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UNDERSTANDING INVESTMENT MANAGEMENT: The problem of Content and Definition

John G. Gatsi

Department of Accounting and Finance


School of Business
University of Cape Coast
nyagart@yahoo.com
Abstract

This is an overview of investment management course for level 400 students. This is to prepare
them to be aware of what investment is about and what should be expected in the course. The
paper addresses problems associated with definitions and content. Investment management
instructors continue to argue among themselves whether to emphasise definitions at the start of
the course or at a point when much information and explanation have been given. The paper
projects a balanced approach that may ensure explanatory definitions and broad based content.
The paper is therefore a guide to students to be able to focus from the beginning of the course.

Keywords: Investment, Investment Management, Investment Process, financial and real assets

Introduction

Available texts on finance and its derivative courses and programmes attempt in futility to define

the subject. The same unrestricted approach is applied to investment management a course in

many Business Schools. The first danger of defining a course is to provide a precise summary of

the subject matter inherent. Investment management as a derivative course of finance may be

defined utilizing only the major decisions involve in finance. The fact remains that learning and

teaching is reduced to an object locked up in a box with a small hole. One can only see the object

by focusing on the small hole. The question experience teachers of investment management do

ask is whether it is helpful to start teaching the course with definition? Should definitions be

assigned after the course when much information about the course is known? It is possible to

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define investment instead of investment management. Some may also define investment

management to mean asset management, portfolio management and project management. In

discussing the difficulty of defining investment management, it is important to note that

investment management is until recently part of corporate finance, thus to some, capital

budgeting and dividend policy which are normally discussed as an integral part of corporate

finance deals with investment. It is important to note that we can provide precise definition for

terms, concepts and principles in investment management but very difficult to provide a precise

and appropriate definition for investment management. As a result, some text writers do not

attempt a definition while some provide generic discussion of key contents of the subject

investment management. The content of some investment management books are written in a

manner that indicate to students and other readers that investment and investment management is

merely about trading in financial assets. The key issue in investment is the commitment of

present resources monetary or otherwise to lay claim on assets hence investment can not focus

on only financial assets but also real assets such as land, real estate, establishment of a business

among others. It is equally important to appreciate the distinction between portfolio investments

and direct investment. Economies with good entrepreneurs promote direct investment which is

key, to job and wealth creation. It is therefore not misleading to provide a new orientation to

students when teaching investment to discuss the importance of investing directly in real assets.

Portfolio diversification or diversification of investment should not be explained to mean

constructing a portfolio made up of many financial assets but a portfolio made up of real and

financial assets.

Levy and Post (2005) clearly ignores the issue of definition and concentrate on the major content

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of a good investment textbook. They consider the investment environment, security markets,

return and risk, portfolio theories, security analysis, macroeconomic analysis and derivative

securities among others as the key contents to discuss under investment. It is clear that Levy and

Post (2005) made no significant comment on direct investment or investment in real assets.

What is Investment?

Investment is described as the continuous commitment /sacrifice of current resources in

particular asset(s) over a particular time horizon with the expectation of gaining more resources.

Professional investors do not make one off investment and stop. They continue to reinvest after

the maturity of the investment. When this is done it provides the conduit for what is referred to

as virtuous cycle of investment in which any investment exit results in new investments. Should

we consider Mr. Akoto an investor because he bought Government of Ghana Jubilee

Savings Bond which matures in June 2011 but has not made any investment after buying

the bond?

Investment is therefore based on expectation of positive future returns though negative returns

are practical realities of investment. Those who made the investment are referred to as investors.

Investors need not have physical cash or actual resource to engage in investment. They may

borrow to invest and return the assets or their equivalent monetary value with or without interest.

This is described as short selling. This may be discussed into details under trading mechanism of

the stock exchange, brokerage business as financial intermediary and under the capital asset

pricing model (CAPM). Economists may describe investment as the sacrifice of current

consumption of resources with the expectation of consuming more resources in the future.

Students may say if the focus of investment is future resources/consumption, then savings and

commitment of resources in financial investment vehicles will be more rewarding. What of


investment in a project (Capital budgeting) that may generate streams of future cash flows?

Thus the focus, whether we are dealing with financial or real asset is future cash inflows.

What is Investment Management

Investment management deals with the active management of the investment process and

investment assets to achieve any investment goal(s). Proper investment appraisal reveals that an

investment must have a goal. The general goal is positive future returns but there must be

specific professional or social goal associated with investments. Thus investment management

involves the main processes involved in capital budgeting including professional and intelligent

proximity with the financial market and the custodian economy. Hence investment management

involves the management function of planning and coordination. Investment management also

involves how to raise funds and proper disbursement of the fund, portfolio construction and

investment evaluation on timely basis. The approach adopted here is to avoid a concise definition

and give way for generic description of investment management. It is therefore easy to accept

that the day-to- day management of a business is coterminous with investment management

because an attempt is being made by the management to grow the business so as to generate

profit for the owners far above their capital contributions. Levy and Post (2005) and Van Horne

and Wachowicz (2005), investment when undertaken in near efficient financial markets, creates

a relationship between investors and the market unlike corporate finance which creates a

relationship between firms and the financial markets. This makes financial markets a link

between investors and firms. This relationship is the basis of the agency discourse

(Akerlof,1970).
The Investment Process

The investment environment and performance of investment assets are described as dynamic

hence the investment management process follows an integrated cycle of steps. There are five

basic investment management process characteristics or components which are:

Investor Characteristics

The investor characteristic is revealed through the investment policy. It is advisable that

both retail and institutional investors develop templates of their investment policies. The

return and risk expectations of the investor and investment constraints are to be an

essential part of the investment policy. The portfolio objective and general investment

philosophy are clearly outlined in the investment policy to guide the investment manager

or the portfolio (asset manager) in ensuring effective monitoring and assessment of the

investment. In deciding on what to invest in (investment vehicle) , where to invest and

when to invest, the investor must consider his/her present financial position, investment

vehicles available, the possible stream of cash flow from the investment and the possible

risk associated with the investments. This makes future income generation as one of the

key reasons for engaging in investment.

Investment Vehicles

These are the assets available to invest in by investors. Investment literature mainly

discusses financial assets. These assets may be money market assets or capital market

assets. The main money market assets include government Treasury bill, one year notes,

commercial paper, repurchase agreement and short term bank facilities. Money market
instruments are normally fixed income securities or debt instruments. Stocks and bonds

are capital market instruments. Stocks are equity instruments and bonds are long term

debt instruments. Derivative products are innovations in financial products which may be

short term or long term depending on the maturity period of such contracts. Examples of

derivative securities are Forward contracts, futures, options and swaps. Derivative

instruments are financial instruments whose prices depend on the price performance of an

underlying asset. Derivatives are commonly traded on major stock exchanges in the

world. They form the main structure of trading arrangement for commodities such as

gold, diamond, oil and gas, natural gas and many agricultural produce.

Investment Strategy Development

This involves proactive steps by investment managers to ensure good return within the

possible investment constraints with respect to risk and liquidity expectation. There is

effective allocation of investment resources into various investment vehicles to construct

a portfolio in appropriate proportions. It is this process that determines which assets to

select. This process will be discussed further when dealing with Markowitz portfolio

theory where portfolio diversification and issues bordering on beta will feature

prominently.

Investment Strategy Implementation

This is the stage where the strategy developed in terms of the portfolio constructed is

implemented actively. An economy with serious macroeconomic volatility may influence

timely change in portfolio construction and expose investments to macroeconomic risks. In

terms of financial asset investment, efficient information, macroeconomic analysis including

industry analysis and financial statement analysis of specific companies as well as analysts
comments are indispensable.

Investment Strategy Monitoring and Evaluation

This is very important because no financial market is practically stable for a long period

of time. Financial market regulation change may be influenced by scandals which then

affect the investment objectives and philosophy. Monitoring helps to ascertain whether

investments are performing as expected. This will be the basis for restructuring of the

portfolio, increase investment, addition of a new investment vehicle and disinvestment.

Type of Investors

Investors are generally categorised into retail (individual) and institutional investors.

Individual investors normally take on limited volumes of investment assets as opposed to

institutional investors. However, some high net worth investors (angel investors) may

invest in total far more than some institutions. Generally institutional investors are active

investors and have experts to properly appraise investment portfolio to ensure good

returns at reasonable risk. It is important to note that individuals, governments, private

and public institutions engage in investment process for various but different reasons.

Characteristics of financial and real assets

Real assets (physical assets) are generally tangible and include gold, real estate,

machinery while financial assets are intangible but are represented by physical

documents such as a certificate. Share certificate represents ownership claim on the

income generated from the utilisation of real assets hence real assets produce goods and

services to generate income.


Why Is Investment in Financial Assets more Visible than Real Assets?

Financial assets are more Marketable than real assets because financial assets can be traded

with ease in that it is easy to transact through a broker to provide liquidity. This is the reason

why financial assets are described as high liquid assets. Also financial assets are highly

divisible such that while it is virtually impossible to purchase a new tractor in its component

parts, financial assets are packaged in small units allowing for high patronage and

marketability. Information is in the heart of vibrant markets. There is much information on

the radio, television, newspapers and academic journals about the financial market and its

products than physical assets. There is strong dissemination of information about stocks,

bonds, treasury bills than many real assets. Financial assets are associated with relatively

shorter holding period than real assets. Some fixed assets in companies are held well over a

decade and more but most financial assets change hand often.

Some Developments in Investments

Increased use of information technology and the automation of many stock markets

across the globe

Introduction of new investment vehicles such as derivative securities, money market

funds and exchange traded funds.

Increase regulation and Reregulation

Globalisation of financial markets and Institutionalisation in investments

Youth investment

Why Study Investment Management


The study of investment when approached methodically with commitment provides the

following benefits:

Makes students well informed and familiar with investment terms such as market

capitalisation, bull and bear market, bid-ask spread, portfolio management,

derivative securities, long and short positions and risk averse investors among

others. Students are also familiar with the importance of macroeconomic

indicators and how they may influence investment decisions.

Helps in making informed investment decisions

May lead to rewarding career

Conclusion

Students should appreciate that investment management involve both quantitative and qualitative

approach especially risk and return, portfolio theory and capital asset pricing model.

Fundamental and technically analyses will strengthen investors’ decision to allocate scarce

investment resources. Financial market regulations are now very important part of investment

management. Investment management may help students improve upon financial literacy and

investment decision making in a volatile macroeconomic environment.

References

Akerlof, G. (1970) “The Market for Lemons: Qualitative Uncertainty and the Market

Mechanism”, Quarterly Journal of Economics, Vol. 84, pp. 288–300.

Levy H and Post , T (2005) , “ Investments”, Prentice Hall UK.

Van Horne J.C., and Wachowicz J.M (2005) , “Fundamentals of Financial Management”,
Twelfth edition, Prentice Hall, UK