Question

An institutional client has approached you for investment advice and fund management- identify and discuss the steps in the investment management process that you will follow as an investment manager. ii)Discuss the view of fundamental indexing. iii) Discuss with examples active and passive equity management strategies

Answer 1

steps in investement management process

Understanding the requirement

asset allocation decision

portfolio strategy selection

Asset selection decision

Evaluating portfolio performance

fundamental indexing

A fundamental  indexing is a type of equity index in which components are chosen based on fundamental criteria as opposed to market capitalization. Fundamental indexes can base their construction on a range of fundamental metrics, such as revenue, dividend rates, earnings, or book value. Fundamental indexes provide a benchmark for passively managed funds offered to investors seeking exposure to stocks based on fundamental characteristics

Active and passive equity management strategies

Active Investing

The goal of active money management is to beat the stock market’s average returns and take full advantage of short-term price fluctuations. It involves a much deeper analysis and the expertise to know when to pivot into or out of a particular stock, bond, or any asset. A portfolio manager usually oversees a team of analysts who look at qualitative and quantitative factors, then gaze into their crystal balls to try to determine where and when that price will change.

Passive Investing

Passive investors limit the amount of buying and selling within their portfolios, making this a very cost-effective way to invest. The strategy requires a buy-and-hold mentality. That means resisting the temptation to react or anticipate the stock market’s every next move.

The prime example of a passive approach is to buy an index fund that follows one of the major indices like the S&P 500 or Dow Jones. Whenever these indices switch up their constituents, the index funds that follow them automatically switch up their holdings by selling the stock that’s leaving and buying the stock that’s becoming part of the index. This is why it’s such a big deal when a company becomes big enough to be included in one of the major indices: It guarantees that the stock will become a core holding in thousands of major funds.

When you own tiny pieces of thousands of stocks, you earn your returns simply by participating in the upward trajectory of corporate profits over time via the overall stock market. Successful passive investors keep their eye on the prize and ignore short-term setbacks—even sharp downturns.