Interview: What is Investment Management?

We caught up with Insight Investment who gave us the low down on investment management. 

Investors have a primary motivation to grow wealth to achieve a goal, or range of goals. If staying in cash on deposit falls short of their investment goals, often referred to as a funding gap, they will ultimately realise that they need to invest their money instead.  

First, they need to decide what they should invest in and what level of risk is appropriate in the context of their goal. This involves considering their time horizon, and how much risk can they take with their initial capital. Investment managers provide advice, solutions and products which are designed to help clients to deliver the outcomes that they need. The industry is designed to explore the world’s economies and markets, looking for places to invest that will help clients meet their goals. Investment managers identify new ideas and through research they seek to quantify the risk and return potential of these ideas. They then structure the investments appropriately within portfolios, diversify risk and target opportunities. They help investors define sensible objectives and then provide access to specific investments which represent a good match. 

Investment management services are used by a very broad range of people and organisations. These range from a ‘retail investor’ - a member of the public -  whose goals will be savings-related, focusing on retirement, saving for children, wealth transfer and legacy planning, all the way through to very large institutions and governments. These large-scale companies typically need sophisticated and complex solutions to meet very long term goals. A good example of an institutional investor is a defined benefit pension scheme where an institution will have a requirement to provide a large pool of scheme members with a specific income in retirement at a future date. The provision of this guaranteed income requires a complex long term investment strategy that will deliver cash flows to current pensioners but also protect and continue to grow capital to meet the income needs of future pensioners. This requirement for a future cash flow is referred to as the liability. Typically these future liabilities will only be partially funded by the institutional sponsor. The investment manager’s job is to close the gap between assets and future liabilities over the client’s time horizon.     

The scope of opportunity in financial markets is extremely broad and is constantly evolving. At the simplest end there are traditional stock markets, bond markets and property markets. 

The bond markets are where governments and companies come to raise finance through different forms of loans. Capital is provided to institutions by the investors and in return the investors receive an interest payment. The bond has a specific life at the end of which the original value is expected to be returned. 

The stock market is where larger companies come to raise finance by issuing shares in their company. Typically the risk profile of a share is higher because the value is based on what the market currently believes a share of those future profits is worth at any given point in time.  Unlike a bond there is no fixed life and therefore less capital security but the potential returns are expected to be higher. 

Property is a third traditional category. From an investment point of view this is typically commercial real estate (commercial properties and infrastructure investments) rather than residential property. Again property has an intrinsic value which underpins security but values can fluctuate and buying and selling property can be a long and expensive process compared with stock and bond markets where there is an opportunity to buy and sell in the markets on a daily basis. 

All of the traditional ‘physical’ markets have derivatives equivalents which are often larger and more sophisticated than the markets on which they are based. Derivatives markets provide a valuable opportunity for companies and investors to manage their risks and liabilities by securing prices at a specific point in time to increase the certainty of a return or they can be used to capture an opportunity in the market to target a return. These markets provide the opportunity to customise how an idea is captured and to create a very specific risk reward profile with varying degrees of risk to capital and exposure to the investment opportunity. 

Markets are influenced by a huge number of factors and each type of investment has different influences, with varying degrees of likelihood and magnitude of impact.

Markets are influenced by a huge number of factors and each type of investment has different influences, with varying degrees of likelihood and magnitude of impact. Interest rates and inflation expectations, patterns in economic growth, political change and currency exchange rates are traditional factors which apply to markets as a whole (macro factors). Individual investments carry a whole host of specific influences which relate to the fortunes of the investment’s industrial sector or to the company itself. Investment managers need to understand the macro economic landscape and also conduct specific and detailed research on industries and companies in order to understand the influences and have an accurate view on the risks and opportunities. They do this ultimately to define an accurate value for specific investments, both today and in the future. 

Less obvious but equally relevant is the legal structure of an investment. An investment manager’s expertise extends to understanding the legal structure of an investment and what an investor is entitled to receive. This is often critical to understanding the risk and return potential of a specific investment. Fundamentally this is because governments and companies typically raise money in multiple ways and the bonds and shares that they offer will have a specific profile in terms of risk reward and the capital security afforded to investors. An investment manager adds value by identifying good investment ideas, structuring portfolios and matching specific investments with the customised goals of investors. It is an extremely challenging, complex and rewarding occupation for professionals because financial markets change in composition and fortune. As markets are constantly evolving, it requires constant evolution in understanding and approach.   

The team at Insight Investment is made up of a high-performing and engaging group of individuals working at different levels of responsibility. There are many kinds of roles within Investment Management, including lawyers, IT specialists, Marketing and those who build client relationships. However, two of the specialist investment focused roles within investment management are Analysts and Investment Managers. 

Analysts - An Analysts' work involves analysing stocks, taking a view on their future outlook and circulating this research to the team for discussion. This might involve meeting with company management to analyse and assess economic data and market trends, as well as completing extensive and thorough research across the market. 

Investment Managers - Investment Managers are primarily responsible for investing clients’ money in a portfolio of stocks. They are heavily reliant on the in-depth research that analysts perform, as this informs how they will invest. They are also in charge of deciding how the fund is constructed, looking at the bigger picture and considering issues that affect the overall asset allocation.  

Read an overview of the graduate roles in Investment Management. 

Investment Management is an industry demanding highly analytical and dedicated individuals. In return it provides a challenging and stimulating environment where high calibre candidates can thrive in a fast paced environment.

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