Investment Management Services: What Do They Offer?

The investment management segment offers a wide range of services to help investors achieve their financial goals. These services include investment research and analysis, portfolio management, fund administration, custodial services, risk management, compliance and regulatory support, environmental, social and governance (ESG) services, and performance reporting and analytics.

Investment management, also known as asset or portfolio management, involves handling an investment portfolio or a collection of financial assets. It can include buying and selling assets, creating short- and long-term investment strategies, overseeing asset allocation, and developing a tax strategy.

By employing various investment strategies, conducting research, and monitoring market trends and portfolio performance, investment managers help clients optimise their investments and navigate the complexities of financial markets.

Investment Research and Analysis

Understanding Investment Research and Analysis

Types of Investment Analysis

Two common types of investment analysis are top-down and bottom-up approaches. The top-down approach starts by analysing economic, market, and industry trends before selecting specific investments that are expected to benefit from those trends. On the other hand, the bottom-up approach focuses on analysing individual stocks based on their unique characteristics, such as valuation, management competence, and pricing power, without a primary focus on macroeconomic trends.

Another important distinction in investment analysis is between fundamental analysis and technical analysis. Fundamental analysts emphasise evaluating the financial health of companies and the broader economic outlook. They seek stocks that they believe are undervalued by the market and often use bottom-up analysis to identify such opportunities. In contrast, technical analysts rely on computer-generated charts and graphs to identify patterns and trends in stock price movements, using statistical parameters and technical indicators.

Role of Investment Research and Analysis in Investment Management

Benefits of Investment Research and Analysis

Tools and Techniques

Portfolio Management Services

PMS offers tailored investment strategies that align with the investor's financial goals, risk appetite, and preferences. This personalised approach helps in achieving specific investment objectives. The process begins with the client providing their investment objectives, risk tolerance, investment horizon, and any specific preferences or constraints. Based on this information, the portfolio manager develops a personalised investment strategy.

There are four popular types of PMS:

• Active Portfolio Management: The portfolio manager's primary goal is to maximise returns by diversifying investments across asset classes, industries, and businesses to reduce risk.
• Passive Portfolio Management: This method focuses on fixed profiles that follow the current market trend. Portfolio managers invest in index funds that grow passively over time with minimal intervention, offering reasonably good long-term returns.
• Discretionary Portfolio Management: The portfolio manager is entrusted to manage a specific portfolio and has full authority to make investment decisions on behalf of the investor without prior approval.
• Non-Discretionary Portfolio Management: The portfolio manager advises the client, but the final decision is the client's. Once approved, the portfolio manager executes the appropriate action.

PMS providers are licensed and regulated, and the service requires a minimum investment. The benefits of PMS include expert opinion, customised investment plans, efficient risk management, and regular monitoring of the portfolio's performance.

In summary, Portfolio Management Services provide a systematic approach to maximising investment returns while minimising risk. It offers a collaborative relationship between the client and a team of professional portfolio managers, allowing clients to make sound decisions based on extensive research and factual data.

Fund Administration

Investment management is the process of building and maintaining an investment portfolio. It involves purchasing and selling assets, creating short- or long-term investment strategies, overseeing a portfolio's asset allocation, and developing a tax strategy. Fund administration is a crucial aspect of investment management, encompassing various back-office activities that support investment funds.

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The calculation of the net asset value (NAV) is a core administrator task. It involves determining the fund's income and expense accruals and pricing securities at their current market value. Accurate and timely NAV calculation is vital as it is the price at which investors buy and sell shares in the fund. Administrators also handle trade capture, security valuation, reconciliations, expense calculation, and NAV reporting.

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Fund administrators also take care of preparing and maintaining financial books and records, including reconciling holdings with custody and broker records. They ensure the payment of fund expenses, settlement of daily purchases and sales of securities, and the collection of dividends and interests. Additionally, they calculate and distribute dividends and distributions, if required, and prepare and file the fund's prospectus and other necessary reports.

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Another crucial role of fund administrators is monitoring investment compliance with regulations and restrictions imposed by the SEC, prospectus, or U.S. Internal Revenue Code. They also assist in the supervision of the orderly liquidation and dissolution of the fund, if necessary. Fund administration helps ensure compliance with legal, regulatory, and financial requirements, enhancing efficiency and minimising legal risks and liabilities.

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Custodial Services

Administrative Activities

These activities are related to the management and administration of client accounts. They include opening and closing accounts, maintaining account records, and providing account statements and reports to clients. Custodians also perform corporate actions, such as dividend payments, stock splits, and mergers and acquisitions, on behalf of their clients.

Operational Activities

These activities are related to the day-to-day operations of custody services. They include the settlement of trades, the safekeeping of assets, and the processing of cash flows. Custodians also provide collateral management services to support clients' trading activities.

Risk Management Activities

These activities are related to managing the risks associated with custody services. Custodians conduct due diligence on clients, monitor their activities to ensure compliance with regulations, and implement controls and procedures to mitigate operational risks such as errors and fraud.

Additional Services

Custodians may also offer a range of other services, including account administration, transaction settlements, collection and distribution of dividends and interest payments, tax support, and foreign exchange management. They can also assist in the oversight and management of financial accounts held by minors or adults who are unable to manage their finances due to age, illness, or physical debilitation.

Overall, custodial services play a vital role in safeguarding and managing the financial assets of individuals and organisations, providing expertise and infrastructure to protect and grow their clients' wealth.

Risk Management Services

Risk management is a critical component of investment management, encompassing the identification, assessment, and mitigation of potential risks associated with investment decisions. Effective risk management aims to balance risks and rewards, optimising returns while minimising losses. Here's a detailed overview of risk management services:

Identifying and Analysing Risks

Risk management begins with identifying the potential downsides and rewards of an investment decision. This involves assessing the volatility and risk associated with different investment choices. By understanding the risks involved, investors can make informed decisions about whether to accept, avoid, or mitigate those risks. Standard deviation is often used as a metric to quantify investment risk, measuring the deviation of returns from expected outcomes.

Risk Management Strategies

Once risks are identified, various strategies can be employed to manage them. These include:

• Avoidance: This strategy involves steering clear of risky investments and opting for safer, less volatile options.
• Retention: In contrast, retention means accepting the risks in pursuit of potentially higher returns.
• Sharing: Risk sharing involves distributing risks among multiple parties. For example, insurance companies share risks with reinsurers.
• Transferring: This strategy involves passing on risks to another party. Health insurance is an example, where individuals transfer the risk of medical costs to insurance companies.
• Loss Prevention and Reduction: Instead of eliminating risk, investors may choose to balance it by combining volatile investments with more conservative choices.

Risk Measurement Techniques

Several techniques are used to measure and evaluate investment risk. One common method is the use of standard deviation, which measures the dispersion of returns around a central tendency. Additionally, beta is used to assess market risk, indicating whether an investment has more or less volatility compared to the market. Other measures include value at risk (VaR), which helps assess the potential maximum loss over a given period, and Treynor Ratio, which quantifies the risk-to-reward ratio.

Risk Management in Practice

Risk management is applied in various scenarios within the investment domain. For instance, an investor may opt for low-risk US Treasury bonds instead of riskier corporate bonds. A fund manager may hedge against currency price changes using currency derivatives. A stockbroker might use options and futures to offset potential losses. Meanwhile, a money manager might focus on portfolio diversification to reduce the risk of losses in specific stocks.

The Importance of Risk Management

Adequate risk management is crucial as it helps investors and fund managers make informed decisions, balancing risks and rewards. It enables them to identify and quantify uncertainties, ensuring that potential rewards outweigh the risks. Additionally, risk management helps investors achieve their financial goals while minimising losses.

Frequently asked questions