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Размещено на http://www.Allbest.Ru/

Размещено на http://www.Allbest.Ru/

Government of the Russian federation

National research university Higher school of economics

Faculty of World economy and international affairs

Master of international business program

Master thesis

Topic:

Factors affecting international investment strategies' choice of investment management firms exemplified by companies originated from the US

Student Bekir Efe Sipahioglu

Research Advisor Maria Pinson

Moscow 2019



Table of Contents

• Introduction
• 1. Review on Theoretical Foundations on Concepts of Investment, Investment Management and Investment Strategies Used in International Financial Markets
• 1.1 Review of theoretical foundations on concepts of investment, investment management and investment strategies of financial institutions in international financial markets
• 1.2 Review of literature on the industry and international companies in the investment management industry
• 1.3 Review of literature on strategies in investment management and the factors affecting the choice of investment strategies of investment management companies
• 2. Approaches of Investment Management Companies to Investment Management in International Financial Markets: Cases on firms from the US
• 2.1 Industry Appraisal of International Investment Management: The Infrastructure and Operational Parameters in the Industry
• 2.2 Process of selection and implementation of investment strategies: Cases on Goldman Sachs Asset Management, Pacific Investment Management Company and BlackRock
• 2.3 Factors affecting investment strategy selection process by investment management companies
• 3. Findings, Implications and Recommendations from the Study
• 3.1 Results and key take-aways of the study
• 3.2 Implications and Recommendations for Businesses and Investors
• 3.3 Limitations of the current study, and the possible aspects of further research
• Conclusion
• References
• 

Introduction

Over the course of the past several decades, the terms “investing”, “investment” and “investment management” began to come into prominence. With broad-band and high-speed internet connections, developed financial infrastructures making it possible for national financial markets to have interoperability and interconnectedness amongst each other. There have been a multitude of developments, allowing financial markets to encompass the whole world and allowing investors to be able to have endless transactions and trade between one another. These developments came from the theoretical field, as well as from the industry, laying emphasis together on the topicality of the topic.

Nowadays, financial markets around the world are working with more interoperability, interconnectedness and interdependence every day. There are more companies from all around the world going public, more financial securities emerging for market participants and investors to trade every day.

In this study, our fundamental points of focus are the concepts of investment, investment management and strategies in investment management. What we endeavor to convey with the term “investment” is investment in financial asset classes, instruments and securities in international financial markets. In this connection, having a complete disambiguation was essential. Therefore, we have exerted to provide clear definitions of the terminology, nomenclature, and the concepts used and focused on in this study.

The aim of this paper is to start off by defining the terminology and classifications related to the concept of investment, investment management and the strategies in investment management. To do that, we referred to some of the respected studies in the academic field and reviewed how they defined the concepts. Later, we moved onto defining related concepts used in the theory and the practice side of it, after which, we have looked at the industry's development on a local and worldwide level from the standpoint of the theories that contributed to the evolution of the industry. In the second chapter, we have provided an industry appraisal by looking at the evolution and the growth of the industry by providing historical numbers as to how big is the industry, measured by some specific criteria that are used frequently in the industry. We present the results and insights from our study in the third chapter.

The object of this paper is “International investment strategies of financial institutions”. The subject of this paper is “International investment strategies of the firms from the investment management industry”.

The hypotheses of this paper are:

1. All factors affecting the choice of international investment strategies in global financial markets are mutually exclusive, thus the factors cannot be in existence jointly.

2. All factors affecting the choice of international investment strategies in global financial markets tend to be unique for all market participants, thus the factors cannot be classified in categories.

3. The concept of risk and return of an investment plays a two-dimensional role in the process of selection of an international investment strategy by an investment management company.

The main goal of this study is to ascertain if there is an accompanying or a contradictive connection between the practice that is executed and carried out in the industry by investment companies all around the world; and theoretical foundations of the concepts. In terms of investment strategies, we are intended to reveal if the strategies, mentioned by scholars in the theoretical review manifest themselves in the operations of investment companies operating in international financial markets, executing trading and investing activities on behalf of their clients and for themselves. The main missing piece of the state of knowledge of the authors was in-depth information about hedge funds and their investment strategies. Since most of hedge funds are private, they are not obligated to share in-house information with the public, consequently no data was found in the theoretical review as well. This paper is predominantly qualitative.



1. Review on Theoretical Foundations on Concepts of Investment, Investment Management and Investment Strategies Used in International Financial Markets

1.1 Review of theoretical foundations on concepts of investment, investment management and investment strategies of financial institutions in international financial markets

Over the course of past several decades, overall attention on the international investment management industry has been growing rapidly on a worldwide level. The attention has been on a broad range of the companies in the industry, starting from mutual funds and hedge funds, to investment banks and all sorts of other funds and firms of investment management.

However, before we elaborate any further; for the sake of arguments that are going to be provided throughout this study and in order to avoid any misunderstanding and misinterpretation of denotations, connotations or the context; some of the terms, concepts and notions should be investigated thoroughly and defined precisely, in terms of their interpretation, historical meaning and evolution of the association of ideas, from their first appearances in the literature to their modern and common usage in the present time.

As underlined by Drake and Fabozzi (2011) as well, more often than not, the term “investment management” is interpreted and used interchangeably with similar terms in the vicinity “asset management”, “money management”, and “portfolio management”.

Just like the majority of industries, industry of oversight and management of financial investments in international financial markets, investment management companies, wealth management companies, money and asset management companies has gone under a profound transition, with the ever-developing technology, increasing level of globalization and the unique way of interoperability and concordance of financial markets of various national financial markets, providing an interconnected, continuous, colossal and harmonious infrastructure of an almost single, connected, unique global financial market.

The concept of investment, as in, investing in financial markets and carrying out this activity internationally goes further back to the beginning period of the 18^th century. As specified by Grosu (2017): “(…) investment and investment activity is becoming one of the important factors for achieving prosperity and competitiveness of business. Despite the fact, that various scientists made reference to investments and their role in ensuring the development of countries as at the beginning of the 18^th century, the relevance of the investment activity of enterprises is increasingly pointed to nowadays, in connection with the transition to market conditions of management and the struggle for limited resources.”.

Grosu (2017) also defines the term “investment” as: “In the economic literature, investments are defined as investing capital for the purpose of its further increase. At the same time the capital gain should be sufficient to compensate the investor for the refusal to use temporarily available funds for consumption in the current period, reward him for the risk, recover losses from inflation in the future and bring the desired income.”

Brinson, (2005) in his study, where he analyzes the future of the industry, also makes a distinction into the definition of the activity of investing: “Investing is a process focused on future economic cash flows from business activities that ultimately determine the value of an investment.”

The very basic concept and the notion of the activity of investing has long been researched and investigated by many of the scholars from the sphere of business, management, economics and finance. To enumerate some of the well-known and established scholars and their respective theories that examine the notion on investment, a list of broad range names could be spoken of, starting from classical theories and the scholars behind them, namely Adam Smith to David Ricardo, early modern theorists starting from 30's to 70's, Eli Heckscher and Bertil Ohlin with their theory of factor endowment, neoclassical economist Irving Fisher, John Maynard Keynes, Evsey Domar, John K. Galbraith, Charles Kindleberger on his theory of competitive advantage of nations, and John Dunning with his theory of the investment development of countries. What follows in a parallel fashion, are the works and theories of investment and investment management from more of a microeconomic perspective and point of view of more minor entities and players of global financial markets, as in, instead of governments, companies that invest and manage investments in global financial markets, as the focus point of this study will be.

However, we should note, that historically, those earlier theorists and theories investigated the concept of investment and the ways and means to invest in the broadest meaning, and in the broadest sense of comprehension possible. Partly because of the fact that the one and only entity on the stage of investments internationally, was the state itself. Due to lack of technology, globalization, transparency, the presence of tariffs, quotas, politics of the states and the World Wars, for the most part, hindered the development of the investment sphere, getting the size of its scope that it currently has. Therefore, it took, more or less, decades, if not centuries for industry to actually transform into the state it is in right now. It also took scholars, theorists and researchers from the field to carry out and come to the conclusions they have been doing so in the past few decades. Consequently, the scope of the research has been narrowing it's concentration and focus down from states investing directly in each other to exploit their capital- and labor-wise specifications and resources, to financial institutions, banks, funds and other entities investing internationally, at a much larger scope and with a much greater detail and complexity, compared to the ways states have done it over centuries, with similar expectations and aspirations in financial markets, with their investments and strategies.

Earlier on, after economists like Smith, Ricardo, and Keynes propounded how the infrastructure and the trade between states shaped by investments, imports and exports should be structured in a way that it benefits countries to increase their wealth and gain an advantage over other countries in international trade; Irving Fisher narrowed this notion down to firms, managers and investors of those firms in the beginning of the twenty first century. Fisher propounded, the one and single motive driving all the entities and actors who take part in the process of investment is the maximization of net present value. (Fisher, 1907)

Having this development with theories in mind, it can be noted that the concept of investment and investment management started to account for the activities of investment of firms, along with the states, which was the main theoretical foundation of the concept, namely the international and macroeconomic approach.

Regardless of the fact, that the general topic “investing” has been attracting a lot of attention in the literature, and many studies have been conducted around the topic, a middle ground has yet to be found, and scientists do not seem to be meeting on a common ground in defining the concept in a strict and a precise way. Therefore, a clear distinction of meaning for the concept of “investment” and hence, “investment management” should be made within the framework and scope of this study, due to the fact that the concept can undertake several meanings in the industry or practice, or in the literature or theory, as it already has been interpreted in a multitude of ways, having more than one meaning over the years as it is seen in a plethora of studies. Grosu (2017) in his study states: “… the concept of investment has been variously interpreted and used with several meanings. This concept is treated, either quite narrowly and contradictorily, or by attributing it quite extensive and expansive meanings. Moreover, there is no common scientists' opinion regarding the concept of “investing”. Some theorists have attempted to highlight the most important characteristics of the investments made at the micro- or macroeconomic level, insisting, more or less on certain features, that are detrimental to others.”

From the second half of the twentieth century moving forward, the interpretation of the investment concept has drawn nearer to the modern usage that is also being used in the twenty first century, by the virtue of studies of Markowitz. In his earlier studies, he argued, what is also known now as general rules of modern investing by systematic approaches through a portfolio. He underscored and connected the dots between two major and arguably opposite components of investments to each other, namely the risk, and the reward, as in profitability of an investment into any given asset, or financial security. (Markowitz, 1952: 7) Hence, with Markowitz's “Modern Portfolio Theory”, it can be concluded that the main factor, affecting the investor's decision and choice of any particular investment behavior or activity, whether it is a company investing in financial securities at home or internationally, or it is an individual investor doing the same thing, would consist of an attempt to maximize the expected income or profit from that particular investment as much as possible, and to minimize the risk as much as possible.

In terms of risk, what is being tried to get across, is the possible maximum drawdown in the price or return from that asset or security compared to the time the “investor” decides to carry out his investment activity into that asset, which can be measured either by percentage points, or it can be stated in numbers, as in the difference between prices.

Kahn (2018) construes Markowitz's definition of risk and concludes: “(Markowitz)… mathematically defined risk as the standard deviation of return and proposed that portfolio selection should follow from the optimal trade-off between expected return and risk. Before Markowitz, investors understood risk as roughly related to the probability of loss.”

After defining the concept and the notion of what is meant with the term “investment”, we shall attempt to define what is meant the management of the term of investment, as with the term “investment management”.

In a broad sense of interpretation, investment management is comprised of management and oversight of processes of activities, pertaining to the concept of investment. Fabozzi and Markowitz (2011) argue: “The investment management process involves setting investment objectives, establishing an investment policy, selecting an investment strategy, constructing the portfolio, and measuring and evaluating investment performance.”

In this context, the majority of the investment management companies' work dynamics and investment management processes primarily consist of steps similar to each other. They collect money from their clients, they invest the clients' money in financial securities as a proxy, and they distribute the returns back to their investors in the case that they generate positive returns and generate income on their investors'/clients' money. (CFA, Indus Capital, Ellis Partners).

Based on this premise, it now can be stated, that the focus of interest of this study in the aspect of business, “investment management companies” will be international companies that operate in the field of investments and investment management, serve their clients on the whole spectrum of the concept of investment management. Investment companies lay out their objectives of their own inhouse processes, they plan, compose and structure their policies, rules, implement strategies that are applicable, suitable with their parameters and feasible for them, they can either invest their client's money, acting as an investment advisor, financial advisory intermediary or an investment vehicle; or they can provide alternative turn-key investment products that are ready-made for their retail and institutional clients and customers to invest in. They also might have their own proprietary trading operations, acting as an individual entity in global financial markets, carry out and manage their own investment activities, compose, construct and monitor their own portfolios, and then monitor and review the results of their investment activities periodically by benchmarking or comparing the returns from the investments to a selected benchmark rate, returns from investments done in the past, internal rate of return, or a stock market index of a country, which is selected as benchmark.

As mentioned earlier, until the time that the overall interconnectedness and the growth of the infrastructure of global financial industry allowed participants and entities in the market operate internationally in a fast and constant manner to achieve objectives set with their expectations of investments, in terms of maximizing the return from their investments; the meaning of the concept of investment was narrower than it is now. It can also be mentioned that, from the point of view of another researcher, the concept of “investment” can be interpreted in two ways, one would be the broader perspective, the basic premise of which is that the term investment should be understood as the usage of monetary funds and resources to purchase tangible assets such as plant, property, and equipment, along with the financial securities which take place through financial intermediaries such as banks, or transactions at the stock exchanges. The term “asset” in this context also refers to the financial securities investable and marketable securities that are not tangible and that can easily be bought and sold through the means of financial intermediaries, banks, brokerage companies, funds; or on financial exchanges even without the presence of third parties. The other way of understanding the concept would be the economic perspective, which underscores the activity of acquisition or procurement of new assets in the economy, and the term “asset” in this contexts refers only to physical and tangible assets. (Prelipcian, 2009: 6)

Grosu (2017), after thorough examination of the economic literature, concludes his study by stating, that the scholars, researchers and practitioners still have not found a precise definition that is accepted by everyone in both the theory and the practice side of the industry, in terms of the understanding of the meaning and interpretation of the concept of investment. This is partly due to the fact that there are different activities and operations of investment that take place simultaneously in various industries and areas, the scope of which are not quite identical to one another, in spite of the fact that the ways, the means, and even the expectation of the outcome might be similar.

What also has been widely seen in both by theorists and practitioners, is the close connection between the investment operations and overall economic development of countries, and even global growth as a whole. Starting from this point of view, it also has been seen in the literature, how many of the widely-appreciated and established scholars and researchers have been putting a strong emphasis on the link between the concept of investment, and economic growth of countries and the world as a whole.

In the context of investment and investment management, an asset means a financial security that can be bought and sold in financial markets, however, before we go any further into investment objectives and parameters of the infrastructure of global investment industry, what should be clearly defined is what we try to convey, when we use the term “asset class” in the context of investing and investment management. Even though there are much more asset classes in the context of investment in global financial markets, and other types of financial products, investable securities and asset classes will be touched upon and examined further in the study, we will first have an attempt at defining what traditional asset classes are. In this context, Anson, Fabozzi and Jones (Fabozzi, Markowitz, 2011: 16) state: “… How do we define an asset class? There are several ways to do so. The first is, in terms of the investment attributes that the members of an asset class have in common. These investment characteristics include:

- The major economic factors that influence the value of the asset class, and, as a result, correlate highly with the returns of each member included in the asset class

- Risk and return characteristics that are similar

- A common legal or regulatory structure.”

Consequently, based on this definition, it can further be noted, that, as enumerated by Anson, Fabozzi and Jones (Fabozzi, Markowitz, 2011: 15-16), for the most part, there are four main and prevalent asset classes change hands in global financial markets. These are common stocks of publicly traded companies, government and treasury bonds, cash equivalents and real estate.

These four major asset classes can also be cascaded and broken down into sub-categories to have a more detailed picture in terms of the types of asset classes. This classification is not the lattermost classification, due to the fact, that some asset classes and investable securities are subject to changes and existential obstacles due to the regulatory infrastructure of that financial jurisdiction, and laws of that particular countries. Some asset classes are either completely non-existent, or not permitted, or discontinued to be investable by the local, or foreign investors or companies.

In this study, since the fact that the principle focal point will be companies and firms originated from the United States from an international business perspective, the asset classes that are available, widely common and invested in internationally by the companies from the US will be utilized as a base, in terms of the definitions, since the US is known as arguably one of the most developed and pioneer countries and financial jurisdictions in terms of global financial investments, whether it is on a macroeconomic scale, or a microeconomic scale.

Based on this premise, we can continue to define asset classes that companies and participants of global financial markets from the US constantly invest in, Anson, Fabozzi and Jones (Fabozzi, Markowitz, 2011: 15-16) argue: “From the perspective of a U.S. investor, for example, the four major asset classes listed earlier have been expanded as follows by separating foreign securities from U.S. securities.

1) U.S. common stocks

2) non-U.S. (or foreign) common stocks

3) U.S. bonds

4) non-U.S. bonds

5) cash equivalents

6) real estate

There are also so-called “alternative” investments to the traditional ones in financial markets, which are harder to define than the traditional ones. In the literature, some researchers have defined them as stand-alone asset classes that are entirely separate from traditional asset classes.

Another evidence for the wide-spread prevalence of the categorization of asset classes this way is the book of Peterson Drake & Fabozzi (2017: 395), in which, they also classify investable assets in four major categories as stocks, bonds, cash equivalents and real estate, their reasoning behind this logic is linked to fact that the returns from the asset classes aforementioned not being highly correlated.

When it comes to the presence in the history, and literature of the term and activities of “investment”, there are scholars who even date the existence of investment and investment management as early as around 2,000 B.C., in terms of a presence of a functioning financial market. (Goetzman, 2016) Other mentionings and citings can be attributed to ancient Rome having corporate shares of some type of companies that are akin to what is nowadays termed as a limited liability company. (Malmendier, 2005: 32), and Italian city-states having government bonds in the twentieth century (Kahn, 2018: 20).

After the first, indefinite and ambiguous traces of some components of the concept of investment and investment management as a whole process, other sightings and mentionings of the type of companies and markets that belong to this spectrum and the process of the given concept followed one another in quick succession.

Different parts of investable securities, assets or entities could be seen from earlier times to the modern times, starting with the first sightings of Dutch Investment Trusts, which acted close to their present time counterparts, within the scope of which their investors were able and entitled to obtain shares in an investment portfolio that is diversified in 1774, according to the Rouwenhorst (2016). Following that, more complex and developed types of investable securities and assets manifest themselves in the United Kingdom and the United States, especially in the nineteenth century, starting with the royal acts for joint stock companies and limited liability companies that were heralded and came into being in during the 1800s. The essentially constituted proceedings and the modus operandi for individuals to establish a joint stock company for prospective investors to invest in. The first British mutual fund was also founded back then in the 1868 for the goal of “(in diminishing the risk of investing) … spreading the investment over a number of different stocks.” (Bullock, 1959: 2)

In modern times, especially with the beginning of 20^th century, the origins have started to emerge and be riveted in the literature of investment management. It would be safe to argue that modern literature has branched out in an educational and instructional fashion, in a way that new works were supposed to have practicability and be feasible in the financial markets; whether they comprised a new theory, attempting at proving new notions or concepts, or arguments, trying to disprove earlier theories.

On the back of the emergence of works in twentieth century, the concept of investment was also re-defined along the way. In one of the studies that is widely accepted as one of the cornerstones of the literature, within the context of investment and investment management; Graham and Dodd (2009: 106) define the concept as: “an investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

In this manner, they also try to draw a hard-to-misinterpret line between the concept of investment, which is tightly-coupled with finance and economic sciences, carried out based on scientific analysis using financial and macroeconomic data, and a kind of gambling which consisted of arbitrary and indiscriminate decisions of buying and selling financial securities, completely on a whim, only in the hope of attaining high returns and profits that are based on the luck of the draw without conducting any type of systematic processes, scientific analysis, or taking into account sets of economic, financial or other types of relevant data.

Another sea-change in the literature, that laid the groundwork for more modern and scientific approaches to hold sway over the industry and the academic studies that followed later on, was the implementation of multifaceted and elaborate mathematics and sophisticated computational methods in comprehension of investments in the theory of investment value. (Williams: 1938)

Markowitz's studies (1952) again played a significant role for the industry in the same connection, especially in terms of calculation and computations of two of the main components of investing in global financial markets; risk and return from the securities and/or assets. He argued, in a portfolio of various assets or financial securities invested in (the investment portfolio), what really mattered is the portfolio's overall movement in risk and return, as an aggregate measure of all the assets and securities invested in, inside the portfolio, as opposed to expected risk and return characteristics for individual assets and/or securities invested in.

Through the instrumentality of the earlier studies, more scientific, more mathematical and more systematic ways started to be duly admitted and adapted. Furthermore, due to the framework laid out by the earlier studies, the concepts of diversification and portfolio investments started to take root in global financial markets, widely by investment management companies, acting as participants on their own, or as financial advisories for their international clients. The clients of investment management companies could be international companies that look to venture into financial markets in an attempt to generate profits through investing in financial assets and securities that have low correlation to each other in a portfolio, and a potential to rise in price in consideration of their fundamental specifications, technical qualities and macroeconomic and financial data.

Kahn(2018: 33), acknowledges the way how Markowitz's framework of risk and return, and the concept of correlation of assets in a portfolio and portfolio investment as: “This says something remarkable. If we can forecast returns and risks, investment management is then a mathematical optimization problem.”

The only problem about making the calculations in terms of expected risk and return of the financial assets and securities in the first half of twentieth century was the availability of capabilities and subsistence of computational facilities. Notwithstanding that some framework approaches were relatively easy and calculate with basic mathematical and financial formulas and not-so-time-consuming to apply to financial assets; the existence of thousands of assets to invest in, and ever changing characteristics of their price, risk, and volatility, and data made it quite challenging in a way that the period into inception of application of these frameworks took some decades into 1980s and 1990s for technology to be much more achievable and prevalent for companies in the industry.

With successive developments in the industry and technology, new theories, currents of thought and approaches to both risk and return, emerged, guiding the narrative in financial markets for investment managers and companies to steer their modality in investment.

After Markowitz's approach, new theories and models took the lead in assessing risk and reward of any type of investment. To instantiate and mention a few highly notable ones, chronologically, Treynor (1961), Markowitz's student Sharpe (1963), Lintner (1965) and Mossin (1966) with their studies. Together, they are accepted as the inventors of one of the most widely accepted and used financial models of nowadays, known as the Capital Asset Pricing Model, which essentially aims at helping the decision making investor establish or compute a required rate of return for an asset, or a financial security, in order to come to a conclusion or a decision, whether it is suitable or favorable to invest in an asset or not. The theory is still largely taught as a classic textbook theory in economics and finance, and largely applied in macroeconomics and investment management.

The unearthing of the capital asset pricing model by theorists also supported and precipitated the emergence of a new type of an investment product for investment companies and investors; mainly known as index funds. It was due to one of the inferences that was brought about by the capital asset pricing model. One of the interpretations of results of CAPM as a study was, as explained by Kahn (2018): “If the market is efficient and has the highest ratio of expected return to risk, then investors should want to own it.”

The term in this argument “the market” refers to the overall stock market index of a country, e.g. The S&P500 Index in the United States.

In terms of the development of theoretical foundations for the concept of investment and investment management industry, after the CAPM influenced both the theory and the practice side of the industry, another theory has been started to have repercussions in the industry. Fama (1970) in his study, propounded that assets and financial securities in markets reflect and represent all the information that is publicly available to be known by every participant of the market, meaning, that every single incident, development, narrative and set of data that is capable of moving the prices of assets up or down is known in that very moment by every single participant of the market, thus, preventing the possibility for opportunities being there for investors to buy assets that are undervalued relative to their fair value, so that there is a possible opportunity for investors to make profits buying the asset while it is undervalued, thereby, with enough time, their investments will be worth more through capital appreciation brought by prices coming to their market equilibrium through the medium of dissemination of news or other factors and data. In other words, the concept of “buying low and selling high” an asset does not have any practical value, because, all the available information is already priced in and reflected in the prices, so there is no undervaluation or overvaluation in the price of any asset for buying in an attempt to selling it for a higher price and making profits, or selling an asset short while it is overpriced, in an attempt to buying it back or closing the short positions and making profits. Fama's hypothesis was one of the most prevalent hypothesis in the worlds of financial economics, macroeconomics and investment management. It also successfully furthered the existence and accelerated the rapid development of funds like index funds, market funds and aggregate funds, which will be detailed later in the study.

In the matter of the Efficient Market Hypothesis of Fama (1970), Kahn, in his study (2018) construes: “The efficient market hypothesis became the basic assumption active managers needed to overcome. And as sometimes happens in academia, the efficient market became such enforced dogma, that it strongly discouraged any work on market inefficiency by finance and economics professors for the next 30 years or more, to the detriment of the ivory tower.”

Later on, into the 1970's, these works in the literature that have been prevalently tracked both by scholars and the professionals in the industry have finally materialized as an investment product by Wells Fargo Investment Advisors in the US financial markets with the term “Index Fund”, and as an embodiment that reflects the characteristics described in the studies discussed in this paper.

The first index fund was merely an investment product that's primary job was to act as a portfolio that invested in equally about one thousand and five hundred publicly traded stocks that were available for investors on the New York Stock Exchange. The emergence of the first index fund in the US, and the fact that the company and its product have definitely laid the initial groundwork and paved the way for the appearance of many other firms to come out with new products, and, concurrently, add to the evolution of the overall industry.

The number of index funds that aim at indexing and investing a large quantity of assets altogether easily rose rapidly. It was due to the academic foundations brought by earlier studies, and especially the efficient market hypothesis that puts a great emphasis to how efficiently information and data is disseminated and distributed to investors, which results in absence of mispricing or assets inefficiently priced in financial markets, so that there are opportunities for investors. Shortly after that, a counter view was emerging in the academy, that, again, was going to influence the industry and lead the way for the emergence of another ways and means in the financial markets for investors and investment management companies to invest in and present to their customers.

After a period, in which, the hypothesis of efficient markets hold sway over both the theory and the practice side of the industry, another academic work started to strike root and be discussed amongst the scholars and practitioners. The work of Black and Scholes (1974), just like the title suggests “From Theory to a New Financial Product”, was trying to find its way around to different types of investment products for market participants to invest in, other than the prevalent method of investing in index funds and equally weighted passive market portfolios that aim to act as a mirror of the overall stock market itself, disregarding the active management of portfolio selection; in other words, disregarding any type of thorough analysis of financial securities and assets in an attempt to find any asset that may be underpriced or overpriced to be positioned and invest either in favor of, or against the asset's future price. The paper was, in essence, trying to prove the existence of those opportunities for investors to generate profits through examining and analyzing financial securities in the market.

In the works of Sharpe and the capital asset pricing model, there was one and only aspect that was described as the factor affecting, shaping and driving the correlation between financial securities and assets, which was the market itself, in which the assets were traded. Rosenberg (1974), later on, attempted at raking together many more up to sixty different factors in an attempt to depict correlation in the US stock market. The author made a clear distinction in terms of the types of risks that could be found in a portfolio, the study defined the risks that are common and constant for stocks of all companies in the US equity markets, also the risks that are not common, unique and idiosyncratic for stocks, thus, elaborating, advancing and fine-tuning the computation process of forecasting possible risks for stocks. The study also has drawn on various investment strategies and styles which were widely implemented and opted for by market participants and investment management companies. These will be touched upon further in the study. The factor models created and first presented by Rosenberg are still used and drawn on in the industry by investment management companies to oversee and forecast the risk for trillions of dollars' worth of assets under management of many of these companies.

Just as the same time, another study by Ross (1976) was emerging in the academia, contextualizing one of the putative theories, namely the capital asset pricing model, in a framework, where the expected returns from an investment into a financial security or an asset have an immediate relation to the risk factors of the given asset or security. The arbitrage pricing theory was rather a new point of view, compared to the existing theories back then, on account of the fact that the study propounded that the investors, or the market participants could ascertain their possible return from an investment, and they can do so in a flexible way, starting with defining their risk factors related to the investment activity they are about to make.

There has been another development in academia and the financial industry that needs to be mentioned in the historical and theoretical context of the evolution and foundations of the concepts of investing and the investment management industry. This development, not so ordinarily, came from a different field of academia called behavioral finance. It examines concepts and events in finance through the perspective of human psychology and tries to offer both explanations of these events in financial markets, as well as the behaviors of practitioners and investors as to why these usual and extraordinary events take place in financial markets. Furthermore, it strives to explain why investors and investment managers behave the way they do in the face of these regular and extraordinary events. It does so, through the instrumentality of assumptions that are sourced not only from finance and economics, but also from the psychology of the participants and practitioners, and the psychological factors, notions and contributing causes that have a driving effect on the participants in financial markets.

Some studies contributed the change of the bias towards the conclusive validity of theories like efficient market hypothesis. It contributed with the reasoning of psychology, in a way which tries to explain human interaction and behavior in the financial markets, propounding that participants and human behavior might not be as not completely rational as the theories that predicate on complete and conclusive rationality, and, by extension, efficiency of dissemination of information in the markets and the premise that every single participant in the market has equal access and opportunities in accessing all the information available for them in the markets. Consequently, if human behavior in financial markets was not as completely rational as the earlier theories suggest, it could mean that the concept of efficient markets, and the ramification of the concept of efficiency, in which, assets and financial securities in financial markets are believed to be priced hundred percent accurately, might not be rational as well. Capocci (2013), in the context of investment management, describes the concept of behavioral finance as: “a strategy based on identifying recurrent errors in the markets generated by human behavior.”

In this particular connection of financial markets not being as rational as it has been believed to be, and market participants not behaving and interacting in the market as rational as they are believed; another theory contributed partly to the change of this belief with compelling arguments. In their study, Grossman and Stiglitz (1980), underline the argument that information is not free, and definitely costs money and time. It follows that there is a possibility for market prices of financial securities and asset not to be able to reflect all the information available to market participants at all times, and this possibility is high enough not to be negligible. Mason, Agyei-Ampomah and Skinner (2016), make mention of the study: “markets should be inefficient enough to reward analysts or investors for the cost of their analysis. Collecting information, arbitrage and trading are both costly and risky, therefore markets might be competitive but still informationally inefficient”. This argument justifiably resonated within the industry and augmented the proportion of companies that follows active management, as opposed to indexing and creating new index funds, which is the opposite of active management.

The arguments of Grossman and Stiglitz also made foundational and fundamental contribution to the emergence of another type of investment management companies, namely the hedge funds. Getmansky, Lee and Lo (2015) also comment about the work of Grossman and Stiglitz: “…(the authors) argue convincingly that perfectly informationally efficient markets are an impossibility. If the markets are perfectly efficient, there is no profit to gathering information, in which case there would be little reason to trade and markets would not exhibit the volume they currently do. Alternatively, market efficiency is not a binary state but rather a continuum; the degree of market efficiency determines the effort investors will expend to gather and trade on information.”

Another topic, that has also been a trend on both the theory and the practice side of the concept of investment, attention to which has been growing rapidly in parallel with the studies on the concept of investment. This was defining the performance of the activity of investing in financial markets and as to how practitioners should rank and compare their results on specific time frames to their own results, and the results of other managers, practitioners and companies.

Just as different movements of thought have been observed in the industry, different movements of investment methods and styles based on those theories have also been observed. Accordingly, the concept of measuring different processes of investment came into prominence very quick. This type of academic debate was in order to discriminate between active and passive management of the assets, determining which investment strategies and styles have the upper hand on the other in different times and under different types of macroeconomic data, selecting an appropriate investment approach for a given country, region, asset class.

In this subchapter, we have built out our terminology in the study going forward by defining the concepts that we are going to draw from and keep building on. We then looked at the theories that influenced the course of theoretical evolution of the concept of investment the most.

On the purpose of extending the lexicon of terms, we have given some of the most used and accepted examples as to how some of the terms in the industry defined by scholars in the first places. The principal focal point in this first subchapter was the point of origin of the idea that lies behind this paper; the concepts of investment and investment management. And we are now We are now going to move onto defining the industry of investment management and companies in that industry operating on an international scope, so that we can work on them in the second chapter where we will lay out the operational real-life parameters and do an industry appraisal.

1.2 Review of literature on the industry and international companies in the investment management industry

We have outlined the historical evolution of theories, that brought up many developments for practitioners and companies in the industry to draw on, and structure their activities, along with their strategies. Consequently, we now should touch upon the industry and the international business side of the concepts we have mentioned in chapter 1.

We have defined the concept of investment and investment management in the previous subchapter. Now, we will look at companies that operate in the industry, providing an overall industry appraisal by looking at the historical development of the evolution and structure of the industry. We will also define and detail the companies, the types and sub-types of those investment management companies, ascertain the peculiarities, differences and similarities in between, and look at their activities, operations and motives that lie behind the logic of those operations. We will also be examining closely their styles and strategies in financial markets as to why they choose to follow specific approaches and strategies and what sorts of factors drive them towards selecting those strategies and approaches.

According to Anderson, Born and Schnusenberg (2010), the term “investment companies” refers to businesses that have “investors” as their clients, and are companies that offer services of managing investment portfolios, or that companies that keep those investors' books for them. They underline the amplitude of those companies, especially in the United States. In their book, they define a total of five types of companies in the investment management industry.

They are:

1) Open-end investment companies which are also known as mutual funds

2) closed-end investment companies

3) unit investment trusts

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