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PAGE 2
A quick overview
Everything you need to know about asset management PAGE 8
Working life
Recent graduates give an inside view PAGE 21
AZ of employers
contents
Introducing asset management
An overview ..............................................2 Buy side vs sell side ................................4
Graduates at work
Types of work ..........................................6 Graduate profiles ....................................8
Assets
Asset categories ....................................11 Asset allocation ....................................14
Major investors
Charities..................................................16 Consultants ............................................16 Insurance companies ..........................17 Investment trusts..................................18 Pension funds ........................................19 OEICs ......................................................20
AZ of employers
Advertisers index ..................................21
Editor Sam Pope Assistant editor Gabrielle Orcutt Design Emily Rogers Proofreader Luke Micallef Advertising Mark Blythe, Duncan Macintyre, Jonathan Nicholl Marketing Rachel Cox, Zita Balogh Circulation Rachel Cox, Patty Shufflebotham, Laura Gilbert Finance Martin Halliday, Chudar Rameshwaran, Lize Hynd, Hayley Harverye, Katrina Brook, Hazel Ford IT Phillip Wong, Neil Bell Series editor Steve James Assistant series editor Gill Whiteman Series designer Chris Zammett Publisher Chris Phillips Production director Jane Anderson UK chief executive officer Paul Sissons Published by: GTI Specialist Publishers The Barns, Preston Crowmarsh, Wallingford, Oxon OX10 6SL Tel +44 (0) 1491 826262 Fax +44 (0) 1491 826401 www.groupgti.com Printer: Headley Brothers, Ashford ISBN: 1 84318 483 4 Acknowledgements GTI would like to thank everyone who has taken the time to write, or find writers, for Insight into Asset Management. GTI Specialist Publishers, September 2007 All rights reserved. No part of this publication may be reproduced by any means including, but not limited to, photocopying or stored in a retrieval system in any form without prior written consent of GTI. This is subject to the single exception of photocopying by careers advisers or lecturers for careers counselling. All items so used should be fully acknowledged. The views expressed in articles are those of authors and their publication does not necessarily imply that such views are shared by GTI. While every care has been taken in the compilation of this publication, the publishers cannot accept responsibility for any inaccuracies, or for consequential loss arising from such inaccuracies, or for any other loss, direct or consequential, arising in connection with information in this publication.
Graduates at work
Types of work
A as fund or investment
management) is all about managing money, including investments, budgeting, banking and taxes, on a longer-term basis than that carried out in banks or by currency traders. This money is made to work as hard as possible by lending and investing it in many different ways its never allowed to just sit! Asset managers are the people responsible for achieving this. Theyre more usually called fund managers here in the UK, while over in the US, theyre better known as either portfolio managers or money managers. Their work is truly international, as many manage investments on behalf of overseas investors and/or invest in overseas assets on behalf of clients based in the UK and abroad. In fact, the Investment Management Association (IMA) estimates that the assets managed globally by its member firms totalled an amazing 13.9 trillion as of December 2006. Read more about the jobs in asset management on pages 67.
The assets
A huge number of asset classes can be included in a portfolio, including cash, equities, bonds, property, gold, silver, art, etc. Within these broader categories, the assets can be further subdivided; eg equities can be split into domestic and foreign; large and small stocks (including venture capital); and actual stocks and derivatives (eg futures and options).
For the purposes of this publication, we have separated them into the following categories: cash equities bonds property domestic and overseas. Read more about assets on pages 1113.
The international element
This industry is highly international, with clients and opportunities throughout the world. Assets managed in the UK on behalf of overseas clients represented 27 per cent of the 13.9 trillion managed by member firms of the Investment Management Association (IMA). The way in which asset management firms manage overseas investment varies between companies. Some centralise their management, handling overseas investment from their UK base. Others delegate their international asset management to overseas offices in the region where the asset is based. To find out more about overseas investments, turn to page 13.
The portfolio
The main aim in asset management is to construct a portfolio for the investor. This process has five main steps for the investor and manager. 1. Determining how much money the investor needs and by when. 2. Agreeing on the minimum rate of return on the portfolio to achieve its aims. 3. Specifying an optimum asset allocation that will hopefully bring in the desired amount of money with the least possible risk. 4. Selecting the investments. 5. Checking the assets performance regularly to ensure that the portfolio is on track to reach its objectives. The way in which a portfolio is designed depends of various factors. To read more about this, see our article on page 14.
The clients
Retail investors These are often also referred to as private clients or retail investors, most of who either manage their own money or entrust it to managers who specialise in private client accounts. Some private clients combine the two: managing their own money but also investing through institutional investors by buying investment trust shares or unit trust units, insurance investment products or adding to their pension entitlements. Private investors were extremely important to the investment management field at the beginning of the last century but their significance has slowly declined. Retail clients often represent the man in the street, who comes to investment managers either directly or through an independent financial advisor or their own bank, looking for good investment opportunities. Institutional investors Nowadays, institutional investors dominate the investment sector, particularly pension funds and insurance companies. According to the IMAs 2006 asset management survey, 77 per cent of assets managed in the UK are invested on behalf of
these institutional investors, with the retail market representing just over 20 per cent of total assets. The growth in importance of institutional investors is due to various factors including: changes in society the increase in corporate pension funds tax policies that favour investment through insurance companies and pension funds rather than direct investment the introduction of unit trusts. Read in more detail about the different client types on pages 1620.
Asset management is often referred to as the buy side because it buys investment products with the aim of making profit for investors. Sell side is often used as a catch-all term for other organisations (eg stockbrokers,
often owned by investment banks) that trade or sell securities or investment research the sell side profits from the commission it makes on the price of the securities it sells. The difference between the buy side and the sell side can be confusing, because investment banks that carry out sell-side activities may also manage money for their clients but these buy-side parts of an investment bank must be kept completely separate from the sell side in order to prevent abuse. This information barrier prevents potential conflicts of interest and is known as a Chinese wall.
On both the buy side and the sell side, analysts work on researching companies in the sector or area in which they specialise. Buy-side analysts make recommendations to in-house portfolio managers, who then decide whether to buy or sell stock. This research is only circulated internally or to select clients. Sell-side analysts do similar research but make this available to a wider external audience, including retail investors, buy-side analysts and portfolio managers, to encourage them to trade.
Traditionally, investment banking has held a huge appeal to graduates, who perhaps are more familiar with this area than they are with asset management. However, as you can see on the previous page, the buy side is closely linked to the sell side and graduate careers in both areas have much in common, especially in terms of career progression, training, and pay. Graduates embarking on a career in this area can expect to: Earn anything up to 38,000, with first-class travel prospects and a handsome benefits package. Undergo a company training programme, lasting on average four weeks and often involving overseas placements. Be given challenging and rewarding work that is meaningful and of real business importance early responsibility is common. Work in a major city: London is the main hub in the UK but there are also fantastic opportunities in Edinburgh. Insight into Asset Management 2008 | 5
GRADUATES AT WORK
Types of work
What does a career in asset management involve? We take a look...
Research analysts
Analysts carry out research to provide ideas and information to asset managers, who will then make decisions on the investment portfolios that they manage. An analyst might research and develop an in-depth knowledge of a particular group of companies, normally within a specific industrial or geographical sector. This is often a qualitative job, as much as a quantitative one, so it could certainly suit someone from a nonfinance or non-numerate degree discipline. On the buy side (see pages 4 and 5 for an explanation) analysts work for investment management companies and provide information to their inhouse asset managers. This is a comparable position to research analysts on the sell side, who work for stockbrokers and investment banks, where their research is used to help the companys clients (normally asset managers). The advantage of asset management is that you will see the results of the assets you manage, and that can be the biggest buzz of the job. manager, you could be involved in such tasks as analysing companies and putting forward ideas, all the while supported by more senior team members, who will show you how to look at companies and come up with ideas and recommendations. In some training programmes, recent graduates will start as analysts and then manage money once they finish their training (normally after two or three years). Asset managers still do fundamental research on companies in the same manner as analysts, so recruiters look for candidates with the same qualities and skills inquisitive, broad-minded thinkers who are forward-thinking.
Asset managers
In a nutshell, asset managers pick which stocks (eg shares and bonds) should be included in clients portfolios. Asset managers normally work on behalf of such clients as pension funds and insurance companies to invest often huge amounts of money. They also manage products bought by private clients such as investment trusts or unit trusts which normally involve smaller sums compared to those offered by institutional investors. Skills required People who do well in these jobs are normally able to think laterally about what affects stocks or companies, and are open to new ideas and challenges. They also need the following: excellent quantitative and analytical skills nerves of steel to make (often split-second) decisions the ability to think outside the box and challenge or debate ideas good teamworking skills the ability to think and work independently, especially under pressure common sense.
GRADUATES AT WORK
familiar with the financial markets. Recent graduates starting their career in this area will need the following skills: numeracy excellent interpersonal skills ability to understand complex financial products.
IT and technology
IT and technology departments provide all of the technology that helps to keep the organisation running efficiently. IT systems enable interaction with clients and brokers, facilitate business processes, perform complex calculations to measure risk or value funds... and many more critical functions. The main types of work in this area are business analysis, development, technical support or project management. Skills required Investment analysts cover a wide range of activities and disciplines, depending on their employer. Basically, they must understand such financial information as: company accounts statistics economics political events. They also need to develop expertise in interpreting that information and how that can impact on investment decisions. Skills required People who thrive in this area are genuinely interested not only in technology but in how it can be applied to real-life business situations and in particular, the financial markets. Life in a technology department can be fast-paced and you may have several projects on the go at any one time, so the ability to multitask is helpful. Recruiters often look for: good academic ability technology-related degree and/or strong interest in technology good communication and teamworking skills problem-solving abilities.
Client services (providing clients with regular information on the value of their funds, including statements and details of valuations and transactions) Compliance (ensuring that all actions are in compliance with legal regulations and rules) Performance analysis/measurement (analysing the overall value of a fund and/or measuring performance against strict industry standards so that clients can compare performance between asset managers) Pricing (establishing and agreeing the market prices of investments these are the prices that clients will buy and sell at so accuracy is crucial) Settlements (making sure that accurate instructions are passed on to the global custodian after an asset manager and a broker have agreed on a deal) Skills required numeracy communication skills attention to detail IT literacy flexibility and adaptability.
Operations
Professionals working in operations (sometimes also known as investment operations or asset servicing) help to ensure that business is carried out as efficiently and punctually as possible. Operations is a crucial function that supports all of the activities carried out by asset managers. As well as dealing with data and ensuring that business transactions are processed smoothly, operations teams may spend time problem-solving or working on innovations to improve processes. Within operations, specific types of work could include:
GRADUATES AT WORK
David Parkhill
Busy and full days
Lewis Talbot
Acclimatising quickly
JOB Operations analyst EMPLOYER BlackRock DEGREE Economics, Loughborough (2006)
JOB Group finance accountant EMPLOYER Schroders DEGREE Accountancy with finance, Glasgow (2006)
After an enjoyable summer internship, I was thrilled to be offered a place on my current employers graduate scheme the work is varied and challenging and even as an intern I felt I was contributing to the business. I came to the industry with no specialist financial knowledge but the training scheme helped me overcome that. In-house, Ive learnt from experienced senior investors about the industry and how to analyse companies. Im also studying for the CFA charter, a globally-recognised investment qualification.
What I do
Our clients are mostly large companies and local authorities that employ us to manage their pension fund money. We decide which shares to buy in order to maximise the value of their pension funds, investing money all around the world from our office in Edinburgh. I work on our UK mid- and small-cap team and am responsible for companies in several sectors its essential that I know whats happening with them every day. I regularly meet with companies and always have a report on the go, in which I look at a company in detail and recommend whether or not we should buy its shares for our clients.
My degree made me realise that I was keen to work in industry, rather than in audit: I knew this was an area in which I would do well and would have good career progression opportunities. I also knew that I wanted to work in the City, with all the excitement and thrills that that entails. In my spare time at university I found out as much as I could, both about the industry as a whole and the employers within it. Before applying for graduate positions, I spoke to a number of City professionals about their jobs and companies and read as many City research reports as I could lay my hands on!
I knew from my degree that the investment industry offered careers that were challenging and rewarding both intellectually and financially. I was also attracted to the thrill, the level of innovation and the rapid pace of the markets. The transition from academia to the workplace was a steep learning curve there was a large amount of information to absorb and the concept of being accountable for large numbers with lots of zeros on the end was quite daunting! However, the firms support network helped me acclimatise far more quickly than I anticipated.
What I do
Im on a rotational programme, experiencing many elements of the firm. I recently completed a secondment in our Luxembourg office, where I helped to ensure that trades fell into the firms $85 billion international fund range efficiently. This involved analysing and scrutinising asset reports from custodian banks and our own internal trading platform. I will shortly be returning to the London office to join the retail desk, where I will help to ensure the successful transfer of clients capital into and (hopefully less frequently) out of the firms funds.
What I do
As a group finance accountant, my days are always busy and full. My work is very seasonal and revolves around yearend and interim reporting. Outside reporting seasons, I tend to be involved with more ad hoc projects for senior management. Most of my activities carry a great deal of responsibility; for example, I often prepare presentation slides and quarterly updates that the chief financial officer (CFO) relies upon.
Lots of responsibility
The best aspects of my job are the amount of responsibility I am given and the opportunities to work with senior management. This inevitably brings inherent time and accountability pressures but I think it will be a strong springboard in my progression within the firm.
Meeting decision-makers
Meeting management is an important part of our investment process and I find this very interesting. Ive met some colourful characters! Its an opportunity to speak to decision-makers about future plans and historical performance.
GRADUATES AT WORK
Ramsey Craine
Working as a team
JOB Product specialist, fixed income EMPLOYER Henderson Global Investors DEGREE Economics, Reading (2004); MA accounting and finance, Cass Business School (2005)
Leena Nandy
People and products
JOB Distribution manager EMPLOYER Barclays Global Investors DEGREE Finance, Wayne State University, Michigan (2001), MBA London Business School (2005)
Sergio Ferreira
Analysing market valuations
JOB Quantitative analyst EMPLOYER Morley Fund Management DEGREE Biochemical engineering with management, UCL
I wanted to get into asset management and knew this area would give me a broad exposure to the various business areas. I was particularly keen to find an organisation that would encourage and support learning and since joining Henderson I have successfully completed my CFA level 1, with help from many different people at all levels including senior management.
What I do
Each morning, I plan my day depending on my workload. My main responsibility is to prepare documents and presentations for client pitches. This involves meeting various people throughout the business, following up with them, and agreeing outputs and pulling the documentation together ready to be sent out externally. I work within a team and its a very open and communicative working culture by asking questions and sharing information we can ensure efficiency and transparency of information.
I really loved my finance degree; learning about quantitative approaches, the markets and portfolio optimisation. However, my degree didnt include areas such as strategy, economics and organisational behaviour so I decided to undertake an MBA. When I did an internship with my current employer I found a fast-paced, dynamic environment. I liked the people, the systematic approach to investment management and the teamwork. I never felt embarrassed about asking questions and was encouraged to articulate my ideas.
I joined my current employer as a graduate trainee. I had very limited financial knowledge and wanted to ensure that I made the right decision in terms of which industry and which company to join. I felt it was a good sign that I found the assessment centre challenging but not intimidating.
What I do
The graduate programme gave me the chance to rotate between different departments and learn how the various pieces fit together. It started with a oneweek induction, followed by two months of training covering various areas of finance and business management. The training also continued throughout the one-year programme and beyond. Halfway through the programme I was offered a place in one of my preferred areas. Deciding whether to take a permanent role at such an early stage or continue in the graduate programme was a difficult decision I sought advice from experienced colleagues, namely my mentor and HR, who were helpful and supportive. I have now been a quantitative analyst for nearly six months, working both in the asset allocation and quantitative funds teams. The strategy team has a top-down approach and involves analysing economic outlook and market valuations so I still get to learn about equities, bonds, currencies, property and commodities.
What I do
My role has only recently been created and is very unique. I work on product development with Barclays Wealth basically working out what clients need and how we can meet this demand. I also provide the training, education and marketing support their clients will need, which involves speaking with them in person or by phone, carrying out training sessions and generally being available to help with any questions. Im constantly learning about the people, products and processes, and have an incredible amount of responsibility.
Developing relationships
One of the main challenges of my job is managing relationships and expectations, and ensuring I incorporate everyones ideas into the document production wherever possible. Liaising with and obtaining information from senior people is something I enjoy but developing these relationships has been a steep learning curve. Its great to have exposure to so many different people and learning from their experience there are no barriers. The career progression opportunities are fantastic, as is the working atmosphere; I never think Oh no, another day of work!
A new challenge
The job is especially challenging because I dont come from an economics background but its also really interesting and I am enjoying it a lot.
GRADUATES AT WORK
Ally Brownsword
From psychology to finance
JOB Equities analyst EMPLOYER M&G Investments DEGREE Psychology, Exeter (2006)
Tim Heine
Doing competitor analysis
Burcu Ugurtas
Researching consumer staples
JOB Vice president, global portfolios group EMPLOYER JPMorgan Asset Management DEGREE Economics and politics, Bristol
JOB Associate, sales and marketing EMPLOYER Fidelity International DEGREE Business economics, Miami University of Ohio, MSc finance, York
People often look at my degree and then ask how and why I ended up in the financial industry! The truth is that I have always appreciated the importance of finance. Before going to university I discovered Behavioural Finance by James Montier, whose articles I read avidly. In light of my interest, I decided to read psychology at university to learn more about the psychology of human behaviour, a critical element of the investment universe.
When I found out about the European rotation programme Im on, it caught my eye I could work in three countries over two years and gain a lot of experience. My first rotation was on the sales desk team in Frankfurt, where I supported the sales managers and got involved in ad hoc projects, research, and client meetings. Working with senior management helped me make some great contacts.
What I do
As a psychology graduate I hadnt had much exposure to finance or economics, so it has been a steep but enjoyable learning curve. An initial training programme brought me quickly up to speed. Im currently on a rotational programme where I will experience various departments across the whole company, not just equities. Ive spent four to six weeks with various teams, including the M&G global macro hedge fund, the pan-European analyst team, global equities, equity income, fixed income and dealing. I will soon spend time with the European equities team, marketing, and small cap.
What I do
Im now on my second rotation and work for our fund supermarket platform, which offers over 1,000 funds from 56 different asset management companies. Im mainly involved in competitor analysis for the investment bond and SIPP (Self Invested Pension Plan) market. I also work closely with our marketing and sales team on other projects. For example, we are looking at revamping the website advisor interface. I want to continue to develop my knowledge of the UK platform industry its an exciting area to be in because its growing so fast. Until a year ago we didnt offer any life products, but now were competing against life companies.
Asset management offered the opportunity to explore my long-standing interest in investment in its purest form. My company was a natural choice for me after I researched its reputation within the industry and the level of commitment that it could offer to my training and future career management. However, ultimately it came down to the people the opportunity to work with and be surrounded by extremely bright and talented people was very motivating.
What I do
Im a member of the global portfolios group within the asset and wealth management division. The team manages global equity portfolios for institutional clients such as pension funds of large corporations as individual serviced accounts, and for retail clients in the form of mutual funds. I am a sector analyst, covering the global consumer staples sector. This involves working with local investment teams to research beverage, food, tobacco, and household product companies such as Colgate, Procter & Gamble, and Heineken, with the objective of identifying compelling global investment opportunities.
Fundamental skills
Each day offers new challenges, from presenting on a particular industry to chairing company meetings and performing valuations. Two fundamental skills in my job are the ability to formulate opinions based on very little or large amounts of information, and the ability to communicate my views to the fund managers. Its important to be able to argue for or against an investment case.
Getting involved
One of the highlights so far has been a trip to Marbella. I was asked if I wanted to get involved in a project, which turned out to involve preparing and translating a huge presentation for a client event in Spain. Next thing I knew I was asked to come along! The more you ask, the more you get...
ASSETS
Asset categories
We take a look at the five main asset categories in portfolios and consider their investment pros and cons.
commercial papers short-term bonds issued by companies to finance their short-term credit needs. Investment pros and cons Granted, it might not be as glamorous as other forms, but cash can help build a respectable amount of wealth without the less attractive risk of losing it. It pays interest, has a defined value and is one of the best investment assets when the financial markets are crashing. It is also the most liquid form of investment if quick access to money is needed. However, because of its lower risks, it also commands a lower rate of return when compared to most other investments. Therefore, investors would usually not want to have most of their portfolio invested in cash.
Equities
Equities are currently the most popular form of asset managed, although there seems to be an upward trend for bonds. The term equities is often used interchangeably with stocks. Equities provide investors with ownership and participation rights in a company. For example, if a sole trader put 100,000 of their own savings into their business this would be called their equity stake. If they then decided they needed more money, they would go to the bank and ask for a matching loan of, say, 100,000. This financial arrangement would mean that the sole trader still has 100% of ownership rights to their company but that it is financed 50% through their equity and 50% though debt, or loan.
Cash
Most portfolios contain cash investments because they tend to be a relatively safe option; they are designed to protect your money while earning a current rate of return. The following typically come under the cash umbrella: cash ie paper money near-cash assets that can be turned into cash quickly, normally within 24 hours Treasury bills government IOUs of up to three to six months duration that pay no interest and are issued at a discount to par value
If his business does well, he might need to expand it somehow. He could either go to the bank and take out more debt or he could get someone else on board to put more equity into the business. Large companies will often float on the stock exchange to enable both the general public and institutional investors to buy shares in them, thereby attracting much-needed equity into the business. These shareholders will normally have a say in the way in which the business is managed, although not on a daily basis. Managers will have this responsibility, and they will report to a board of directors who, in turn, will be answerable to the shareholders. Shares in large companies are normally traded on stock exchanges. Most will be quoted on only one stock exchange but some very large companies with an international presence can be quoted, or listed, on several. In order to be quoted, companies need to meet certain requirements, including financial reporting standards and a certain amount of stock that must be freely tradable.
ASSETS
Some countries operate secondary exchanges with less stringent requirements; these are aimed at smaller or younger companies who, as yet, cannot meet the criteria for the main exchanges. The Alternative Investment Market (AIM) is the UKs secondary exchange. Institutional investors can still buy into these smaller companies, and many do because it gives them the opportunity to either: sell all or part of the holding to another institutional investor or trade buyer (ie another company) sell shares in the stock market if and when the company can be quoted. This kind of investment is called either venture capital or private equity. Investment pros and cons Ordinary shares are inherently risky, as financial situations often change from excellent to poor from year to year. Shareholders are at the back of the queue when it comes to being paid; creditors (ie banks and other money lenders) must always be paid first. If times are tough, there may be nothing left for the shareholders by the time the creditors are satisfied. If a company has such a bad time that it goes into bankruptcy, the creditors automatically have priority over any remaining assets. However, on the flip side, shares can also be extremely profitable, otherwise they wouldnt be the most popular form of investment! When a company is doing well, creditors will still receive their fixed amount but will not benefit from any increase in profits or asset value growth. Shareholders, on the other hand, will receive a percentage of the profit made in the shape of dividends. If its been a great year, the shareholders should be very happy indeed.
Bonds
Simply put, bonds are IOUs; agreements under which sums are repaid to investors within an agreed period of time. If you purchase a bond, you are in effect lending money to whatever institution is issuing the bond.
Normally, bonds are issued either by one of two sources: the government (gilt-edged bonds) or by a public company (ie corporate bonds), and last for a fixed period called a maturity. During this time, the bondholder will receive interest payments at a fixed rate, called a coupon. At the end of this time the redemption date the amount borrowed (the principal) is repaid or redeemed. However, there are variations on this. When the government wants to borrow money, it will issue loan stock, or gilts. Until 1981, the coupon and principal were fixed in money terms, so if you bought a 2,000 bond, and the coupon was 10%, you would receive 200 a year for the life of the bond and then get 2,000 on redemption. However, in 1981, the UK government started issuing bonds whose coupons and
principals were indexed to the retail price index (RPI). The bonds issued pre-1981 are referred to as conventional while those issues thereafter are index-linked or linkers. Outside of the traditional fixed income classes of government and corporate bonds, clients and asset managers may also seek further diversification of their portfolios through the use of more esoteric fixed income assets such as infrastructure, structured products (including collateralised debt obligations CDOs) and leveraged finance, each of which has its own unique risk/return profile. Investment pros and cons Bonds are normally rated in order of safety, with (AAA) being the best and (D) being the riskiest also known as junk bonds.
ASSETS
It is thought that investmentgrade bonds are generally less risky because large well-known companies are less likely to go bankrupt and default on their IOU; their safety rating would normally be BBB or higher. Gilts are also considered to be very safe forms of investment because the government will guarantee the loan. Provided a bond does not default, its income stream and repayment value are certain.
Property
Most investors who hold direct property investment will own buildings. While homes are obviously buildings, they are not normally included in UK institutional portfolios. Instead, property investment comprises of shops, offices and industrial buildings. A buildings worth is determined by its prospective rental worth. This will be high if there is strong economic growth and inflation, but will decrease during times of recession and if the buildings are sitting idle, are outdated or have depreciated in value. Additionally, the tenant needs to be considered. Are they reliable? Or is there a risk that they will default on their rent payments? Institutional investors are interested both in existing properties and in future developments, eg housing estates, office buildings and shopping centres. Investment pros and cons Because of the inherent uncertainty in this area, property is more like equities than bonds in terms of risk. On the one hand, there are great prospects for an increase in capital value and rental income but on the other there are uncertainties to contend with too. Moreover, property cannot be easily converted into cash as it takes time to arrange property deals. The value of property can also be badly affected by other influences, such as economic downturn in an area.
and charities are done so in UK assets and this trend tends to be reflected in most countries. However, investors in the UK arent limited to UK assets; they can and do invest overseas too, in a wide range of areas including hedge funds and retail funds. Asset management is becoming increasingly international. In October 2006, the BBC reported that investment into developing countries is growing. Last year, UNCTAD the United Nations Conference on Trade and Development estimated that investment in developing countries had almost doubled in two years from $175 billion in 2003 to nearly $335 billion in 2005/06. This international investment boom is being attributed to: rapid economic growth, particularly in such countries as China and India high prices for raw materials the growing liberalisation of many developing countries economies, which makes investing in them easier. Investment pros and cons Investing overseas can be a fairly secure option in countries with a long-standing reputation in this area, such as the Isle of Man, the Cayman Islands and Bermuda. There are many other advantages to offshore investments, too. For a start, many investors can benefit from an attractive reduction in tax. Small countries (or tax
havens) with tiny populations and few resources may offer tax incentives to foreign investors to attract outside wealth in order to dramatically increase their economic activity. Overseas or offshore investors form a corporation in that country, and this protects their accounts from the higher tax demands that they would be subject to in their own country. Secondly, there can be greater diversity in investment opportunities. Offshore accounts and investments give investors access to international markets and exchanges, which they might not have enjoyed otherwise due to their own countrys financial regulations. Some of these opportunities exist in developing countries, where privatisation is becoming commonplace. However, there are disadvantages too. Ever wise to the potential revenue lost through offshore investment, the tax man is looking for ways to restrict access to overseas opportunities or at least the tax breaks they offer. Additionally, offshore accounts arent cheap to set up. In some cases, an offshore corporation may need to be set up, potentially leading to expensive legal and registration fees and the requirement that the investor own a property in the country where their offshore account is located. Moreover, many offshore accounts stipulate a minimum investment amount of anything from $100,000 to $1 million.
ASSETS
Asset allocation
Once a decision has been made on which asset categories to include in a portfolio, the next step is to decide how much to invest in each and what kind of investment approach the client is willing to take.
Active management This means that the investor is using someone else such as a fund manager or a team of managers to run their investment portfolio. The managers will base their management decisions on what to buy, sell and hold on analytical research, financial forecasts and their own judgement and experience. Passive management The opposite to active management, passive management (or indexing) tends to reflect a market index rather than trying to beat it. Investors who prefer to opt for this strategy believe in the Efficient Market Hypothesis (EMH), which states that since the markets tend to provide all the relevant information, stock picking is pretty useless. Passive management, instead, favours investing in an index
fund a type of mutual fund whose portfolio matches or tracks the components of a market index, such as the FTSE 100. The advantages of an index mutual fund are that it supposedly gives a broader market exposure, lower operating costs and a lower portfolio turnover.
Active or passive?
Asset allocation can be either active or passive, depending on the clients investment preferences.
ASSETS
Strategic asset allocation This method involves reviewing and rebalancing the mix of assets in a portfolio to maintain the long-term goals. When first compiling the portfolio, a base policy mix will be established, based on expected returns. At various intervals during the portfolios lifespan, this mix will be reviewed and readjusted in order to take into account fluctuating market conditions. Constant-weighting asset allocation With this, the assets within a portfolio are regularly rebalanced. So, if one asset declines in value, then you should purchase more of it. On the other hand, if an asset increases in value, its time to sell. In terms of timing for a rebalancing, it is generally agreed that the portfolio should return to its original mix when an asset category moves more than five per cent in either way from its original value. The potential downside is that rebalancing might happen too frequently. Tactical asset allocation This is quite a flexible and moderately active approach to allocation. It allows for short-term deviations from a portfolios original asset mix to take advantage of any unusual or exceptional investment opportunities. However, it does require some attention and discipline as managers must know when to return to the original asset mix once any short-term profits are gained. Dynamic asset allocation The key to this type of allocation is a regular adjustment of the asset mix, depending on the rises and falls in the markets and economic growth and recession. As opposed to constantweighting, dynamic asset allocation demands that you sell declining assets and buy those on the increase. Therefore, stocks would be sold in a bear market (in anticipation of further decreases) and bought in a bull market (in anticipation of further gains).
Insured asset allocation This is the best option for an investor who only likes a low level of risk, but who still wants to attempt active portfolio management. A base portfolio value is established at the start, below which the portfolio should not be permitted to drop. The trustees will exercise active management while the portfolios value stays above base level. However, if it drops back to the base value, the strategy will change to one of investing in risk-free assets to fix the base value and give some breathing space to either reallocate assets or completely change the investment strategy. Integrated asset allocation This strategy considers both the investors economic expectations and the risk in establishing an asset mix.
While all of the other types of allocations take into consideration expectations for future market returns, not all account for how willing an investor is to take risks. This approach does both. However, investors will have to choose between either a dynamic or a constant-weighting approach, otherwise the two will compete with one another.
MAJOR INVESTORS
Major investors
Fund managers work on behalf of investors. But who are these clients and what makes them special?
Various clients invest in the longterm asset market. The following are the major players: charities consultants insurance companies investment trusts pension funds units trusts and open-ended investment companies (OEICs). Over the next five pages, well take a look at what each client is, what they do and the investment options open to them.
Consultants
If a client whether retail or institutional is looking to start up a new, or restructure an existing pension scheme, or is dissatisfied with the way their assets are managed, they will turn to a consultant to provide information and opinions on potential asset managers. Consultants will gain this information by using questionnaires and interviews, by conducting their own research on the potential candidates and by arranging a beauty parade for the managers shortlisted by their client. During this beauty parade process, the client will have an opportunity to ask the managers questions on how they run their investments. While this may seem a sensible option, some people question the value of this type of activity, claiming that it puts managers under such intense pressure that they focus more on what the competition is doing rather than concentrating on the liability structure of funds.
Charities
The majority of charity funds are very small and may only be made up of a bank account or a small holding in one of the charity-specific unit trusts. However, there are some very large charities, such as those associated with Oxford or Cambridge colleges or the Wellcome Trust, with portfolios to rival any pension fund. The kind of assets that a charity can hold will be determined by: whether it is governed by the Trustee Investments Act 1962 any constraints that the trustees may set (for example, a healthrelated charity might object to having shares in tobacco companies) what their resources are in relation to their objectives. Charity funds are usually exempt from tax and are managed by external managers.
MAJOR INVESTORS
Insurance companies
These companies offer financial protection against risk in exchange for a premium, then pay out if a customer makes a valid claim.
Life insurance (or assurance) With life insurance, an individual pays out either a monthly or yearly premium to their insurance company. In the event of their death, a lump sum will be paid out to their named beneficiary, giving them a form of financial security. Life insurance normally comes in three different forms: Term insurance: A temporary insurance policy, in which benefits are only paid if the client dies during a specified time. This is pure protection and doesnt guarantee a pay-out. Whole-life (aka whole-of-life): This lasts throughout a clients life and is both protection and investment: their dependents will certainly receive a pay-out but the client wont as theyll be dead! Endowment: Premiums are paid for a certain term and the sum assured is paid at the end of the term or on earlier death. This is mainly investment and pays whether the client dies or not. Whole-life and endowment policies can be either with profits or unitlinked. With-profits These offer both a guaranteed sum and a share of the investment return of the insurance companys life fund. The fund will normally be invested in various different asset types but there may be a bigger weighting in bonds because they promise returns on specific dates. Unit-linked With these, the insurance company maintains a fund that is split, for accounting purposes, into units. A guaranteed sum is assured, but the death benefit may be higher depending on the value of the units at the time of death. The returns received will depend on which funds were selected and how well they have performed. Since this relies heavily on market and asset manager performance, these are riskier than with-profits policies. Pension business Insurance companies also often manage: an organisations entire pension scheme, investing it either in its with-profits or unit-linked funds personal pension plans self-administered company pension funds (in this event, the funds assets will probably be managed as a distinct portfolio rather than being pooled with other clients contributions).
Investment options
he insurer offers clients financial protection for a certain amount of money, or a premium, for an agreed period of time. The underwriter decides what price to put against a risk to work out how much insurance or reinsurance should be allocated to mitigate it. If the client claims on their insurance, the insurer is liable to pay out compensation. But how do they make their money? Insurance companies collect premiums from thousands of customers and then pay out to those who make claims. If they collect more premiums than they make payments, they will make an underwriting profit. Many companies make a profit on the float, or the money they make on the premiums that they invest. Insurance can be divided into two categories: general and long-term, with most large companies acting in both arenas. General insurance: This provides protection in such areas as fire and accident; motor; and marine, aviation and transport. Long-term insurance: This applies to life insurance and group pensions business.
Generally, any insurance companys main business is unlikely to fall considerably from one year to the next, due to new business opportunities and clients providing liquidity. The continued use of shortterm investments can be expensive so longer-term options may provide the best solution. While some investment in equities is almost certain, most insurance funds will invest more in cash and bonds.
MAJOR INVESTORS
Investment trusts
These companies, quoted on the London Stock Exchange, invest their shareholders funds in the shares of other companies or in other types of assets.
nvestment trusts are a popular way of investing. They are similar to other companies in their structure they have shareholders and are run by a board of directors and their shares can be bought and sold in the same way as other companies. However, they differ in their objectives: they dont actually make anything or provide any kind of service. Their sole reason for existing is to invest in other companies shares or in other types of assets.
What they do
The money invested in an investment trust is pooled with that of other investors. Then, a professional fund manager buys shares in a wider range of companies than most individual shareholders would have access to. Those with only small amounts of money to invest can benefit from being exposed to a diverse portfolio of shares, thereby spreading the risk of investing on the stock market. Trusts often specialise in certain sectors and types of company, or in companies from different countries. According to the London Stock Exchange, over 300 investment trusts are responsible for managing of billions of pounds worth of assets on behalf of investors. The Association of Investment Companies (the trade association for the industry) classifies trusts into the following categories: international (general) international (capital growth) UK (income growth) North America Far East (exc Japan) property continental Europe
commodity and energy emerging markets smaller companies venture and development capital. Investment trusts are called closedend investment funds because they have the same capital structure of UK companies: fixed rather than variable. The companies issue a fixed number of shares and if they want to change this at any time they must get their shareholders approval. While this is possible, its also rare. Shareholders cannot get their money back but they can sell their shares to other investors. What this means is that the money invested is not changed for long periods of time: ie it is closed. Investment trusts can be either self-managed or the investment management can be given to external managers. Self-management is fairly uncommon and involves having an in-house team of investment managers who are employees of the trust. The majority of investment trusts are managed externally.
The benefits
The benefits for investors are that: You can pool your money: This helps cut down on dealing and administration costs. You can spread your risk: Each investment company owns shares in a range of investments, so this will help you achieve a diversified portfolio. Investors are not solely dependent on the success of one or two investments. You benefit from someones expertise: Investment companies use experienced professional managers to handle their investments. You can invest small amounts: 30 a month is enough to get you started or you can contribute small lump-sum payments.
MAJOR INVESTORS
Pension funds
The UK asset management industrys biggest clients, providing retirement income.
ension funds are a form of savings that employers and their employees pay into to provide a source of income on retirement. Private-sector pensions are normally organised within companies or organisations themselves, and are fully funded, meaning that the money comes from payments made by both the employer and its employees well in advance of when the pensions will be drawn. This protects employees in the event that their company goes bankrupt. Pension scheme funds are kept separate from employers, placed in special legal relationships called trusts. The beneficiaries are the pension holders or their immediate next of kin.
guarantee that there will be sufficient money in the scheme to cover its liabilities. Poor investment returns in recent years have forced some companies to pay out tens or hundreds of thousands of pounds in order to keep the schemes healthy. Therefore, many companies have abandoned this type of pension. Personal pension schemes (aka defined contribution schemes) In these, individuals still pay into a fund as do their employers in the same way as in a final-salary scheme. However, the fund itself is not the asset of the company but of a pension provider. The factors that influence how much a person will receive when they draw their pension are: how much they contribute to the fund how long they pay in how well the fund grows through investment returns.
The benefits
Types of funds
As well as the state pension, pension schemes fall into one of two main categories: final-salary schemes and personal pension. Final-salary schemes (aka defined benefit schemes) These are more commonly offered by public-sector organisations. A finalsalary scheme is run by an organisation itself, with contributions made by its employees. The organisation invests these contributions and then when an employee retires, it will pay out a proportion of their final salary for every year of service normally 1/60th. Employees like final-salary schemes for the peace of mind they bring: benefits are normally guaranteed. However, they can be a cause for concern for employers because the organisation must
Pension funds can be invested in a wide variety of ways, with different pros and cons. With-profits A medium-risk option, these funds invest in a mixture of UK and overseas shares, property, fixed interest and cash deposits. Since the aim is to balance the highs and lows in the stock market, pension providers can be quite cautious. The upside is that once a bonus has been given, it cannot be taken away, so the value of funds cannot fall. Additionally, in retirement, another final bonus may be given if investment conditions have been good.
Unit-linked This is generally considered riskier as the value may change alongside the underlying investments. On the other hand, the long-term returns can be better. The main types of funds in this area are: Managed funds: Popular, as they invest in a mixture of both UK and overseas shares, property, fixed interest securities and cash deposits. Specialist funds: Investing in only one type of asset; ideal for savers who prefer to make their own investment decisions. Tracker funds: Follow the performance of a certain stock market index such as the FTSE 100, and are therefore passive. They cost less than managed funds. Lifestyle funds: Savings are normally placed in a tracker fund but as retirement approaches, the money is gradually switched (over five to ten years) into a safer, fixedinterest fund. Since many people receive pay rises at two per cent (or higher) above the inflation rate, final-salary schemes must invest in assets in order to match the growth and meet their liabilities. Personal pensions are not under such pressure but they do have to achieve good levels of growth to attract investors. Therefore, firms that sell these products must be competitive to both secure business and achieve growth.
MAJOR INVESTORS
nit trusts and OEICs are both types of collective investment, which means that a clients money is pooled with lots of other investors in one big fund. This in turn is invested a wide variety of assets. However, there are differences between unit trusts and OEICs although they offer the same benefits. Unit trusts issue units, while OEICs issue shares. Unit trusts have two prices: a bid price (at which you sell) and an offer price (at which you buy). OEICs have one single price, at which you both buy and sell. Unit trusts and OEICs are overseen by different independent bodies: the Trustee for unit trusts and the Depositary for OEICs.
liquidation by the managers. The managers then make corresponding purchases or sales of investments. Purchases or sellers of units dont have to deal directly with the manager: they can get an agent such as a stockbroker or an independent financial adviser to act on their behalf. Like investment trusts, unit trusts have wide aims and portfolios will vary according to the objectives. Generally, unit trusts have the same range of objectives as investment trusts but, because of slight differences in taxation treatment, some unit trusts only invest in cash or bonds.
OEICs
Unit trusts
Unlike investment trusts, unit trusts are legal trusts. Assets are controlled by the trustees (usually large banks) on behalf of the beneficiaries (individual and institutional investors). The trustees are responsible for ensuring that the assets are managed according to the terms of the trust deed. Many well known unit trust managers also manage investment trusts and pensions funds, and some are insurance companies. The managers are responsible for the daily investment management and also promote the trust. The pool of investments that comprise the unit trust is divided into equal amounts, or units. Unit trusts are open in that anyone can buy units from the manager, who will create new units for them or sell back their units for cancellation or
OEICs have been around for a while in Europe but only came into existence in the UK in 1997 to cater for the preferences of continental European investors, who preferred a company structure over the legal status of the unit trust. OEICs are companies with variable share capital ie they are open-ended and are governed by a special freestanding code, outside of the Companies Acts. An OEIC can be considered as similar to an investment trust (in that it is a company) and similar to a unit trust (in that it is open-ended). As far as most investors are concerned, OEICs are merely revamped unit trusts.
The benefits
OEICs require a fairly low level of investment, typically 500 as a lump sum or 50 per month, for example. Other benefits for investors include: Theyre a great way for small investors to benefit from the power of large institutional investors in the stock market, offsetting some of the risk. The money is pooled with other investors to make up one large fund. This is then invested across many different assets, thereby spreading the cost and risk. The expertise of an expert fund manager looking after the money and making any necessary adjustments according to the performance of individual holdings, the market conditions and the funds aims.
Unit trusts and OEICs are mediumto long-term investments. Investors can access their money at any time but it is best to wait for at least three to five years. As is the case with investment trusts, unit trusts and
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