The distribution of assets in trust
Various definitions of asset classes is widely debated, but four common class is shares, bonds, real estate and commodities. Implementation of the distribution of funds among these assets (and among individual securities within each asset class) is what they pay for the firms investment management. Asset classes exhibit different market dynamics and different interaction effects, thus, the allocation of money among asset classes will have a significant impact on the performance of the Fund. Some research suggests that allocation among asset classes has more predictive power than the choice of individual holdings in determining portfolio returns. It can be argued that the ability of a successful investment Manager consists in constructing the asset allocation, and separately the individual holdings, so as to outperform certain benchmarks (e.g., peer groups of competing funds, bond and stocks).
Long-term profitability of the investment portfolio
It is important to look at data on long-term income through investment in various assets, and return on investment for different periods of ownership (return on investment on average over different periods of time). For example, over very long holding period (e.g. 10 + years) in most countries, equities have generated greater profits than bonds, and bonds have generated more profit than cash. According to financial theory, this is because equities are riskier (more volatile) than bonds which, in turn, riskier than cash.
Diversification of the investment portfolio
On the background of asset allocation, Fund managers consider the degree of diversification that makes sense for a particular client (given its risk preferences), and accordingly make a list of the planned possessions. The list will indicate what percentage of the Fund should be invested in specific stocks or bonds. The theory of portfolio diversification was put forward by Markowitz (and many others). Effective diversification requires managing the correlation between return on assets and return responsibility, internal problems in the portfolio (individual holdings volatility), and cross-correlation between the profitability of different types of assets.
Investment management styles
There are a number of different styles of Fund management that the institution may adhere to. For example, growth, value, growth at reasonable price (GARP), market neutral, small capitalization, etc. Each of these approaches has its own characteristics, followers and, in varying financial situations, distinctive risk characteristics. For example, there is evidence that the style of “growth” (buying rapidly growing earnings) are especially effective when the companies able to generate such growth is not enough; and, conversely, when such growth is plentiful, there is evidence that the style of “value” as a rule, shows a particularly high success rate.