[MUSIC] Hi everyone. Investment management in a nutshell. That's the purpose of this video. I often get asked whether investment management is an Art or a Science. Difficult question, to which I generally answer, it's a combination of both. And you will see throughout this course, that there's a number of tools you can use to assess whether the markets are fairly valued, over, undervalued, whether there are some interesting assets you should invest in. But, it's not an exact science, it's also a question of feeling. And when we talk about feeling, we talk about emotion. And that's the interesting thing we have now. We study so-called behavioral finance, i.e., the integration of emotion into a more broader rational thinking. So by the end of this video, you will know what question you should ask yourself if you want to be the investor or your customer. if you want to be In the asset management industry and you're advising clients as to their wealth management. And you will also know about which type of risks you should focus on. Because investment management is a lot about knowing the underlying risks of the instruments you're using in your asset allocation. Talking about asset allocation, the key here, and I will give you some elements on this issue, is to differentiate what we call strategic from tactical asset allocation. And you will see in this video what is the difference between the two concepts. So, investment management is about knowing your needs, your constraint, your risk tolerance, or that of your customer if you're advising that customer. Understanding how each asset class, and we'll talk about that in detail. We'll talk about equities, we'll talk about bonds, about cash, about hedge funds, commodities, real estate. How each of this asset class works and the risks which are inherent in this asset classes. And last but not least, you have to decide whether you want to be, what we call an active investor. And by that, we mean someone who believes that you can actually beat the market, you can actually do better than the average investor or the market. Or, if you want to be a so-called passive investor, here you're not aiming at beating the market but you are aiming at just replicating the market. Obviously the latter option is cheaper than the previous one. We'll see that throughout the schools that investment management is about managing risk. And that's indeed the key to successful investment management. There are various types of risks. Country risk. A country can be subject to a political problem at some point, and so the authorities, the government decides to shut the borders. And also there's some restriction on capital movements, or the money you've invested actually cannot be exported out of the country. So, that's what we call the country risk. Very often, and indeed in this early in January of this year, we've seen a lot of turmoil emanating from China. A lot of questions whether the slowdown, the economic slowdown there will be soft or hard. And there's some also policy errors, possibly which have been made in China. We have the renminbi, we have the yuan. The devaluation is hurting investors' confidence, so there's a lot turmoil. And it's affecting also markets in developed countries. And that is the market risk. Currency risk, also attached to that. Well does the currency always for instance, we'll talk about Japan. We'll see that a call often is to go in Japanese equities, if we talk about the stock market. But at the same time, hedge against the currency risk, because the policies that favour the stock market actually impact negatively the currency. So you should treat them separately. And you can be positive on the stock market but negative on the currency because there's a currency risk. Liquidity risk. If you're investing in what we call small caps, i.e., firms which have a small capitalization on the stock market. Well, the problem with this is that their liquidity is less. And when everyone is rushing for the exit, sometimes everyone wants to sell, and nobody wants to buy. So these stocks get hurt really badly when there's what we call a bear market. And you will see what we mean by a bear market. There's also the inflation risk. We will see that in details when we talk about bonds. Clearly, if you're investing in a bond, you'll get your capital in maybe ten years time. Maybe you will demand a higher interest rates, because over the period there may be some inflation down the road which will impact negatively on your capital when you get it back. There's also what we call a shortfall risk. That is the risk that your capital undershoots your targets. You have some needs. Maybe you're a retired person and you have some income needs that's important for you. And if you're below that, well it hurts your annual income and that can be a problem. The key here to manage all these risks is diversification. Clearly, that's a rule that comes regularly. If you put all the eggs in the same baskets, at some point, you'll get a problem, okay? So, we see that investment management is a two-step approach. On the one hand, you have your objective, you, as an investor. Or your client's objective, if again, you're advising a client on his wealth management. And that, the profile, the investment horizon, the risk tolerance, whether you're shooting for income or for growth, all that defines your profile. And that goes into what we call your strategic asset allocation. The outcome will be, maybe that you need over a horizon of five to ten years, the optimal asset allocation is 10% cash, 40% fixed income, and 50% equities. Once you have defined the strategic asset allocation, then you move on to the tactical asset allocation. And here, it's basically something that you will adjust. We talk about underweighting or overweighting the US market, the Japanese market, emerging market debts. Or the various components which enter the asset class. And you do this by looking at the macro picture, by looking at valuation and things like that. And the two combined, the strategic and the tactical asset allocation, form what we would call portfolio construction. So, investment management is a lot about knowing yourself if you're the investor again, or knowing your customer. What kind of investor are you? Are you looking for income? Are you're looking for growth? Do you want to be implicated in the investment process? Or would you rather give that to the specialist that works and does the wealth management for you? And again, you have these two things that you should differentiate. You should shoot for a strategic asset allocation for the long run but then adjust this asset allocation on a tactical basis. Depending on what you view, the macro picture, some technical analysis possibly, also that it can be used as a complimentary tool. Market volatility, market events, and valuation. Do you believe that US market is too expensive or the European one? Things like that, that help you adjust the markets and your bets on a tactical basis. [MUSIC]
