holdings in an investment portfolio and trading them to achieve a specific investment objective. Investment management is also known as money management, portfolio management, or wealth management.

Investment management includes devising strategies and executing trades within a financial portfolio. Investment management firms handling over $25 million in assets must register with the SEC and accept fiduciary responsibility toward clients.

Professional investment management aims to meet particular investment goals for the benefit of clients whose money they have been given the responsibility of overseeing. These clients may be individual investors or institutional investors such as pension funds, retirement plans, governments, educational institutions, and insurance companies.

Investment management services include asset allocation, financial statement analysis, stock selection, monitoring of existing investments, and portfolio strategy and implementation. Investment managers may also provide financial planning and advising services, helping clients align their investments with their retirement and estate planning, as well as asset distribution.

Professional managers deal with a variety of different securities and financial assets, including bonds, equities, commodities, and real estate. They may also manage real assets such as precious metals, commodities, and artwork.

In corporate finance, investment management includes ensuring a company's tangible and intangible assets are maintained, accounted for, and well-utilized.

Running an investment management business involves many responsibilities. The firm must hire professional managers to deal, market, settle, and prepare reports for clients. Other duties include conducting internal audits and researching individual assets, asset classes, and industrial sectors.

Those who head investment management firms must also ensure they operate within legislative and regulatory constraints, examine internal systems and controls, account for cash flow, and properly record transactions and fund valuations.

Invesco, for example, is one of the largest municipal managers and offers a broad suite of municipal bond strategies, from short-term high-grade portfolios to long-term high-yield strategies. They have access to unique opportunities due to their size and are often the first call for municipalities looking to secure financing for key projects.

Investment managers are usually compensated via a management fee, typically a percentage of the value of the portfolio held for a client. Fees are usually on a sliding scale, with clients negotiating lower fees for larger amounts of assets. The average management fee is between 1% to 2%.

Investment management, also known as asset management or portfolio management, is a service that helps investors achieve their financial goals through the professional management of their securities and assets. By employing various investment strategies, conducting research, and monitoring market trends and portfolio performance, investment managers enable clients to optimise their investments and navigate the complexities of the financial markets.

The role of an investment manager

Investment managers are responsible for handling their clients' financial planning, investing, and portfolio management activities. They help individuals or institutional investors such as pension funds, retirement plans, governments, educational institutions, and insurance companies.

Investment managers work with investors' money to help them reach their financial goals. They devise strategies and execute trades within a financial portfolio. They also buy and sell investments when necessary, oversee the performance of the portfolio, and report results back to their clients.

• Identifying the investor's risk tolerance: This involves assessing how much risk an investor can handle before it affects their peace of mind. This helps determine the allocation of funds into stocks, bonds, or other securities that may offer more stability during market downturns. Less experienced investors tend to be more risk-averse, while seasoned investors are often comfortable with additional risk.
• Choosing investments for a client: After determining the allocation of the investment portfolio across different asset classes, investment managers decide which specific stocks, bonds, or other financial instruments to purchase for their client. This step involves research, and the level of involvement of the client in decision-making can vary.
• Monitoring performance: Investment managers monitor the performance of the assets they buy or sell against specific benchmarks or milestones set by the client. They report this information back to the client, allowing them to track their investments and make necessary adjustments.

Additionally, investment managers may provide advice in other areas, such as saving for college or a large purchase. They also address questions related to risk and factors influencing it, including stock market conditions.

Investment managers typically have strong analytical, problem-solving, and communication skills. They are also self-confident and adept at time management, allowing them to effectively manage their clients' investments and meet their financial goals.

Developing investment strategies

Understanding Investment Management:

Investment management involves handling an investment portfolio, which can include municipal bonds, and developing strategies to achieve specific objectives. It entails buying and selling assets, creating short- and long-term strategies, tax strategies, and managing asset allocation.

When developing investment strategies, it's important to consider the following:

• Client Goals and Risk Tolerance: Understanding the client's investment goals and risk tolerance is crucial. This information will guide the types of assets selected and the level of risk that can be taken.
• Asset Allocation: Determining the appropriate allocation of assets across different classes, such as stocks, bonds, commodities, and real estate, is essential to balance risk and return.
• Diversification: Diversifying investments across multiple asset classes helps protect against market volatility and unexpected economic shifts.
• Research and Selection: Conducting thorough research to select suitable investments that align with the client's goals and complement other securities in their portfolio is key.
• Market Monitoring: Staying updated on stock and bond markets, as well as global economic trends, helps identify potential opportunities and risks to prepare the portfolio for any changes.
• Tax Considerations: Considering tax implications is vital. Strategies such as tax-loss harvesting and locating specific types of securities into appropriate accounts based on their tax treatment can help retain more profits.
• Regular Rebalancing: Periodically rebalancing the portfolio, such as every six months, ensures that it remains aligned with the target asset allocation and mitigates any drift caused by gains or losses in various asset classes.

Implementing the Strategies:

Once the investment strategies are developed, they need to be implemented and monitored. This includes executing trades within the financial portfolio and coordinating with internal partners, external clients, and the investment team. It's important to stay informed about market trends and communicate conclusions and recommendations to relevant stakeholders.

Adapting to Market Changes:

Investment strategies should be dynamic and adaptable to market changes. Monitoring existing investments and industry developments is crucial to making timely adjustments. Staying proactive and keeping abreast of trends, news, and market developments enables investment managers to make informed decisions and communicate these changes effectively to clients.

Tax strategy and financial duties

Investment managers are responsible for creating tax strategies for their clients. They also handle financial planning, investing, and portfolio management activities. These managers are usually individuals or organisations who act on behalf of their clients.

Investment managers help their clients meet their investment goals by devising strategies and executing trades within a financial portfolio. They buy and sell assets, develop short- and long-term investment strategies, and manage asset allocation.

The managers also conduct in-depth research and analysis of various financial instruments and market trends to make informed investment decisions. They develop and implement investment strategies, allocate assets, manage risk, and monitor the performance of their clients' portfolios.

In addition, investment managers may provide financial planning and advising services, coordinating their clients' portfolios with other assets and life goals, such as retirement and estate planning. They may also handle banking, budgeting, and other financial duties.

Investment managers must have knowledge of tax laws and regulations relevant to their clients' industries or organisations. They ensure that financial details meet legal requirements and may prepare financial statements, business activity reports, and forecasts.

Fees for investment management services are typically structured as a percentage of the client's assets, annual fees, or performance-based fees. The average management fee is between 1% to 2%.

Monitoring and reviewing performance

Monitoring and reviewing the performance of an external municipal investment manager is a critical aspect of managing such an entity. Here are some detailed instructions and considerations for this process:

• Establish Key Performance Indicators (KPIs): Clearly define the KPIs that will be used to assess the investment manager's performance. These KPIs should be aligned with the investment objectives and goals set for the municipality. Examples of KPIs could include investment returns over specific periods, risk-adjusted returns, compliance with investment guidelines, and client satisfaction.
• Regular Performance Reviews: Conduct periodic performance reviews to evaluate the external investment manager's performance against the established KPIs. The frequency of these reviews can vary but should be conducted at least annually. During these reviews, analyse the financial and investment reports provided by the manager, assess their investment strategies, and compare their performance to relevant benchmarks and peer groups.
• Risk Management Assessment: Evaluate the risk management practices employed by the external investment manager. Assess their ability to identify, monitor, and manage various types of risk, such as market risk, credit risk, liquidity risk, and operational risk. Ensure that their risk management framework aligns with the municipality's risk tolerance and guidelines.
• Compliance and Regulatory Oversight: Ensure that the external investment manager maintains compliance with all relevant laws, regulations, and ethical standards. Stay informed about any changes in regulatory requirements and ensure the manager adapts their practices accordingly. Conduct periodic audits or engage external auditors to verify compliance and identify potential areas of concern.
• Client Service and Communication: Assess the level of client service and communication provided by the external investment manager. Evaluate their responsiveness to the municipality's needs, their ability to provide timely and transparent reporting, and their effectiveness in addressing queries or concerns. Regularly seek feedback from stakeholders and beneficiaries to gauge their satisfaction with the investment manager's performance.
• Performance Benchmarking: Compare the performance of the external investment manager against that of their peers and relevant market indices. Analyse the consistency of their performance over time and assess their ability to deliver returns that meet or exceed the expectations set by comparable investments. This benchmarking process can help identify areas where the manager excels or falls short, guiding future decision-making.
• Continuous Improvement: Encourage a culture of continuous improvement by working collaboratively with the external investment manager. Provide constructive feedback based on performance reviews and work together to identify areas for enhancement. This may include refining investment strategies, improving risk management practices, or enhancing reporting and communication protocols.
• Performance Incentives and Consequences: Implement a performance-based incentive structure to motivate the external investment manager to strive for superior results. This could be in the form of bonuses, additional compensation, or other rewards for exceptional performance. Conversely, establish clear consequences for underperformance or failure to meet expectations, such as financial penalties or contract renegotiation.
• Independent Verification: Consider engaging independent third-party experts to review the performance of the external investment manager. This could include hiring a consulting firm or auditor to provide an unbiased assessment of the manager's investment strategies, risk management practices, and compliance with regulatory requirements. This independent perspective can add an extra layer of oversight and help identify potential issues.

By diligently monitoring and reviewing the performance of the external municipal investment manager, you can ensure that they are held accountable, that the municipality's investment objectives are being met, and that the interests of all stakeholders are protected.

Frequently asked questions