What is investment management?

Have you ever wondered what investment management is and what investment managers do? Here we explain their role and the different ways your money can be managed to achieve your investment goals.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
Investment management

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 assest allocation

(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.

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●  Understand how to build a diversified portfolio and manage your risk

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  • I’d like to receive information from IG Group companies about trading ideas and their products and services via email.

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For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

●  Discover the benefits of investing your money

●  Learn about the different investment options available and how to get started

●  Understand how to build a diversified portfolio and manage your risk

Get your free beginner's guide to investing

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.