Understanding Professionally Managed Investment Entities: What, Why, And How?

A professionally managed investment entity is a business that conducts activities such as trading in money market instruments, foreign exchange, transferable securities, and commodity futures trading on behalf of a customer. It also includes individual and collective portfolio management, as well as investing, administering, or managing funds for clients. These clients can be individual or institutional investors. The entity is managed by a financial institution that performs the above-mentioned activities on behalf of the entity. Investment management services include devising strategies, executing trades, asset allocation, financial statement analysis, and monitoring existing investments.

Investment management services

The investment management process typically begins with understanding the client's investment goals, risk tolerance, and financial situation. Based on this information, the investment manager designs an investment strategy and constructs a portfolio by purchasing various assets such as stocks, bonds, and other investments. The manager then monitors the performance of the portfolio and makes adjustments as needed to ensure it aligns with the client's goals and the market conditions.

In summary, investment management services encompass a wide range of activities that help investors achieve their financial objectives by effectively managing their investment portfolios and providing guidance on various financial aspects.

Investment objectives

The main investment objective of a professionally-managed investment entity is to generate lucrative returns for its clients while carefully navigating market risks. These entities employ expert professionals, such as investment managers or portfolio managers, who conduct in-depth research and analysis to make informed investment decisions. They leverage their knowledge of securities, financial assets, and market trends to develop and implement robust investment strategies.

These investment strategies are tailored to meet the unique financial goals and risk tolerance levels of each client. The investment objectives are typically discussed and agreed upon during initial meetings with clients, where factors such as investment horizons, risk appetite, and target returns are considered. The investment entity then structures the client's portfolio accordingly, selecting appropriate assets and securities to align with these objectives.

Professional investment entities also focus on diversifying their clients' portfolios to mitigate risks. They allocate assets across various asset classes, sectors, and industries to reduce exposure to market volatility and enhance long-term growth potential. This diversification strategy ensures that adverse events impacting a particular sector or asset class do not disproportionately affect the overall portfolio's performance.

Additionally, professionally-managed investment entities aim to provide a comprehensive suite of services beyond just investment selection. They assist clients in financial planning, offering advice on retirement planning, saving for education, and other life goals. These entities also help clients navigate the complexities of taxation, implementing tax-efficient investment strategies to optimise after-tax returns.

Another key investment objective is to provide regular performance updates and reporting to clients. Investment managers typically supply clients with periodic reports detailing the performance of their portfolios, ensuring transparency and client involvement. This proactive communication helps clients stay informed about their investments' progress and enables them to make any necessary adjustments to their investment objectives over time.

Lastly, professionally-managed investment entities strive for long-term sustainability and capital preservation. They aim to balance growth objectives with risk management strategies to protect their clients' capital, especially during market downturns. This involves regularly monitoring and rebalancing portfolios, ensuring they remain aligned with the clients' investment objectives and adjusting them as market conditions evolve.

In summary, the investment objectives of professionally-managed investment entities revolve around generating strong returns, providing comprehensive financial services, diversifying portfolios, and offering transparent and tailored solutions to help clients achieve their financial goals. These entities play a crucial role in guiding investors through the complexities of the financial markets, providing expertise and peace of mind.

Investment strategies

A professionally managed investment entity is an investment account owned by an investor but managed by a professional money manager. These managers are tasked with making investment decisions that are in line with the client's needs, goals, risk tolerance, and asset size.

Investment Strategy #1: Diversification, Not Over-Diversification

The key to successful investing is diversification across different sectors and assets. However, it is important not to over-diversify, as this can lead to reduced returns. The goal is to find a balance where you can still profit from significant asset appreciation. This involves meticulously monitoring the holdings of your primary mutual fund and choosing additional funds that add variety to your portfolio without diluting your potential returns.

Investment Strategy #2: Be Strategic with Your Time Horizon

Aligning your investments with your time horizon is crucial. If you have a longer time horizon, you can afford to take on more risk, such as investing in small-cap stocks, which offer growth potential but come with higher volatility. By investing in these while you have a long time horizon, you give yourself the chance to benefit from their growth potential, with enough time to make up for potential problems.

Investment Strategy #3: Focus on Value-Added Investments

When choosing additional mutual funds, select those that offer unique prospects compared to your primary fund. Look for funds that bring something genuinely new and beneficial to your portfolio, such as infrastructure funds, which can provide protection against inflation, or small-cap funds, which offer higher risk-reward ratios.

Investment Strategy #4: Active Monitoring and Rebalancing

Adding multiple mutual funds to your portfolio increases the complexity of managing your investments. It is important to actively monitor the performance of each fund and rebalance your portfolio as needed to ensure it remains aligned with your risk tolerance and goals. Regular and careful portfolio reviews are essential to identify any deviations from your target asset allocation.

Investment Strategy #5: Fundamental Analysis

Fundamental analysis involves evaluating all the business factors that can affect an investment's performance. For stocks, this includes analysing a company's financial information, meeting with executives, employees, suppliers, customers, and competitors. This strategy helps managers understand what will drive growth and make informed decisions about whether to invest in a particular company.

Investment Strategy #6: Contrarian Investing

Contrarian managers choose assets that are out of favour and bet against the market consensus. This strategy is generally aligned with value investing, which involves buying undervalued assets. The risk is that the consensus is correct, resulting in losses for the manager.

In conclusion, a professionally managed investment entity employs various investment strategies to optimise their clients' portfolios. These strategies include diversification, time horizon planning, value-added investing, active monitoring, fundamental analysis, and contrarian investing. By employing these strategies, managers aim to help their clients achieve their financial goals while navigating the complexities of the financial markets.

Investment funds

A managed account is an investment account owned by an investor and managed by a professional money manager. The investor allocates funds to the account, and the manager purchases and places physical shares of securities into the account portfolio. The manager has discretionary authority over the account and makes investment decisions based on the client's needs, goals, risk tolerance, and asset size. Managed accounts are typically used by high-net-worth individuals as they often require a high minimum dollar amount of investment. The manager of a managed account is subject to fiduciary duty, meaning they must act in the best interest of the client or face civil or criminal penalties.

Mutual funds are a type of managed account that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. They are open to anyone with the means to buy shares and are marketed as a way for small retail investors to benefit from professional money management. Mutual funds are actively managed, with the fund manager overseeing the portfolio and deciding how to divide money across sectors, industries, and companies based on the fund's strategy.

Investment advisory

A professionally managed investment entity typically refers to an investment fund or portfolio that is overseen and actively managed by qualified professionals. These professionals, known as investment managers or investment advisers, are responsible for making investment decisions on behalf of their clients, considering their specific needs, goals, risk tolerance, and asset size.

The scope of investment advisory services can vary, but generally includes activities such as trading in money market instruments, foreign exchange, interest rate and index instruments, transferable securities, and commodity futures. Additionally, investment advisers may provide individual and collective portfolio management services, helping clients to invest, administer, or manage their financial assets or funds.

It is important to distinguish between investment advisory services and financial institutions that solely provide investment advice. Under the Common Reporting Standard (CRS), investment managers and advisers are typically classified as 'Investment Entities' and are considered 'Reporting Financial Institutions'. However, in certain jurisdictions, such as Bermuda, investment advisers who only provide investment advice and do not hold or manage client funds may be exempt from specific reporting obligations.

When engaging the services of a professionally managed investment entity, it is essential to understand the fees involved. Investment managers typically charge a fee for their services, which can be structured in various ways, including a flat fee, a fixed percentage of assets under management (AUM), or performance-based fees. It is also worth noting that professionally managed investment funds often charge a fee, usually deducted from the yield, but their performance is expected to outweigh the cost of administration.

Frequently asked questions