An Introduction to Fund Management

An Introduction to Fund Management introduces readers to the economic rationale for the existence of funds, the different types available, investment strategies and many other related issues from the perspective of the investment manager. It gives an overview of the whole business and explores the process and techniques of fund management, performance measurement and fund administration. This updated edition reflects new regulatory changes and industry developments.

Preface xi

About the author xiii

1 INTRODUCTION 1

Economic background 3

‘Money makes the world go round’ 4

‘Money doesn’t grow on trees’ 5

Risks and rewards 6

Considerations 9

Markets 10

Investment instruments 11

‘Neither a borrower nor a lender be’ 12

2 ROLE OF FUNDS 13

Definitions 14

Investment businesses 15

Types of fund 16

Open-ended and closed-ended funds 23

Uses of funds 24

Associated packaging 25

Features and characteristics 25

Purpose, providers and players 25

Costs, benefits and comparisons 27

How to invest 31

Sales, marketing and disclosure 31

Categories, sectors and statistics 32

Investor protection 33

‘Be it enacted by the Queen’s most Excellent Majesty . . .’ 33

Regulation in practice 42

Establishing a fund 47

Who wants one and why? 47

Options and approaches 48

Documents and authorisations 50

Launching the fund 51

3 PORTFOLIO MANAGEMENT 53

Strategies, styles, objectives and policies 54

Meeting investors’ requirements 56

Risks to be managed 57

Hedging 59

‘Please don’t ask for credit . . .’ 62

‘You can’t do that!’ 63

Asset allocation versus stock selection 65

Choosing the investments 66

‘First, pick your markets’ 66

Portfolio weightings and profiles 68

Income and growth 69

Liquidity 70

Evaluating alternatives 71

Data, ratios and measurements 75

Dealing with events 78

News and announcements 79

New issues and underwriting 81

Rights, splits and scrip 83

Breaches of regulations 85

4 PORTFOLIO ADMINISTRATION 87

‘Day by day in every way . . .’ 88

Buying and selling 88

Delivery and settlement 89

Registration 89

Custody 91

Use of nominees 91

Stock exchange reporting 93

Records and regulations 93

Portfolio accounting and controls 94

Profits, income and taxation 96

Valuation and pricing 98

5 INVESTOR ADMINISTRATION 103

Agents, agreements and delegation 104

Investor transactions 105

Registration 108

Communicating with investors 109

6 PERFORMANCE MEASUREMENT 115

Sector comparisons – ‘my fund is better than your fund’ 116

Yields and returns 119

Time- and money-weighted returns 123

Indices and benchmarking 127

Volatility and risk adjustments 130

7 INVESTMENT MATHEMATICS 133

The arithmetic of indices 134

Standard deviation 137

Capital Asset Pricing Model 139

Glossary 147

List of abbreviations 155

Index 157

Ray Russell has been a consultant and trainer within the financial services industry since 1988. Prior to this he spent 25 years in investment banking. Operating as GCR Management Services he has served as a director of a fund management firm for 10 years and has developed introductory training for the SII and fund management firms in the UK and Ireland. He also created a week long course for the compliance Institute. This guide is derived from the author’s notes for the two-day course of the same name that he presents for the Securities and Investment Institute.

It is neither a transcript of the course, nor a fully comprehensive work of reference. Rather, it is intended as an introductory text for those new to or unfamiliar with investments and asset management. It provides a broad and practical description of investment funds and fund management from a number of perspectives and aims to stimulate further, more detailed study.

Starting with the general economic background and rationale for the existence of funds, it moves through a description of the features and characteristics of different types of funds, and the associated regulatory and investor protection mechanisms, to the process of establishing a fund.

It then addresses the topic from the perspective of the portfolio manager, by providing an overview of the principal investment strategies and styles deployed in the construction of portfolios, and of their administration, before covering investor administration and, finally, the mathematics and methods of performance measurement.

Your own understanding of fund management after reading this guide will depend upon your interest and aspirations, your appetite for and approach to learning, and, of course, your expectations of the guide, which, please note, is an introduction to the subject; it will not make you an expert!