Investment Management and Portfolio Structuring

If asked: what is the purpose of investment management?, the average man in the street would probably say that it is to ‘beat the market’ i.e. to select shares that will outperform the market as a whole. Self-directed investors (households) generally operate on the basis that this is what they are trying to achieve for themselves and will read magazines such as Investors Chronicle in order to pick up ‘stock tips’ which they hope will lead to investment success — outperformance relative to some benchmark they have chosen. Households which do not want to do this themselves will employ a professional investment manager — a wealth manager — often because they believe a professional can achieve ‘outperformance’ on their behalf. Certainly the ability to generate outperformance is the marketing claim that many professional investment managers make. But despite this belief in outperformance being what investment management is about, generating outperformance is not in fact the purpose of investment management and indeed is also very seldom achieved consistently. The purpose of investment management is risk management, which in this case means creating portfolios which give the highest expected return for any given level of risk chosen by the underlying investors. The major types of risk facing the equity investor are the following.