In a previous article, we introduced the
CFA Institute Investment Foundation Program (Read
more here). It is a free program
designed for anyone who wants to enter or advance within the investment
management industry, including IT, operations, accounting, administration, and
marketing. Candidates who successfully
pass the online exam earn the CFA Institute Investment Foundations Certificate.
There are total of 20 Chapters in 7
modules, covering all the essential topics in finance, economics, ethics and
regulations. This series of articles
will highlight the core knowledge of each chapter.
Chapter 13 provides an overview of the Structure
of the Investment Industry. The learning outcome of chapter 13 is as follows:
·
Describe
needs served by the investment industry;
·
Describe
financial planning services;
·
Describe
investment management services;
·
Describe
investment information services;
·
Describe
trading services;
·
Compare
the roles of brokers and dealers;
·
Distinguish
between buy-side and sell-side firms in the investment industry;
·
Distinguish
between front-, middle-, and back-office functions in the investment industry;
·
Identify
positions and responsibilities within firms in the investment industry.
The investment industry provides
services to those who have money to invest—individual and institutional
investors who become providers of capital. Investing involves many activities
that most individual and institutional investors cannot do themselves.
Investors must
·
determine
their financial goals—in particular, how much money they will need to invest
for future uses and how much money they can withdraw over time.
·
identify
potential investments.
·
evaluate
the risk and return prospects of potential investments.
·
trade
securities and assets.
·
hold,
manage, and account for securities and assets during the periods of the
investments.
·
evaluate
the performance of their investments.
Financial planning helps investors set their financial
goals and determine how much money they should save for future expenses and/or
how much money they can spend on current expenses while still preserving their
capital. Meanwhile, investment
management assists retail, institutional, and high-net-worth investors in
implementing their savings and investment plans to be able to achieve their
financial goals. The three major investment management activities are asset
allocation, investment analysis, and portfolio construction.
Asset allocation indicates the proportion of a portfolio
that should be invested in various asset classes to help meet financial goals.
Asset classes typically include cash, equity and debt securities, and
alternative investments (such as private equity, real estate, and commodities).
Investment analysis involves estimating the fundamental
value of potential investments and identifying attractive securities and
assets. An investment’s fundamental value, also called intrinsic value,
indicates the price that investors would pay for the investment if they had a
complete understanding of the investment’s characteristics. A widely used
approach to estimating the fundamental value of an investment is to estimate
the present value of all the cash flows that the investment will generate in
the future.
Portfolio construction is the activity that brings everything
together. It requires investment managers to invest in the attractive
securities and assets they identified through their investment analysis, taking
into account the client’s requirements and appropriate asset allocation. To do
so, investment managers must trade securities and assets; hold, manage, and
account for these securities and assets during the periods of investment; and
evaluate the performance of these investments.
Investment managers may suggest passive
or active investment management, or both.
Passive investment managers
seek to match the return and risk of an appropriate benchmark. Benchmarks
include broad market indices that cover an entire asset class, indices for a
specific industry, and benchmarks that are customised to the needs of a
specific client.
In contrast, active investment
managers try to predict which securities and assets will outperform or
underperform comparable securities and assets. The managers then act on their
opinions by buying the securities and assets that they expect to outperform and
selling (or simply not buying) the securities and assets that they expect to
underperform. Active investment strategies are more expensive than passive investment
strategies because they require greater resources, so investment clients hire
active investment managers only when they believe that these managers have the
skill to outperform the market after taking into consideration all fees and
commissions.
Many investors and investment managers
obtain investment research, financial data, and consultancy services from firms
that specialise in providing these services. These companies include investment
research providers, credit rating agencies, financial news services, financial
data vendors, and investment consultants.
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