Pension pots, portfolios and the art of long-term investment

Fund management is about investing other people’s money and earning a fee for the privilege – be it from the man on the street or from large investors such as pension funds.

Fund managers (also known as asset managers) broadly fall into two camps: ‘active’ and ‘passive’.

Active fund managers use their skill to build portfolios that can beat the market average and often take bigger risks for better rewards.

By comparison, passive management, or index tracking, involves selecting a portfolio of assets whose change in value will match that of the changes in a financial index – such as the UK’s FTSE 100, Eurostoxx 50 in the eurozone, the Dow Jones Industrial Average in the US and the Hang Seng Index in Hong Kong. Simply creating returns that match the market is known as ‘generating beta’.

However, within these two categories, the array of fund management styles is huge. For example, two contrasting styles are ‘bottom up’ investing – where a fund manager focuses on analysing individual stocks or securities – and ‘top down’ investing, which relies on analysis of ‘big picture’ trends in the economy, financial sector or individual industries.

Key players

Roles and career paths

Investment roles — These are about actually investing money managed by the asset management firm. People in investment roles are usually analysts, who scrutinise the best companies and products in which to invest, or portfolio managers (otherwise known as fund managers), who are responsible for investment decisions on a range of funds in their area of expertise, be it equities, fixed income or alternatives.

Distribution roles — These cover sales, marketing, product development and client servicing, and are about selling a fund manager’s services to the clients who invest their money with it, and maintaining good relationships.

Graduates starting out in a fund management firm begin as research analysts, working closely with the portfolio managers, visiting companies to assess their investment potential, and sifting through buy and sell information and company reports.

After a training period, usually around three years, during which you’re likely to undertake the Chartered Financial Analyst (CFA) qualification, analysts on fund managers’ investment programmes typically take one of two routes. You could become a senior analyst, focusing on a particular industry or region and broadening your knowledge to suggest investment ideas or strategies.

Or you could move on to become a junior fund manager, where you learn how to take the investment decisions directly and shape portfolios and investment strategies.

As in investment banking, there’s a range of middle-office jobs in fund management in areas such as compliance, technology, operations, performance measurement and risk management. The higher-paying roles are in investment and distribution, however.

Pay and bonuses

Compensation in the asset management sector doesn’t reach the dizzy heights of investment banking, but it’s still a very well-paid industry.

In the UK, on average, total comp in the sector was £156k ($250k) in 2011, according to specialist asset management remuneration consultancy PRPi. A junior portfolio manager (a position attained after around three years) in London should expect a salary of £60k-80k ($96k-129k), according to recruiters Robert Walters. In Germany, fund managers earn €70k-100k ($86k-124k) after three to seven years, which rises to €90k-130k ($110k-160k) after seven years’ experience.

In the US, the largest asset management hub in the world, pay is higher.

According to a report by Johnson Associates and Greenwich Associates, average compensation for equity portfolio managers is $850k, while the range in the fixed income sector is $340k-525k.

In Singapore, a junior portfolio manager salary is S$72k-120k ($57k-95k), according to Robert Walters, rising to S$190k-350k ($150k-280k) at the senior end.

Skills sought

Don’t expect an easy ride as a fund manager – you’ll need to be an expert at filtering large quantities of data, and to be passionate about investing.

You’ll also be heavily judged on your performance: one fund manager told us it’s like “being a student taking a test every single day and getting a grade, and that grade is then published in the newspaper”.

Fund managers generally take on a smaller number of graduates than the banking sector, and the skills needed differ wildly, suggests Mark Burgess, chief investment officer at Threadneedle.

“In investment banking, you’re generally advising clients and trying to persuade them to do things. But you can’t make and implement decisions yourself,” he says. “However, as a fund manager, you manage a portfolio as an investor. We don’t have to persuade people to do things, we do things ourselves. We are investors rather than advisors.”

As competition has intensified in recent years, the reality is that fund managers are now expecting their graduate recruits to be more prepared for the job market than ever.

“For a career in asset management, do major coursework in finance, economics, accounting or mathematics,” advises James Keenan, managing director of BlackRock’s leveraged finance group and senior portfolio manager for its high yield fund in the US. “Since competition for employment may be higher than ever, set yourself apart by joining investing clubs or working with your college or university’s endowment. A lot of schools now have programmes or classes for top students who can work for or even manage part of the endowment.”

This is reflected in the level of responsibility given to junior fund managers – all firms will run their own in-house training schemes, but an understanding of financial markets before starting the role is a distinct advantage.

Being a good fund manager isn’t just about an ability to analyse company reports, track the machinations of the markets and make the right decisions. Fund managers should be naturally inquisitive people, keeping up with current events, whether that’s a technological breakthrough or a political change within a particular country, and understanding the implications for future investment ideas.

“From the beginning they’re given responsibility for coming up with investment ideas in their area for the fund managers to implement,” says Burgess. “We teach them how to analyse companies, market patterns, and particular kinds of product. Over time, they become more experienced, get more responsibility and, after five to seven years, will become fund managers themselves.”