Week 6 (2) Flashcards
Investment Management
Chief Investment Officer
The Chief Investment Officer (CIO) usually holds the role of head
of investments at the board level of the investment management
organisation.
A CIO needs to have a broad understanding of all areas of
investment. They need not necessarily be an expert in any one
area but need to be able to converse in each and to understand the concepts and principles at a high level, seeing that it all fits together well. They are responsible for how well the clients’ objectives are being met, including managing the risks around this.
They typically manage all the different investment teams that make up the organisation – which means that they are involved with
portfolio design and construction, designing new products, engaging with teams about new projects/ideas and aiming to
challenge, debate and promote them.
What do Portfolio Management Teams do?
Portfolio management, that is, the managing of a portfolio
of assets, involves:
* assessing the current state of the portfolio – position
keeping, performance measurement, risk assessment etc.;
and
* making changes to the portfolio and rebalancing it to
keep it consistent with the investment strategy.
Risk Management function of an Investment Manager
The risk management function of an investment manager
includes consideration of:
* Position risk management: the size of positions held in
various client portfolios relative to limits, targets or other
constraints set explicitly by those clients or by product
documentation and advertising.
* Operational risk management.
In assessing the extent of operational risk in the
investment managers processes, the following might be
considered:
* The character and professionalism of the individuals
involved.
* The culture of the organisation – the extent to which
individuals are aiming at excellence in performance of their
roles, and the extent to which they consider it necessary to go beyond just going through the motions
* Proportionality – not expending a disproportionate degree of resources to generate spurious accuracy.
* Any reliance on manual intervention in any processes,
without adequate checks and balances.
Increase in regulation since 08/09
This has resulted in greater direct costs – needing to hire
additional staff to oversee compliance with expanded
regulations and greater regulator interaction – as well as indirect costs as it has become increasingly difficult for certain types of products to gain approval for sale and/or the types of customers who can be approached has
reduced. These fixed costs of regulation make it difficult for
smaller managers and niche players to enter or remain in
the market.
There has also been an argument that the costs of regulation may be exceeding the benefits to the wider
public, i.e. that there is now over-regulation. Regulation can take the form of local as well as regional regulation.
For example, across Europe various EU directives exist
which have a direct bearing on the investment management industry and the sales of investment
management funds or services, especially if a firm wants to
offer its products across the EU.
What is Investment Management?
The investment management industry is made up of
various types of organisations managing investments on
behalf of clients. The organisations are quite diverse – from
large multinational investment managers managing all
asset classes with trillions of dollars under management to
small boutique operations focusing on niche investment
areas with much smaller amounts under management.
They typically manage money on behalf of institutional
clients, money from individual investors in the form of retail
funds sold directly by the investment manager or through
intermediaries and money from high net worth individuals
in the form of wealth management services.
What does the ‘Quant Team’ do?
Most investment managers will have some kind of ‘quant team’.
They will be responsible for back-testing investment strategies
and finding competitive edges for the fund manager. They will
also be custodians of the firm’s databases (containing price
information, balance sheet information, etc) especially where
that information has been gathered or calculated using the firm’s proprietary methods.
The quantitative team is typically comprised of individuals with
PhDs in mathematics, physics or high-performance computing.
Some investment manager firms may offer only products which
rely on quantitative decision-making (for example: trend-
following hedge funds). In this case, the quantitative team takes
on the full role of the investment manager.
What does a Compliance Team do?
A compliance team is tasked with ensuring that the organisation fulfils its regulatory requirements. Staff in the team often have a legal background.
The compliance team would usually be the first point of
contact between the firm and its regulators.
What is the function of Marketing and Sales Teams?
The function of the marketing and sales teams will be to
win new clients and to maintain good relationships with
existing clients in order to retain their business. The precise make-up of the sales functions differs by
organisation. Many will have regional sales teams focused
on clients in specific geographical areas. Sometimes finding new clients is handled by a different team than that which services existing clients. The structure chosen will be one which the firm believes provides the best customer experience while using the fewest number of staff.
Marketing and sales staff are usually compensated based
on the volume of clients won or retained, and less based
on investment performance over which they have limited
control.
The importance of the marketing activity of an investment
manager depends on its performance. At one end of the
spectrum, if investment performance is poor, it will rely
heavily on its marketing team to retain business. If performance is excellent, it probably doesn’t need a
marketing department beyond some basic customer
servicing (like providing portfolio updates or statements).
Key Challenge: Finding and Retaining Talent
Competition for talent remains fierce and managers whose
performance is weak (relative to competitors) may suffer
an outflow of assets or a reduction in incentive fees which
in turn means these managers are at a competitive
disadvantage when it comes to compensating their key
staff. The heavy reliance on people (rather than machines,
factories or patents) and the relative ease with which
people can move to competitors, taking with them any
knowledge gained at the firm, makes this problem worse
for investment managers than for many other types of
firms.
Key Challenge: Wealth Management
Increasing individual choice – for better or worse – means that
investment managers must adapt their product range to offer
clients more transparency, choice or flexibility to design their
own portfolios than may have been the case in the past.
Key Challenge: Finding and retaining clients
An investment management firm has a comparatively high level
of fixed costs. A minimum number of people is required to
effectively manage a portfolio, regardless of the size of that
portfolio. Some functions – like sales – may be more easily
increased or reduced in response to market conditions, however
the core ‘production’ roles are difficult to cut without
compromising investment performance. Attraction of new clients
and retention of existing clients is therefore highly important.
