Investment Management explained

Investment Management - Toolshero

Investment Management: in this article you will find a practical explanation of investment management. This article explains Investment Management in general and provides its different elements and styles, externalities and performance measurement. After reading, you will understand the importance of effective financial management in companies. Enjoy reading!

Investment management is the process of managing investment portfolios or financial assets, typically for large institutions such as pension funds, endowments, and insurance companies. Investment managers are often called client portfolio managers or asset allocators.

What is Investment Management?

Investment management, or money management, is a process, not a product. It includes the creation of an investment policy and strategy followed by continuous monitoring to ensure that the objectives set out in it are being met. Many variables have to be considered when formulating an investment policy for a pension fund. In broad terms, these include:

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Desired rate of return

A long-term view will focus on capital appreciation while a shorter-term view may require income generation as well.

Investment horizon

Since pension funds have deferred liabilities, their time horizon tends to be longer than other financial institutions.

Risk tolerance

Factors such as a company’s existing obligations and its projected cash flow play a in deciding how much risk is appropriate.

Currency risk

A fund that invests in securities denominated in a foreign currency has exchange rate risk. The degree of this risk is a function of both the assets and liabilities of the fund. For example, if a Canadian company funds its pension plan with U.S.-dollar assets but has most of its employees based in Canada, it will have significant exposure to changes in relative value between the two currencies.


Some types of investments (such as commodities) are not very liquid and may be subject to wide daily price fluctuations.

Type of investor

Individuals vs. institutions; public vs. private; equity vs. debt; short term vs long term.

Definition of Investment Management

Investment management is the management of money or any kind of assets owned by investors. It is the process through which the investment manager seeks to accomplish defined investment objectives by deploying capital in an appropriate mix of financial instruments and other assets.

There are two major types of investments: publically traded securities (stocks) and fixed income products, including bonds.

The investment management process begins with a thorough understanding of client needs, guidelines, policies and restrictions. As market conditions constantly change, so do asset allocation strategies. Communication is key throughout the entire process as well as ongoing monitoring to ensure that portfolios are on track towards meeting their objectives.

Investment managers typically manage endowments for educational institutions or pension funds for corporations on behalf of employees. However, many mutual funds and brokerage firms offer investment management services more accessible to individual investors.

The process of managing investments that is carried out by investment managers. The investment manager aims to accomplish defined investment objectives by deploying capital in an appropriate mix of financial instruments and other assets.

Investment Management is a service provided by mutual fund companies, wealth management companies , brokers & financial planners which enables them to build customized portfolios for their customers .

Investment Management: Investment managers and portfolio structures

Investment managers and portfolio structures play a major role in the world of investments. The investment managers take control of investments, which entails a lot of risk, and invests them in a way that meets a certain financial objective.

There are different types of investment managers that play a role in the world of investments, but they all have one main objective which is to invest funds in the market and turn the initial capital into more money. Some of these types include:

Fund manager

This type of investment manager manages fund assets and allocates them in various securities, such as stocks and bonds.

Portfolio manager

A portfolio manager invests clients’ assets across assets classes such as equities, fixed income, etc., by investing directly or through managed products such as mutual funds, ETFs, hedge funds, etc.

Financial advisors

This type of investment advisors provides financial advice to their clients regarding the right strategies for investing and other related services.

Advisory director or portfolio consultant

Advisory directors and portfolio consultants provide independent advice on portfolios, asset allocation strategies, performance reporting, etc. to institutions with typically over US$100 million in assets under management.

An investment may be made in public securities such as common stocks, preferred stocks, bonds, mutual fund shares, or by direct investment with a company or entity acting as an originator or sponsor of the funds being put up for investment. The originator/sponsor is usually paid in fees by investors in return for providing capital.

Investment managers are compensated through one of two methods– either by charging fees based on the total value of the capital invested, or by charging fees as a percentage of profits earned. Investment managers may also be compensated with investment products, including stocks, warrants, options, and derivatives.

Investment management is divided into two separate parts: discretionary and advisory. The difference between them boils down to whether or not the manager has discretion to make trades without consulting their client. In an advisory relationship, investment advice is provided but no trades are executed without approval from the investor.

In general, asset-management companies manage money for individual investors as well as institutions such as pension funds and labor unions. They offer a wide variety of services that include stock picking and market timing; assembling diversified portfolios that reflect combinations of strategies, including growth, income and value investing; managing money based on the risk profiles of investors; providing investment advice on direct investments in real estate or other assets outside of stocks and bonds; designing insurance products; etcetera.

Asset managers typically charge for their services according to a pricing grid that’s usually expressed as an annual management fee. This is generally between 0.5% and 2% of the total amount invested with them, although some may even exceed 5%.

High asset-management fees are particularly onerous for investors who have small amounts to invest or who aren’t able to contribute any more capital once they’ve reached the maximum level of wealth allowed by their financial advisers or brokerage firms.

The greatest draw of asset-management companies is their ability to deliver better rates of return than investors might be able to find on their own.

Investment styles in Investment Management

The style of investment management that you choose for your portfolio is based on the wishes and needs of your clients.

Investment managers will often use a combination of these styles, as they offer different benefits and limitations.

Core / Relative Value

Core / relative value managers are focused on finding undervalued or overvalued securities. They spend most of their time researching individual securities using data that ranges from price-to-earnings ratios to flow-of-funds statistics. Relative value is a slightly different approach where managers use statistical analyses to identify inefficiently priced assets, either through fundamental company analysis or statistical methods.


Contrarian investment management is highly tactical. Like relative value managers, contrarians look for inconsistencies in the market, but they’re also willing to bet against them. These strategies can be divided into three categories – bottom up, top down and macro.

Bottom-up investors conduct extensive fundamental research before they invest, looking at a company’s financial statements, management, and competitive advantages. Top-down managers use economic indicators to identify market trends that may affect the future performance of companies in their portfolios.

In addition to these two styles, which are typically used by hedge funds, some large mutual funds also take macro positions with their portfolio. Macro managers look for broad market themes that will influence the economy as a whole and invest accordingly.

Managed Futures and Investment Management

Managed futures strategies include investing in futures contracts on the major exchanges, including bonds, currencies, commodities, and equity indices. These investors often employ a top-down approach but don’t conduct fundamental research before making investment decisions. Instead, these funds rely on momentum indicators such moving averages instead of using traditional valuation models.

Merger Arbitrage

Merger arbitrage investors attempt to take advantage of the price discrepancies that often emerge after merger announcements. In a simplified example, an investor can purchase a stock just before it’s taken over for $20 and resell it after the acquisition for $30. If this strategy earns 5% per month and the deal takes six months to finalize, then you’ll double your money in 18 months.

Investment Management Pricing

The fees associated with these types of funds range from 0.75% (fixed income) to as much as 3% (funds that use various strategies). This fee isn’t based on assets under management but is instead charged as a percentage of profits earned. So, if one of these funds earns no profits that month, there’s no fee.

Asset management companies often use a combination of several different styles, tailoring their long-term investments to the needs of each client. By using this approach, they can offer clients broad exposure to the market without taking unnecessary risks.

Investment Management Externalities

The key advantages for asset managers are having large amounts of capital and superior expertise. This enables them to take advantage of anomalies in the financial markets that are unavailable or too expensive for most individual investors.

What are the disadvantages?

Good investment returns must be balanced with low costs & high liquidity. So, if you’re able to find an investment manager who offers excellent at reasonable levels you should consider paying higher fees.

Successful asset managers can become so successful that they require high levels of capital to satisfy the demands of their clients. At this point it often makes sense for them to take on outside investors instead of limiting themselves to a specific group of people.

Some investment management companies use complicated strategies that even experienced investors don’t understand. This approach may be acceptable if you can find a manager with a long track record and an excellent performance history, but it could also be dangerous if the company’s methods suddenly change or fail.

Performance measurement in Investment Management

Performance measurement in Investment Management is important because it helps to measure when a fund manager or an asset manager has done well for their clients. There are different ways to assess performance.

One way is by looking at the total value of assets under management and comparing it to the total amount in fees charged. Another way is by looking at performance over time and examining how someone has done against a benchmark that they set for themselves.

There are many people in the financial world that try to come up with ways to improve performance measurement. One such person was Harry Markowitz who came up with the Modern Portfolio Theory which states that diversification can help reduce risk and increase return by reducing volatility.

The high performance can also occur when two or more managers are working together. This is achieved through the use of a fund of funds which invests in other asset management companies.

Another way to achieve high returns with low risk is through the use of derivatives such as futures, swaps, options and forwards. These tools are very popular among hedge funds, but they also have their risks.

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It’s your turn

What you think? Is it important that today’s companies have a person or a specialized area that manages investments? Have you put investment management into practice, if so, share your experience with us? Do you have any suggestions or something else to add?

Share your experience and knowledge in the comments box below.

More information

  1. Francis, J. C., & Kim, D. (2013). Modern Portfolio Theory + Website: Foundations, Analysis, and New Developments (Vol. 795). John Wiley & Sons.
  2. Litterman, B. (2004). Modern investment management: an equilibrium approach (Vol. 246). John Wiley & Sons.
  3. Singh, P. (2012). Investment Management. Himalaya Publishing House.

How to cite this article:
Ospina Avendano, D. (2021). Investment Management. Retrieved [insert date] from Toolshero:

Original publication date: 10/07/2021 | Last update: 02/01/2024

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Daniela Avendaño
Article by:

Daniela Avendaño

Daniela Avendaño is a content producer and translator at toolshero. She obtained a Bachelor in Communications & Journalism, and with her theoretical and practical knowledge she supports the toolshero production team with interesting articles on management, personal & professional development, marketing and more. She is driven by sharing knowledge and stimulating others to develop.


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