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Investment management exchange-traded funds and the new dynamics of investing pdf the professional asset management of various securities shares, bonds and other securities and other assets e.

Investors may be institutions insurance companies, pension funds, corporations, charities, educational establishments etc. The exchange-traded funds and the new dynamics of investing pdf asset management is often used to refer to the investment management of collective investmentswhile the more generic fund management may refer to all forms of institutional investment as well as investment management for private investors.

Investment managers who specialize in advisory or discretionary management on behalf of normally wealthy private investors may often refer to their services as money management or portfolio management often within the context of so-called " private banking ". The provision of investment management services includes elements of financial statement analysisasset selection, stock selection, plan implementation and ongoing monitoring of investments.

Coming under the remit of financial services many of the world's largest companies are at least in part investment managers and employ millions of staff. It remains unclear if professional investment managers can reliably enhance risk adjusted returns by an amount that exceeds fees and expenses of investment management. The term fund manager or investment advisor in the United States refers to both a firm that provides investment management services and an individual who directs fund management decisions.

The global investment management industry is highly concentrated in nature, in a universe of about 70, funds roughly The business of investment has several facets, the employment of professional fund managers, research of individual assets and asset classesdealing, settlement, marketing, internal auditingand the preparation of reports for clients.

The largest financial fund managers are firms that exhibit all the complexity their size demands. Apart from the people who bring in the money marketers and the people who direct investment the fund managersthere are compliance staff to ensure accord with legislative and regulatory constraintsinternal auditors of various kinds to examine internal systems and controlsfinancial controllers to account for the institutions' own money and costscomputer experts, and "back office" employees to track and record transactions and fund valuations for up to thousands of clients per institution.

Institutions often control huge shareholdings. In most cases they are acting as fiduciary agents rather than principals direct owners. The owners of shares theoretically have great power to alter the companies via the voting rights the shares carry and the consequent ability to pressure managements, and if necessary out-vote them at annual and other meetings.

In practice, the ultimate owners of shares often do not exercise the power they collectively hold because the owners are many, each with small holdings ; financial institutions as agents sometimes do. There is a general belief [ by whom? Such action would add a pressure group to those the regulators and the Board overseeing management. However, there is the problem of how the institution should exercise this power. One way is for the institution to decide, the other is for the institution to poll its beneficiaries.

Assuming that the institution polls, should it then: The price signals generated by large active managers holding or not holding the stock may contribute to management change. For example, this is the case when a large active manager sells his position in a company, leading to possibly a decline in the stock price, but more importantly a loss of confidence by the markets in the management of the exchange-traded funds and the new dynamics of investing pdf, thus precipitating changes in the management team.

Some institutions have been more vocal and active in pursuing such matters; for instance, some firms believe that there are investment advantages to accumulating substantial minority shareholdings i.

In some cases, institutions with minority holdings work together to force management change. Exchange-traded funds and the new dynamics of investing pdf more frequent is the sustained pressure that large institutions bring to bear on management teams through persuasive discourse and PR.

On the other hand, some of the largest investment managers—such as BlackRock and Vanguard —advocate simply owning every company, reducing the incentive to influence management teams. A reason for this last strategy is that the investment manager prefers a closer, more open and honest relationship with a company's management team than would exist if they exercised control; allowing them to make a better investment decision.

The national context in which shareholder representation considerations are set is variable and important. The USA is a litigious society and shareholders use the law as a lever to pressure management teams. In Japan it is traditional for shareholders to be low in the 'pecking order,' which often allows management and labor to ignore the rights of the ultimate owners.

Whereas US firms generally cater to shareholders, Japanese businesses generally exhibit a stakeholder mentality, in which they seek consensus amongst all interested parties against a background of strong unions and labour legislation. The 3-P's Philosophy, Process and People are often used to describe the reasons why the manager is able to produce above average results. At the heart of the investment management industry are the managers who invest and divest client investments.

A certified company investment advisor should conduct an assessment of each client's individual needs and risk profile. The advisor then recommends appropriate investments. The different asset class definitions are widely debated, but four common divisions are stocksbondsreal estate and commodities. The exercise of allocating funds among these assets and among individual securities within each asset class is what investment management firms are paid for.

Asset classes exhibit different market dynamics, and different interaction effects; thus, the allocation of money among asset classes will exchange-traded funds and the new dynamics of investing pdf a significant effect on the performance of the fund.

Some research suggests that allocation among asset classes has more predictive power than the choice of individual holdings in determining exchange-traded funds and the new dynamics of investing pdf return. Arguably, the skill of a successful investment manager resides in constructing the asset allocation, and separate individual holdings, so as to outperform certain benchmarks e.

It is important to look at the evidence on the long-term returns to different assets, and to holding period returns the returns that accrue on average over different lengths of investment. For example, over very long holding periods e. According to financial theory, this is because equities are riskier more volatile than bonds which are themselves more risky than cash. Against the background of the asset allocation, fund managers consider the degree of diversification that makes sense for a given client given its risk preferences and construct a list of planned holdings accordingly.

The list will indicate what percentage of the fund should be invested in each particular stock or bond. The theory of portfolio diversification was originated by Markowitz and many others. Effective diversification requires management of exchange-traded funds and the new dynamics of investing pdf correlation between the asset returns and the liability returns, issues internal to the portfolio individual holdings volatilityand cross-correlations between the returns.

There are a range of different styles of fund management that the institution can implement. For example, growthvalue, growth at a reasonable price GARPmarket neutralsmall capitalisation, indexed, etc. Each of these approaches has its distinctive features, adherents and, in any particular financial environment, distinctive risk characteristics. For example, there is evidence that growth styles buying rapidly growing earnings are especially effective when the companies able to generate such growth are scarce; conversely, when such growth is plentiful, then there exchange-traded funds and the new dynamics of investing pdf evidence that value styles tend to outperform the indices particularly successfully.

Large asset managers are increasingly profiling their equity portfolio managers to trade their orders more effectively. While this strategy is less effective with small-cap trades, it has been effective for portfolios with large-cap companies. Fund performance is often thought to be the acid test of fund management, and in the institutional context, accurate measurement is a necessity. For that purpose, institutions measure the performance of each fund and usually for internal purposes components of each fund under their management, and performance is also measured by external firms that specialize in performance measurement.

The leading performance measurement firms e. In a typical case let us say an equity fundthen the calculation would be made as far as the client is concerned every quarter and would show a percentage change compared with the prior quarter e.

This figure would be compared with other similar funds managed within the institution for purposes of monitoring internal controlswith performance data for peer group funds, and with relevant indices where available or tailor-made performance benchmarks where appropriate.

The specialist performance measurement firms calculate quartile and decile data and close attention would be paid to the percentile ranking of any fund.

Generally speaking, it is probably appropriate for an investment firm to persuade exchange-traded funds and the new dynamics of investing pdf clients to assess performance over longer periods e. This can be difficult however and, industry wide, there is a serious preoccupation with short-term numbers and the effect on the relationship with clients and resultant business risks for the institutions.

An enduring problem is whether to measure before-tax or after-tax performance. After-tax measurement represents the benefit to the investor, but investors' tax positions may vary. Before-tax measurement can be misleading, especially in regimens that tax realised capital gains and not unrealised. It is thus possible that successful active managers measured before tax may produce miserable after-tax results.

One possible solution is to report the after-tax position exchange-traded funds and the new dynamics of investing pdf some standard taxpayer. Performance measurement should not be reduced to the evaluation of fund returns alone, but must also integrate other fund elements that would be of interest to investors, such as the measure of risk taken.

Several other aspects are also part of performance measurement: The need to answer all these questions has led to the development of more sophisticated performance measures, many of which originate in modern portfolio theory.

Modern portfolio theory established the quantitative link that exists between portfolio risk and return. The Capital Asset Pricing Model CAPM developed by Sharpe highlighted the notion of rewarding risk and produced the first performance indicators, be they risk-adjusted ratios Sharpe ratio, information ratio or differential returns compared to benchmarks alphas.

The Sharpe ratio is the simplest and best known performance measure. It measures the return of a portfolio in excess of the risk-free rate, compared to the total risk of the portfolio. This measure is said to be absolute, as it does not refer to any benchmark, avoiding drawbacks related to a poor choice of benchmark.

Meanwhile, it does not allow the separation of the performance of the market in which the portfolio is invested from that of the manager. The information ratio is a more general form exchange-traded funds and the new dynamics of investing pdf the Sharpe ratio in which the risk-free asset is replaced by a benchmark portfolio. This measure is relative, as it evaluates portfolio performance in reference to a benchmark, making the result strongly dependent on this benchmark choice. Portfolio alpha is obtained by measuring the difference between the return of the portfolio and that of a benchmark portfolio.

This measure appears to be the only reliable performance measure to evaluate active management. In fact, we have to distinguish between normal returns, provided by the fair reward for portfolio exposure to different risks, and obtained through passive management, from abnormal performance or outperformance due to the manager's skill or luckwhether through market timingstock pickingor good fortune.

The first component is related to allocation and style investment choices, which may not be under the sole control of the manager, and depends on the economic context, while the second component is an evaluation of the success of the manager's decisions.

Only the latter, measured by alpha, allows the evaluation of the manager's true performance but then, only if you assume that any outperformance is due to skill and not luck. Portfolio return may be evaluated using factor models. The first model, proposed by Jensenrelies on the CAPM and explains portfolio returns with the market index as the only factor.

It quickly becomes clear, however, that one factor is not enough to explain the returns very well and that other factors have to be considered. Multi-factor models were developed as an alternative to the CAPMallowing a better description of portfolio risks and a more accurate evaluation of a portfolio's performance. For example, Fama and French have highlighted two important factors that characterize a company's risk in addition to market risk.

These factors are the book-to-market ratio and the company's size as measured by its market capitalization. Fama and French therefore proposed three-factor model to describe portfolio normal returns Fama—French three-factor model. Carhart proposed to add momentum as a fourth factor to allow the short-term persistence of returns to be taken into account.

Also of interest for performance measurement is Sharpe's style analysis model, in which factors are style indices. This model allows a custom benchmark for each portfolio to be developed, using the linear combination of style indices that best replicate portfolio style allocation, and leads to an accurate evaluation of portfolio alpha. Increasingly, international business schools are incorporating the subject into their course outlines and some exchange-traded funds and the new dynamics of investing pdf formulated the title of 'Investment Management' or 'Asset Management' conferred as specialist bachelor's degrees e.

Cass Business School, London. For people with aspirations to become an investment manager, further education may be needed beyond a bachelors in business, finance, or economics. Designations, such as the Chartered Investment Manager CIM in Canada, are required for practitioners in the investment management industry. A graduate degree or an investment qualification such as the Chartered Financial Analyst designation CFA may help in having a career in investment management. There is no evidence that any particular qualification enhances the most desirable characteristic of an investment manager, that is the ability to select investments that result in an above average risk weighted long-term performance.

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