2019 Curriculum CFA Program Level III Portfolio Management and Wealth Planning
Overview of the Asset Management Industry and Portfolio ManagementView the full reading (PDF)
Available to members
The asset management* industry serves as a critical link between providers and seekers of investment capital around the world. The industry provides professional investment services for a diverse client base with varying objectives and risk tolerances. Asset managers have evolved with the global expansion of capital markets and will likely continue to evolve as technological advancements and demographic trends influence new innovations and opportunities.
This reading is divided into three main sections. Section 2 provides an overview of the structure of the global asset management industry, examining major client segments and investment product types. In addition, several macro industry trends shaping the future of the asset management industry are explored. Section 3 examines an overall portfolio management process that balances asset owner objectives and the investment opportunity set. Section 4 examines the fundamentals of investment governance, and a summary of key points completes the reading.
*Note that both “investment management” and “asset management” are commonly used throughout the CFA curriculum. The terms are often used interchangeably in practice.
The candidate should be able to:
- describe the structure of the asset management industry;
- discuss a portfolio management process that supports achieving asset owners’ objectives;
- discuss the elements of effective investment governance.
- The asset management industry is highly competitive, with industry firms ranging from “pure-play” independent asset managers to diversified commercial banks, insurance companies, and brokerages that offer asset management services in addition to their core business activities.
- Asset managers are increasingly offering other strategies beyond traditional market-cap-weighted exposures. One such strategy is smart beta, which involves the use of simple, transparent, rules-based strategies as a basis for investment decisions.
- Traditional managers generally focus on long-only equity, fixed-income, and multi-asset investment strategies, while alternative asset managers focus on hedge fund, private equity, and venture capital strategies. Increasingly, the line between traditional and alternative managers has blurred.
- The majority of asset management firms are privately owned. Portfolio managers who have personal capital invested in their firms or investment strategies are often viewed favorably by potential investors.
- Asset managers who focus on individual investors typically package investment strategies through highly regulated pooled vehicles (e.g., mutual funds or exchange-traded funds). Institutional-focused managers typically package their investment strategies in less regulated and more customizable product structures (e.g., separately managed accounts and limited partnerships).
- Institutional investors include several major segments: pension plans (both defined benefit and defined contribution), sovereign wealth funds, banks, insurance companies, and endowments and foundations.
- Among the major investment products offered by asset managers are mutual funds, separately managed accounts, exchange-traded funds, hedge funds, and private equity/venture capital funds.
- Three key trends in the asset management industry include the growth of passive investing, “big data” in the investment process, and the emergence of robo-advisers in private wealth management.
- The portfolio management process includes the construction, monitoring, and revision of an asset owner’s or asset manager’s portfolio. The process is represented by a sequence of activities that begins with understanding the asset owner’s entire circumstances—including objectives, constraints, and other preferences—and forms the basis for structuring a portfolio and formulating other portfolio decisions, such as investing passively or actively. The portfolio management process rests on a foundation of good investment governance, which includes the assignment of decision-making responsibilities to qualified individuals and the oversight of processes.