Investment management involves various assets being invested by professional investment managers. Managers need to make active investment choices across different asset categories to construct diversified portfolios that aim to maximize returns for clients within their risk tolerances. This article will analyze how a is invested by managers actively through portfolio construction, implementation and monitoring.
Investment managers construct diversified portfolios based on asset allocation
Investment managers firstly determine the strategic asset allocation for a portfolio according to expected risk and return characteristics of different asset classes. The asset classes generally include traditional investments like stocks and bonds, as well as alternative investments such as real estate, private equity, hedge funds, commodities and infrastructure. The managers allocate capital across these assets to build a diversified portfolio.
For example, a balanced portfolio may consist of 60% stocks, 30% bonds and 10% alternatives. More conservative portfolios allocate more to fixed-income, while more aggressive ones allocate more to equities and alternatives. Asset allocation is the primary driver of portfolio returns and risks over the long run.
Investment managers select securities and make tactical allocation decisions
After determining the target asset allocation, investment managers need to select specific securities within each asset class to implement the portfolio. This security selection process involves screening for securities that meet the risk-return criteria.
Managers may choose individual stocks and bonds, mutual funds and ETFs. For alternative investments like private equity and real estate, the managers select partnerships or investment vehicles to gain exposure.
In addition to strategic asset allocation, managers also make tactical allocation decisions to capitalize on market opportunities. For instance, they may temporarily overweight an asset class that appears undervalued.
Investment managers monitor portfolios and rebalance when necessary
After portfolio construction and implementation, investment managers need to monitor the investments continuously. They track factors like macro environment, company fundamentals, and portfolio characteristics versus benchmarks.
As market movements cause deviations from target allocation, managers need to rebalance the portfolio periodically by buying and selling assets. Rebalancing helps maintain the intended risk-return characteristics over time.
Overall, investment managers have to make active choices on asset allocation, security selection, tactical moves, monitoring and rebalancing so that the capital is invested effectively to meet portfolio objectives.
Investment managers construct, implement and monitor diversified portfolios by actively allocating capital across different asset categories and securities. Their investment expertise and continuous decisions are crucial for generating returns from a invested by managers.