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Professional investment management:
Making the right choice.
By Norman C Sdhaffer
SOLOMON SMITH BARNEY, Inc.
Even the most experienced investors may find identifying the
right investment opportunities at the right time a challenge.
That’s why more and more investors who haven’t the time, inclina
tion or resources to manage their investment portfolios themselves
are turning to professional investment managers for advice.
Choosing the best manager for your portfolio is itself a challenge.
Before you make any long-term commitment of capital to an invest
ment management firm, you should know about the capital markets,
risk/reward parameters and the most popular investment styles.
Understanding the capital markets. To develop an appro
priate investment strategy, you need to understand the historical
relationships of the stock and bond markets, and how inflation can
impact investment returns and erode purchasing power. If you're
an investor with a long-term view, you may want to consider
equities as part of a diversified portfolio, to improve your return
potential and protect your wealth from inflation.
Risk versus reward. Think of risk as the degree of certainty
with which future investment returns can be predicted. Different
markets and investment management companies carry varying
levels of risk. Generally, as the potential for investment reward
increases so does the likelihood of increased risk. Equities, al
though potentially rich in terms of reward, will almost always be
riskier than corporate bonds or Treasury securities.
¢ Since no investor wants a high-risk/low-return investment, and
it’s unrealistic to expect a low-risk investment to generate high
gwards, somewhere between these two extremes you must seek to
iind the risk tolerance that matches your investment tempera
ment. The investment manager you choose, then should work
within the risk parameters you’ve established.
¢ Investment styles. Different investment management styles
and the various investments employed within these styles produce
different results in terms of growth, income and risk. The following
are some of the most popular management styles.
¢ - Value style: Value managers tend to perform better than the
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market when the market is trending down while providing close
(plus or minus) to market returns in a rising equity market.
Managers seek companies with anticipated growth in earnings per
share, increasing dividends or excess market returns with less risk.
- Contrarian style: Contrarian managers expect to perform very
well in down markets and should participate well in up markets.
Managers focus on out-of-favor companies at depressed prices.
- Growth style: Growth managers seek high-quality, small to
mid-capitalization companies with high current and expected
earnings per share. A growth style is appropriate for investors
seeking above-average, long-term total return, mostly through
principal appreciation; however, they should be able to tolerate a
higher level of portfolio fluctuation over the long-term as well.
- Aggressive growth style: Aggressive growth managers typically
invest innon-S&P 500 companies with small to medium capitalization
and accelerating earnings per share. Here again, since an aggressive
growth portfolio may fluctuate dramatically over time, aggressive
growth investors should be able to tolerate this level of risk.
Once you've determined your investment style, the next step is
to identify a compatible investment manager, one whose style
matches your own. But remember, your investment management
program does not end with the selection of a manager. You must
have a means of measuring your results versus your objectives and
relative benchmarks, such as the S&P 500. You’ll also need to
evaluate your portfolio and your manager on a consistent basis, in
case adjustments are necessary if market conditions or your
financial circumstances change.
If you choose to seek the advice of a professional investment
manager, Smith Barney can help you clarify your investment
objectives and risk tolerance, find appropriate professional invest
ment managers and regularly evaluate whether or not the invest
ment management program you’ve chosen is meeting your goals.
If this approach appeals to you, or if you would like to apply any of
these ideas to your own financial management, please do not
hesitate to call.
Mr. Norman C. Schaffer is a financial consultant with Solomon
Smith Barney, Inc. One Tenth Street, Suite 600, Augusta, GA
30901, (706) 724-2601
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AUGUSTA FOCUS MAY 14, 1998
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