It can be overwhelming trying to navigate the complex world of investing. Understanding the intricacies of global stock markets and knowing how to minimize risk and find hidden opportunities are beyond the capabilities of most Canadians.
This is why many investors turn to professional money managers. They’re able to open up a whole world of investment opportunities that individuals couldn’t access by themselves. But what exactly does professional money management entail and how does it deliver a superior investment performance?
Let’s take a look at the key aspects of professional money managers’ services, including:
- Their expertise and tools.
- How they deliver returns that are higher than the overall market.
- Their ability to minimize risk.
- How (and why) they consistently monitor and adjust portfolios.
We’ll also explore how financial advisors work hand-in-hand with professional money managers to create tailored investment portfolios designed to meet your unique financial situation.
What is professional money management?
Professional money managers work for various types of investments, including mutual funds, hedge funds and pension funds. They use their expertise, advanced tools and in-depth knowledge of financial markets to make investment decisions on behalf of investors. Their primary goals are to maximize returns and manage risk, all within the framework of specific objectives and risk tolerance levels.
Professional money management allows investors to benefit from their specialized knowledge, access to exclusive investment opportunities and their ability to execute complex strategies that are beyond most individual investors. Let’s break down the advantages that professional money management offers, piece by piece.
Expertise and advanced tools
Many professional money managers have decades of experience and deep expertise when it comes to choosing the best investment opportunities. They also have access to advanced, complex tools that allow them to analyze and interpret vast amounts of financial data.
These experts are often specialists, with even greater in-depth knowledge of:
- Specific sectors, such as energy, commodities and technology.
- Types of assets, such as growth equities or government bonds.
- Regions, such as North America, Europe and emerging markets.
This focus on specializations enables them to make extremely well-informed decisions on the factors that could influence the performance of various investments.
Advanced analytical tools
Professional money managers use cutting-edge tools, such as financial models, algorithms and data analysis platforms, to evaluate the performance potential of a wide variety of investment opportunities. These tools also help them calculate risk and monitor market movements in real time. This level of analysis goes far beyond what the average individual investor could achieve using online resources or personal research.
For example, fund managers might use a Monte Carlo simulation (a technique that’s also known as a multiple probability simulation), which helps money managers understand the impact of risk and uncertainty. It’s used to project the potential outcomes of different market scenarios and assess their impact on portfolios. They might also use fundamental analysis software to evaluate the financial health of companies. These resources allow professional managers to make informed, data-driven decisions that lead to less risk and better performance.
Generating alpha: how professionals can deliver outperformance
Generating alpha means delivering returns that are higher than the market as a whole, a market benchmark or an index. Benchmarks and indices are used to measure the average performance of a specific sector of the investment universe.
The S&P/TSX Composite Index, for example, measures the performance of around 250 of Canada’s largest publicly traded companies. If the index saw an increase in value of 6% in a specific year, and a money manager’s Canadian equities mutual fund increased in value by 10%, that fund would have generated alpha.
As you can imagine, generating alpha can be difficult. It requires a deep understanding of how the market works and the ability to quickly identify opportunities and risks, in order to outperform broader market trends.
Discovering bargains
Professional money managers are highly skilled at finding undervalued stocks, bonds and other investments that have the potential to grow considerably in value over time. By conducting thorough research, analyzing company earnings reports and studying market trends, they can pinpoint investments that have been overlooked by the general market but offer strong growth prospects.
Protecting your money
While delivering good positive returns is a crucial part of any money manager’s role, protecting capital is equally important, especially during periods of market volatility or downturns. Professional money managers have a variety of strategies to help minimize risk so that portfolios won’t decline as much as the market during periods of volatility.
Diversification
Diversification is one of the most important strategies that professional money managers use to manage risk. By owning different types of investments, from a wide variety of sectors and geographical regions, they reduce the risk you could have by owning a small number of stocks or focusing on any one sector.
Professional managers can also access a broader range of investment products (such as alternative investments like private credit and private infrastructure), whose performance is not tied to that of stock markets. This in turn provides even greater diversification.
Continuous monitoring
Markets are dynamic, so professional money management involves a continuous monitoring of both individual investments and broader market conditions, adjusting portfolios as necessary. This ongoing attention helps ensure that any emerging risks are identified early and minimized before they can cause significant damage to the portfolio.
Conversely, continuous monitoring also allows money managers to discover and invest in new opportunities as they arise.
Exclusive investment opportunities
Professional money managers often have access to investment opportunities that are not available to individual investors. These can include private equity, venture capital and other alternative investments that offer the potential for higher returns and/or greater diversification.
They’re also often able to invest in bonds before they become available to the public. By leveraging their networks, experience and relationships, professional money managers can access investments that are typically off-limits to individuals.
For example, many professional money managers can invest in private companies before they go public, opportunities that are usually out of reach for the average investor. Additionally, professional money managers often have better access to proprietary research and insights from financial analysts, which can give them an edge when making investment decisions.
Consistent portfolio management and rebalancing
A consistent, disciplined approach to management is crucial for a portfolio’s long-term success. Professional money managers follow well-defined strategies to ensure that their portfolios remain aligned with their clients’ goals, risk tolerance and investment timelines. One key aspect of this consistency is regular portfolio rebalancing.
Over time, as markets fluctuate, the makeup of a portfolio (known as its asset allocation) can skew away from its original target. For example, if a portfolio’s stocks outperform its bonds, its overall risk could increase substantially.
Professional money managers regularly rebalance portfolios by replacing overweighted assets with underweighted assets, ensuring that the portfolio stays in line with its original balance of risk.
Maintaining a long-term perspective
Professional money managers understand the importance of keeping a long-term perspective, especially during periods of market volatility or uncertainty. While short-term market movements can worry some investors, professionals rely on their experience and market knowledge to avoid making emotional or reactionary decisions.
This disciplined approach can prevent unnecessary portfolio changes, help investors stay focused on their long-term goals and ultimately bring about more consistent returns.
The role of a financial advisor: tailoring strategies to your unique goals
A financial advisor acts as the bridge between you and professional money managers, ensuring that their investment strategies fit in with your particular financial goals and circumstances.
Professional money management offers a wealth of benefits that can significantly improve your portfolio’s performance. From generating alpha and mitigating risk to providing access to exclusive opportunities and maintaining a disciplined, long-term strategy, professional money managers have the expertise, resources and tools to help you achieve your financial goals.
When paired with the personalized guidance of a financial advisor, professional money management becomes even more powerful.
Speak with an IG Advisor about how they can create an integrated approach to managing your investments, leaning on the expertise of money managers. They’ll help ensure that your portfolio is aligned with your unique objectives while being able to adapt to life’s changes.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Advisor.
Commissions, fees and expenses may be associated with mutual fund investments. Read the prospectus before investing. Mutual funds are not guaranteed, values change frequently and past performance may not be repeated. Mutual funds and investment products and services are offered through Investors Group Financial Services Inc. (in Québec, a Financial Services firm). And Additional investment products and brokerage services are offered through Investors Group Securities Inc. (in Québec, a firm in Financial Planning). Investors Group Securities Inc. is a member of the Canadian Investor Protection Fund.
