If you have saved up a pot of money and you want to try and grow that pot by investing it, you have two options. You can either choose to create a portfolio yourself or pick an investment manager to professionally manage your investments.
Investment management firms employ professionals to manage financial assets on behalf of their clients. These clients can be anyone from insurance companies to charities to an individual private investor with some savings.
How the investment process works
When you choose an investment manager, they will usually start by gleaning as much information from you as they need to form, what the industry calls, an Investment Policy Statement (IPS). The IPS is the foundation of the portfolio management process and will include details on your investment goals, investment constraints and other unique requirements.
The investment manager will also ask questions – either online or face-to-face - to determine your ability to take on investment risk. This might differ from your willingness to bear risk. This may lead to your investment manager demonstrating that either you may benefit from taking on a higher amount of risk or attempting to prevent you from taking on more risk than you can tolerate.
Your risk tolerance will impact the type and mix of assets that form your portfolio, which is also commonly referred to as the portfolio asset allocation.
Using the five portfolios that we manage here at IG, the table below illustrates how asset allocation varies between different risk-targeted portfolios.
(IG Smart Portfolio asset allocation as of 2 July 2018)
A client with a relatively short investment time horizon who is only willing to tolerate small fluctuations in the value of their portfolio may be better suited to a lower risk portfolio, such as our Moderate portfolio. This has a greater concentration of bonds, which historically have been less volatile than stocks and other types of assets such as commodities and property.
In contrast, an investor with a longer investment time horizon who is less concerned about short-term market fluctuations may be better suited to a higher-risk portfolio. In our Aggressive portfolio, stocks have a greater weight. If you are able to take on a higher amounts of risk, allocating a greater portion of your portfolio to smaller companies and emerging markets could generate even higher returns. It is important to remember that there is no such thing as low risk, high reward. Past performance is no guarantee of future performance, but investors historically have been rewarded over the long term for holding asset class risk.
Two different approaches to investing
Investment managers may choose to take a passive approach or actively manage the portfolios that they oversee.
Passive management, also known as index investing, is an investment strategy that attempts to generate returns that mirror the returns of a stock market index like the FTSE 100. The investment manager will have no opinion on whether an individual company is undervalued or is too pricey.
Active management can take views on which company, country, region or asset class might perform best in the future. As your life evolves from saving to retirement, your asset allocation will also need to be actively managed. Active investment managers will generally command a slightly higher fee for these services.
IG Smart Portfolios uses a hybrid approach, taking low-cost passive building blocks but combining them with active asset allocation, to deliver smoother, risk improved, returns to client portfolios over time.
How do investment managers make their money?
The primary source of revenue for investment managers is through charging a percentage on the value of the assets they manage, though some also have custody fees and transactional charges on dealing and foreign exchange.
Many studies have found that active managers fail to consistently outperform the market index, which has led to some private investors moving their money out of actively managed funds and onto DIY platforms where cheap index trackers and exchange traded funds (ETFs) are readily available.
Manage your wealth, trade your best ideas
IG has a range of five expertly-managed Smart Portfolios that you can use as the core of your portfolio. These are based on investment research from BlackRock, the world’s largest risk and asset manager, and seek to reward investors for taking on a suitable amount of risk over the long term.
For your best ideas, our Share Dealing platform allows investors to buy and sell individual stocks, ETFs and investment trusts for as little as £5 per trade.