Professional fund management refers to the process where an expert, known as a fund manager, is responsible for overseeing an investment fund. These managers make key decisions about buying, selling and holding a variety of assets within the fund to achieve specific financial goals on behalf of the fund’s investors. Their primary objective is to optimise returns while managing risk, offering investors an opportunity to benefit from professional expertise without needing to actively manage investments themselves.
THE ROLE OF A FUND MANAGER
A professional fund manager’s job is to handle the day-to-day operations of the fund. This involves:
Selecting investments: Fund managers decide which assets to include in the fund, whether these are stocks, bonds or other securities. They conduct in-depth research to identify opportunities that align with the fund’s strategy.
Monitoring the market: Fund managers keep an eye on economic trends, market movements and global events that could impact the performance of the investments within the fund. This continuous oversight allows them to make informed decisions.
Adjusting the portfolio: Based on market conditions or changes in investment outlook, the fund manager may rebalance the portfolio, selling certain assets and purchasing others to maintain the fund’s risk and return profile.
Fund managers do more than just pick stocks or bonds, as they develop and execute a strategy aimed at meeting specific investment objectives, whether that’s growth, income or a balanced mix of both.
TYPES OF FUND MANAGEMENT STRATEGIES
The strategy a fund manager employs will depend on the fund's goals. There are several common approaches:
Active management: In this approach, the manager attempts to outperform a market index, such as the FTSE 100, by selecting stocks or other assets they believe will perform better than the market. This involves a hands-on approach, with regular buying and selling of assets to take advantage of market trends and opportunities.
Passive management: A passive manager, on the other hand, aims to mirror the performance of a specific index. Instead of actively picking stocks, they invest in the same assets as the index, offering a lower-cost, long-term investment strategy.
Growth vs value: Growth fund managers focus on companies that are expected to increase in value rapidly, while value managers seek out stocks that are undervalued by the market but have strong fundamentals.
RISK MANAGEMENT IN FUND MANAGEMENT
Managing risk is a crucial part of the fund manager’s role. They aim to reduce the fund’s exposure to market volatility by diversifying the portfolio across different asset classes, industries or geographical regions. Diversification spreads risk, ensuring that if one asset underperforms, others within the portfolio might compensate for those losses. Fund managers may also use hedging strategies – such as options or futures contracts – to protect the fund against potential downturns in specific markets.
Effective risk management ensures that the fund stays aligned with its objectives, even during turbulent market conditions.
BENEFITS OF PROFESSIONAL FUND MANAGEMENT
For individual investors, professional fund management offers several key advantages:
Expertise: Fund managers are seasoned professionals with deep market knowledge and research resources, enabling them to make informed decisions on behalf of investors.
Convenience: Investors don't need to manage the daily complexities of their investments. The fund manager handles the buying, selling, and adjusting of the portfolio.
Access to broader markets: A professionally managed fund can provide exposure to a wide range of assets, including international markets or niche sectors, which might be difficult for individual investors to access on their own.
POTENTIAL DOWNSIDES OF PROFESSIONAL FUND MANAGEMENT
While professional fund management offers many benefits, there are also potential drawbacks. One of the most significant is the cost. Actively managed funds tend to have higher fees than passive ones, which can eat into overall returns, especially if the fund underperforms its benchmark. Another potential downside is the risk of underperformance. Even professional managers can make poor decisions and not all actively managed funds outperform the market consistently.
CHOOSING A FUND MANAGER
Selecting the right fund manager is critical to achieving your investment objectives. Consider the manager’s track record, their fees and whether their investment philosophy aligns with your goals. It’s also important to look at the level of risk the manager typically takes on and whether this fits with your own risk tolerance.
By understanding the role and strategies of a professional fund manager, investors can make more informed decisions when selecting funds that align with their financial goals. Fund managers provide a valuable service by leveraging their expertise to navigate the complexities of the financial markets on behalf of their clients, but careful consideration of costs, performance and approach is essential to ensure it’s the right fit for your portfolio.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.