Esi & Mario: The world of fund managers

Mutual funds have been the more popular of the two types of CISs, constituting more than double the number of unit trusts.
Kwadwo Acheampong

Meet Sister Esi a trader at Mallam Atta Market who sells ‘ntoos’ (a corruption of tomatoes). On Saturdays, she never has time to idle. It is market day and Esi always intends to sell all her merchandise simply because ‘ntoos’ are perishable. She would sell them in wooden crates for the bulk buyers, and in polythene bags for those who bought smaller sizes, usually for their kitchens. It had been some fifteen years since she pitched camp at the market to sell tomatoes. During that time, she had built a strong network of customers she could count on. One of them, Mario, usually bought crates of tomatoes from her and would have them milled into paste and cooked into a puree.

One day, Mario came to her stall to purchase tomatoes. Through conversation, as she made ready his purchase, she asked him what work he did. Mario replied that he worked as a fund manager and helped those who invested to get their money to work for them. It was all confusing. How could money work for someone? How safe was the investment going to be? Mario smiled and told her he could explain. He sat with her for a long time, explaining to her how important it was for her to begin investment in securities and other investment assets. They discussed a lot of issues and he helped her understand what would she would not have considered. After a week, Mario opened an investment account for her, after explaining to her, carefully and without technicalities/jargons, how her money would begin to work for her. He helped her fill out the account opening forms, which comprised a ‘Know Your Client’ (KYC) form and an agreement form.

Careful and Calculated Esi

Mario explained to Esi that her investment was to be suitable for her. He set out to find out what her investment needs were. She needed money to take her son to the university when he was old enough. She needed to begin developing the land she had bought a few years ago so she would require a steady flow of money to meet that need.

Being a calculated and careful person in her early thirties, she classified herself as a medium-risk tolerance person and Mario agreed. Of course, she would be very angry if she lost a significant portion of her investment but she understood it was better for her to invest in a few securities which were likely to give high returns.

Esi wished to invest and see what the returns on investment after two to three years would look like. Thereafter, she would review and probably invest more money.

Armed with these details, Mario set off to draft an investment strategy and an asset allocation. These would be the framework within which the whole investment would operate and be guided by. Sister Esi transferred GHS 50,000 from her bank and he issued her with a receipt.  Her account was a managed account and a discretionary one. This meant that Mario’s company would be responsible for selecting which securities/assets without having to refer to her for her consent.

As a fund management firm, Mario’s company invested Esi’s money in different securities. Together, these securities formed a portfolio of securities or financial assets. Each security was selected based on recommendations of the Research Department of the company, highlighting its prospects as a suitable portfolio asset for the next two or three years, in keeping with Esi’s initial investment horizon.

Each class of assets had bounds of percentages of the entire portfolio. With time, the value of each security would change. A rebalancing would be required to bring the assets into conformity with the bounds. Some assets may be sold off while other may be bought to restore the original bounds as are spelt out in the strategy.

Periodically, the investment account performance would be reported to Esi.  Mario, in charge of her account, would prepare it in a very simplified manner for her to be able to appreciate what has become of her investment. He would show and explain the report to her and she would ask questions.

The initial three years came quickly and Esi’s investment had grown gradually. Mario’s company had not only nurtured the investment but the relationship between the company and the client. She was happy to see her investment intact and grown. Her tomato selling business had done well and she had an extra GHS70,000 to invest. Do you see it? That the exercise of Fund Management all begins with the client? Welcome to the world of fund managers.

A Fund Manager?

A Fund Manager is a licensed professional who offers a regulated service to clients with the view to helping them achieve their investment objectives. These services include the trading of financial assets in order to execute an investment strategy which is set with the client as the driver. Everything revolves around the client- the client’s desired time for investment (investment horizon), the client’s risk preference/tolerance, the amount of money the client invests, the client’s source and size of income, and the client’s age are all very important considerations for formulating an investment strategy.

What do fund management companies do to bring value to the investments of their clients, as we do here at OctaneDC? Is it worth talking to a fund manager before investing? Are there pitfalls?

Fund managers are licensed to operate in a way that safeguards the interests of clients. They have expertise to engage in investment advisory, strategy formulation, portfolio construction, research and portfolio analytics. They may be pension fund managers and they collective investment scheme fund managers. In both cases, they are responsible for taking investment decisions for the funds.

Fund management companies undertake wealth management usually for wealthy individuals, often referred to as ‘high net worth individuals’ (HNWIs). Wealth management is an investment advisory service that combines other professional services to address the complex needs of affluent clients such as investment advice, estate planning, accounting, retirement and tax services.

Additionally, fund managers may be engaged in financial planning or retirement planning. These may include advising clients on personal insurance needs, home insurance, planning for a second- or third-income stream and medical insurance.

Fund managers often veer into investment banking ventures such as corporate financial advisory, deal sourcing and advisory for mergers and acquisitions.  Investment bankers act as intermediaries between investors (who have money to invest) and corporate entities (who require capital to grow and run their businesses).

In conclusion, fund management is broad. However, the profession is very regulated, with similarities among certain participants. The central role played by clients cannot be overemphasized. In Ghana, fund management is growing steadily, especially with the growth of pension funds. Fund managers are very professional and intend to help clients meet their investment goals.

About the Writer

Kwadwo is a Senior Investment Analyst at OctaneDC Limited and heads OctaneDC Research. Prior to joining OctaneDC team, Kwadwo was a Fund Manager at Dalex Capital and has over a decade experience in fund management and administration, portfolio management, management consulting, operations management and process improvement. You may contact him at  [email protected] or +233244563530

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