How Fund Managers Manage Investment

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The art and science of managing an investment is a complex one, this article briefly touch on the commonly used practices. Please refer to my another article on investment philosophies and strategies if you would like to know more about investment philosophies and strategies. 

Investment Philosophy and Strategy

As mentioned in my article Investment Philosophy and Strategy, some fund managers use a combination of investment strategies whereas some of them prefer to use one proven strategy. However, sometimes it is the investor that dictates the investment strategy. It is common for institutional investor to demand the fund manager to track closely to one of the common benchmark and at the same time allows 20% deviation from the benchmark with the objective of outperforming the benchmark. In this situation, the fund manager can only use 20% of the investment to prove their investment skills. This arrangement allows the institutional investor to protect their investment and at the same time monitor the performance of the fund manager.

  

Asset Allocation

Asset allocation is the portioning of the investment money to different class of investment instrument such as stocks, bonds and real estate. Depending on the investment mandate, you might need to perform asset allocation yourself. For a balanced portfolio, you need to develop asset allocation strategy based on the risk tolerance of your client. You have to decide how much money will be use to buy bonds and how much money will be use to buy stocks.The details of asset allocation strategy are beyond the scope of this article. After the asset allocation strategy is being implemented, you would invest in stocks and bonds based on the allocation. For institutional clients, they might perform their own asset allocation and stipulate the asset allocation percentage in the IMA. Some institutional investor perform their own asset allocation and give the investment mandate to two different fund managers, one specialize in bond market and the other specialize in equity market. 

Country and Sector Allocation 

Depending on your investment mandate and strategies, you might need to allocate your investment between different countries and industry. Usually the fund managers are given sole discretion to perform country and sector allocation. For investment that tracks an established benchmark closely, the fund manager might need to follow the country and sector allocation of the benchmark. 

Stock Selection

Depending on the investment philosophy and strategy, the fund managers perform their stocks selection base on fundamental analysis, technical analysis or quantitative data. 

Top-Down Investment Approach

A top-down investment approach performs the country and sector allocation first based on the economic and industry data and outlook. After allocating the investment amount on each country and sector, then the fund manager proceed to pick stocks. The number of stocks and the investment amount is restricted by the country or sector allocation.

Bottom-Up Investment Approach (Stock Picking Approach)

A bottom-up investment approach only performs stock selection without considering the country and sector allocation.

Mixed Investment Approach

Most fund managers adopted a mixed investment approach where they perform both top-down and bottom-up investment approach. In this situation sector or country allocation can be affected by the stock selection.

Model Portfolio

For larger fund management firm which manage more than 5 similar portfolios, a common practice is to develop a model portfolio. This model portfolio is then implemented across different account taking into consideration the investment restriction. This practice also ensure that different clients are given the same investment decision at the same time.

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