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John G. Gatsi
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
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.
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
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?
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
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
Thus the focus, whether we are dealing with financial or real asset is future cash inflows.
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
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
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
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.
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
select. This process will be discussed further when dealing with Markowitz portfolio
theory where portfolio diversification and issues bordering on beta will feature
prominently.
This is the stage where the strategy developed in terms of the portfolio constructed is
industry analysis and financial statement analysis of specific companies as well as analysts
comments are indispensable.
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
Type of Investors
Investors are generally categorised into retail (individual) and institutional investors.
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
and public institutions engage in investment process for various but different reasons.
Real assets (physical assets) are generally tangible and include gold, real estate,
machinery while financial assets are intangible but are represented by physical
income generated from the utilisation of real assets hence real assets produce goods and
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
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.
Increased use of information technology and the automation of many stock markets
Youth investment
following benefits:
Makes students well informed and familiar with investment terms such as market
derivative securities, long and short positions and risk averse investors among
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
References
Akerlof, G. (1970) “The Market for Lemons: Qualitative Uncertainty and the Market
Van Horne J.C., and Wachowicz J.M (2005) , “Fundamentals of Financial Management”,
Twelfth edition, Prentice Hall, UK