Comparison and Performance Assessment of Fund Management Companies - Essay Example

Comparison and performance assessment of fund management companies Introduction Investment management is a generic term used to describe the functionof buying and selling investments within a particular portfolio (Lettau and Nieuwerburgh, 2007; Campbell and Viceira, 2007). Investors seek the help of private investment managers or investment manager working for investment management companies in order to design an optimal portfolio that guarantees a stable return (Elton and Gruber, 2009; Ait-Sahalia and Brandt, 2007). That is why investment managers suggest investors to diversify their portfolio investment by investing in both high risk and low risk securities (Brandt, 2008; Stutzer, 2007). The UK is till date the largest centre of fund management in all of Europe. In the year end 2013, the total assets that were under management of the companies operating in the industry amounted to 6.2 trillion GBP. This was an increase of 14% from the funds that were managed in the previous year (KPMG, 2014). This increase was driven mainly by a huge inflow of new funds and augmenting returns on investment. UK fund management industry accounted for 8.4% of the global fund management, managing nearly $ 146 trillion assets in end 2013 (KPMG, 2014). On the other hand the US is till date the biggest source of funds managed by global fund management industry. The fund management industry in US accounts for nearly half of the total assets managed by the global industry, managing nearly $ 869 trillion worth of assets (KPMG, 2014). It is with regards to this fact that the researcher wishes to conduct an in-depth analysis of two of the most prominent investment management companies based in the United Kingdom Invesco Perpetual and M & G Securities Limited. The underlying reason behind the selection of these two companies is their position in the market as well as because of abundant data availability. Analysis of these two companies will allow the researcher to learn the strategies adopted by the managers that helped them occupy the topmost position. Company Invesco Perpetual M&G investments Headquarters Hanley on Thames, UK London, UK Asset under management £39,342,316,979 £38,957,833,801 Turnover/profit £15,770,527,000 £873,746,000 (Source: Invesco Perpetual, 2014; M&G Investments, 2014) The aspects which will be covered in this study includes the investment philosophy of the investment management companies, investment strategies adopted by the investment managers of the respective companies, the asset allocation mechanism of both the organizations, fees charged for investment management and lastly the investment performance of both the companies with respect to the performance delivered by the index. Investment philosophy of Invesco Perpetual Investment philosophy of Invesco Perpetual has always been to focus on securities that provide long term growth instead of short term benefits. The company promotes this philosophy in a world where investors are more eager to achieve short term benefits by focusing more on short term measurements such as evaluation of monthly performance figures (Invesco Perpetual, 2015a). The company’s investment philosophy has always been to promote patience where the investment managers have always suggested the investors to hold their nerves and stick very closely to their conviction. The investment managers of Invesco Perpetual have always encouraged their investors to remain calm even in situations where other investors are rapidly selling and purchasing shares (Invesco Perpetual, 2015a). The company’s motto has always been to not follow the herd. The investment managers of Invesco Perpetual have always been confident regarding suggesting any investment decisions and they consider patience as their most valuable asset. Invesco Perpetual’s patience investment philosophy constitutes of four key aspects patience, long term conviction, team work and finding the right value. Their investment managers have always been patient in formulating investment strategies for their clients which in turn has allowed the former to identify the securities with the potential to generate value for their customers. The company’s expertise in this field is enhanced through the ability of the investment managers in work in coherence with their clientele (Invesco Perpetual, 2015a). This attributes of the company enabled the managers to achieve the leading position in the market in terms of the amount of funds management by all investment management companies in the UK. Investment philosophy of M&G Securities Limited As far as the investment philosophy of M&G Investments is concerned, the company takes a very long term approach towards investment that is led by conviction. According to the managers of M&G investments adopting a long term approach to investment allows them to maximize the return for both the clientele as well for the company. A long term approach to investment allows the managers to counter the market wide movements by manoeuvring their investment strategies (Merton, 2008). In addition to that a long term approach also provides managers with adequate time to adapt to the changing business scenarios and ensure that the portfolios that they are dealing with remain unaffected from the invariable economic scenarios (Barberis, 2008). The managers of M&G investments believe that they have the potential to maximise the returns for their customers with the help of conducting active management thereby acquiring an in-depth understanding about the organizations and companies in whose bonds, properties and equities the investment managers have invested (M&G investments, 2015). M&G investments rely heavily on the skill sets and the core competency of the workforce. According to the top tier managers the average tenure of an investment manager in the company is 11 years which indicates that the managers and the workforce have been able to work as team with strong coordination and collaboration which in turn has helped the organization to not only fulfil the needs and requirements of the clients but also investment fund managers (M&G investments, 2015). The managers of M&G investments have stated that they do not have any particular style or pattern of investments and they do not believe in any form of house view. The managers of M&G investments instead prefer to provide their investment fund manager with the optimum flexibility in order for them to be able to decide on their own approach towards making an investment on behalf of the company’s clients (M&G investments, 2015). Investment strategy of Invesco Perpetual The strong performance delivered by the stock market in the UK over the last year or so has stimulated a wave of optimism among the key players in the country’s financial sector which has enabled them to imitate a process of self sustaining recovery of the economy. The managers of Invesco Perpetual have an increasing expectation regarding the fact that formation of a multiyear equity bull market is possible. Given the fact that the equity market remains highly attractive despite the economic slowdown all over the world and in particular in the UK, Invesco Perpetual’s fundamental strategy will be to remain extremely vigilant regarding the strength with which corporations perform (Invesco Perpetual, 2015b). This will help the company to navigate the near term situations in the market. Invesco Perpetual’s managers will be very selective regarding their choice of equity in order to counter any uncertain economic downturn as well as to account for the augmentation in the valuation of the market. Therefore, given the current situation of the UK fund market, Invesco Perpetual’s investment strategy will be largely unchanged. This means that the investment managers of Invesco Perpetual will always be in search for companies that has the potential to generate greater revenues, consistent cash flow and henceforth profit in the current economic backdrop (Invesco Perpetual, 2015c). The investment management team of Invesco Perpetual will always emphasize on the importance of delivering long term sustainable return and dividend growth to its client base. It is this form of investment opportunities that forms a major part of the profit strategy followed by the company. The fundamental aim of the managers of Invesco Perpetual is to deliver a stable risk adjusted return to its customers in the long run (Invesco Perpetual, 2015b). The strategy implemented by the investment managers at Invesco Perpetual is very closely linked to the Capital Asset Pricing Model (CAPM) that reflects the relationship between return and risk. According to the model, an investment with a greater risk exposure will always provide a greater return (Jorion, 2008). In other words return generated by an investment instrument increases with an augmentation of the level of risk. That is why investment managers at Invesco Perpetual form optimal investment portfolio that constitutes high risk and low risk investment instruments. Such diversified portfolio enables investors to achieve a stable rate of return which is greater than their expected return (Wachter, 2009). Investment strategy of M&G Securities Limited As far as the investment strategy of M&G investment is concerned, the investment management team of the company shares an identical philosophy. A common chain of thoughts flowing between the investment management team of M&G investment which allows the employees to share investment ideas along with each other which in turn enables them to refine their own strategies on the basis of the flaws and loopholes identified upon discussion (Roll, 2009; Viceira and Campbell, 2008). The organizational culture of the company enables the employees to share their own investment ideas with others and challenge them in order to evaluate their feasibility before these strategies are implemented in the real world (M&G investments, 2015b). The company’s global investment strategy has always been to invest in equities that can consistently provide long term dividend growth. This strategy has helped the company’s managers to maximise the return for their client base in return for the investment made by them (Sharpe, 2007). M&G investment closely navigates publicly listed companies based all over the world in order to select the ones with the greatest potential to generate maximum, profit and cash flow (Merton, 2006). The investment managers of M&G investment have been very watchful while selecting a particular company in order to add it into an investment portfolio (M&G investments, 2015b). The employees have an eye for the best company, which is why the company has been so successful in managing huge amount of funds invested by its clientele (Dessein, Garicano and Gertner, 2008). This has made M&G investment the second largest company in the UK in terms of the amount of funds that are managed by the company. The fundamental investment strategy of M&G investment has been increase the total return which includes capital growth and income by means of investing in equities that have the potential to augment their dividends without fail over a period of time. Moreover, the investment managers of M&G investment also seek to invest in equities that have the potential to generate an income yield which is sufficiently higher than the average income yield generated by all equities listed around the world (M&G investments, 2015b). The investment strategies adopted by the investment managers of M&G investments are more aggressive in nature and emulate one of the assumptions of the CAPM. The investment managers in this company encourage managers to include those investment instruments within their portfolio that are expected to yield the maximum return (expected) for a greater degree of volatility. This is the second assumption of the CAPM as has been mention in Berk and DeMarzo (2007). This is precisely the reason why majority of the investors of M&G investments have long term portfolios that consists of investment instruments with greater degree of volatility. This allows them to wait for a longer period and compensate for the risky position taken by them by generating greater returns during maturity (Browne, 2007). Asset allocation mechanism of Invesco Perpetual As far as the asset allocation mechanism of Invesco Perpetual is concerned, the company has a Perpetual Balanced Risk 10 Fund that seeks to attain capital growth in the long run through different market situations thereby investing various classes of assets such as derivates and several other financial interlined investment instruments (Invesco Perpetual, 2015d). This enables the investor to gain a goof exposure to three fundamental classes of assets: fixed income assets, commodities and equities. In order to enable investors to diversify their investment portfolio the Perpetual Balanced Risk 10 Fund balances the risk contribution from all the asset classes mentioned above in order to pave way for strategic allocation of assets. The Perpetual Balanced Risk 10 Fund also seeks to regulate the risk contribution strategically in order to make the portfolio more adaptive to the fluctuating market situations. The fundamental aim of the asset allocation fund is to target a10% precariousness on an average over the due course of a full market cycle (Invesco Perpetual, 2015d). Cost As far as the cost incurred in investment is concerned, both Invesco Perpetual and M&G investments have identical philosophies and that is to reduce the cost incurred by investors in order to ensure higher investment returns. In both the companies investors have to pay the entry charge which is mostly up to 5% of the total amount that is invested, the ongoing charges, portfolio transaction costs and stamp duty reserve tax (applicable in the UK) (Invesco Perpetual, 2015e). Payment made for all these cost factors actually reduces the investment amount upfront for the investors of both the fund management companies. This is precisely the reason why fund managers of both Invesco Perpetual and M&G Investments encourage their clients to invest for the long term. This allows them to not only nullify the negative impacts of fluctuating market conditions by buying and holding shares for a longer time frame buy also enables them to increase the returns of investment by selling shares at a greater margin. The greater investment returns achieved as a result of long term investment strategies enable investors compensate for all the costs incurred while the investment was ongoing. Asset allocation mechanism of M&G Securities Limited The investment fund managers of M&G investments believe that the performance of various classes of assets change according to the fluctuations the market. That is why appropriate allocation of asset is extremely important in order to nullify the risk posed by the variable economic conditions. M&G investments have a category of multi asset funds whereby investors get the option to invest in a number of asset classes. This provides investors with the opportunity to form a diversified portfolio of assets (which includes equities, bonds, properties, currencies and cash and so on and so forth). The asset allocation strategy of M&G Investments closely emulates the Markowitz model of optimal portfolio selection which enables the investors to consider several covariance estimates that allows them to deal with a long list of securities (Cornell and Roll, 2008). The highly expert fund managers of M&G investments conduct an in-depth market research in order to assess the amount that needs to be invested in a particular class of asset (M&G investments, 2015c). The fundamental reason behind conducting such an in-depth market research is to make an assessment of risk exposure as well as to evaluate the return generating potential of this investment. The fund managers in M&G investments emphasise a lot on providing proper diversification in order to reduce the risk exposure of each and every portfolio acquired by customer. They are mainly responsible for managing a range of assets so as to be able to meet the investment objective set for each type of fund (M&G investments, 2015c). Investment performance of Invesco Perpetual The figure given above shows that Invesco Perpetual investment performance has consistently outperformed the growth rate in the index returns over the last three years. However the figure also reveals that that during the period between January 2011 and July 2012, Invesco Perpetual investment performance more or less reflected the index growth and in some cases slightly underperformed than the index. However, since then the return generated by this company has consistently hit higher levels. Figure 1: Comparison between Invesco Perpetual and Index performance (Source: Invesco Perpetual, 2015c) As far as the cumulative growth rate is concerned, Invesco Perpetual has performed considerably better than the Index. As is evident from the figure given below, six months cumulative growth is 10.06% compared to the index’s 7.19%. The 1 year cumulative growth rate is 14.31% compared to the index’s 5.61% (Invesco Perpetual, 2015c). The three, five and ten year’s cumulative growth rate is 53.71%, 83.59% and 179.79% respectively compared to the index’s 41.30%, 57.90% and 105.76% respectively (Invesco Perpetual, 2015c). Talking about the annualised growth rate Invesco Perpetual has generated three, five and ten years growth rate of 15.39% 12.91% and 10.83% respectively compared to the index’s 12.20%, 9.56% and 7.48% respectively (Invesco Perpetual, 2015c). This also signifies that Invesco Perpetual’s investment performance has been considerably better than the index performance. Figure 2: Invesco Perpetual investment performance compared to the index performance (Source: Invesco Perpetual, 2015c) Investment performance of M&G Securities Limited Figure 3: Comparison between M&G Investments and Index performance (Source: M&G investments, 2015d) Figure 3 given above reveals that much unlike the performance delivered by Invesco Perpetual, the performance of M&G investment has been largely identical baring few situations where the company’s investment performance has marginally outperformed the index performance. The year to year return data reveals that M&G investment fund underperformed when compared to the performance delivered by the market. As is evident from the figure given above in the year 2010 the return generated by M&G index tracker fund was 9.81% which relatively lesser than the index return of 11.59% (M&G investments, 2015d). In the year 2011, M&G index tracker fund return was 0.69% while that of the index was 0.725. In 2012, 2013 and 2014, the return generated by M&G index tracker fund was 16.67%, 8.140% and 6.42% respectively while the index return was 17.58%, 14.45% and 5.93% (M&G investments, 2015d). The five year return data of both the index and M&G investment reveals that the latter was able to outperform the index only once in the year 2014 out of the last five years. Conclusion The study revealed that both Invesco Perpetual and M&G Investments are identical to each other in terms of their investment strategy, investment philosophy, asset allocation mechanism and the end objective (which is to enable customers to form an optimal investment portfolio with lesser exposure), what separates these two companies is their investment performance. While the former has consistently outperformed the index over the last five years, the latter has failed to do so in the same time frame. Reference List Ait-Sahalia, Y. and Brandt, M. W., 2007. Variable selection for portfolio choice. 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