1.1.3 35–45 minutes · Read, practise, review
What you will learn
- Distinguish a firm, a fund and a portfolio.
- Explain the roles supporting an investment decision.
- Calculate a simple fee and distinguish gross from net return.
1.1 · Introduction to Investing
Introduction to Investing
Introduction to Investing · the work you will do
- 1Start with a purpose
- 2Identify the claim
- 3Trace the risks
- 4Explain the choice
Before you begin
A fund earns a positive return. Is that enough to judge whether its manager did a good job? List the other information you would ask for.
Take an initial view. Try the choices as you work through the explanations, then revisit your first view.
Video coming soon · about 4 minutes
How investing works
Use the narration below while the recording is being made, then try the decisions in this lesson.
Read the full narration
Welcome to On Judgement. A fund earns a positive return. Is that enough to judge whether its manager did a good job? List the other information you would ask for. Take a first view. You can change it when you have considered the evidence.
A firm has its own business model, staff, costs and clients. A fund pools investors' money under a specified structure and set of terms. The portfolio is the collection of underlying holdings. Funds are not the only way assets are managed: an owner can appoint a manager for a separate account or manage assets internally. The fund's objective matters. A global share fund should not be assessed as if it promised the stability of a short-term cash instrument. Equally, an exciting performance story does not excuse breaching agreed constraints.
Research explores business quality, finances, price and risks. Portfolio construction considers position sizes and how holdings interact. Execution concerns how and when a trade is placed, including price and transaction costs. Risk monitoring examines exposures and potential losses. Compliance supports adherence to applicable rules and arrangements. Fund accounting and administration maintain records and calculate relevant fund information. Settlement is the completion of a transaction through the exchange of securities and payment. Custody concerns safeguarding and servicing assets. Responsibilities vary by structure, market and service agreement.
Assets under management, or AUM, describe the value managed within a stated scope. A manager may charge a percentage of those assets. Other arrangements include performance-related charges. Product expenses and trading costs can also matter. A growing AUM total can reflect new client money, acquisitions or market movements. It does not alone prove good investment decisions. Gross return is measured before specified costs; net return is measured after them. Always ask which costs and period are included. A benchmark is a reference for comparison, not a guarantee or necessarily an investable portfolio without costs.
Investing teams select and oversee assets for portfolios. Investment banking includes services such as capital raising and transaction advice. Wealth management can include broader advice and portfolio services for individuals. Custodians safeguard and service assets; consultants can help owners design arrangements and select managers. Index providers define indices and data providers supply information. “Buy side” commonly refers to organisations investing capital; “sell side” commonly refers to businesses providing research, execution or market services to investors. These labels are shorthand. Assess the actual service, client relationship and potential conflicts rather than assume every firm fits one box.
Let's work through A fee is a cost, not a performance measure. A simplified portfolio starts with £1 million. It earns 6% before a fee of 1% of beginning assets. Ignore all other costs and cash flows. What is the ending value? Pause here and try the calculation or reasoning before continuing.
Gross investment gain: £1,000,000 × 6% = £60,000. Specified fee: £1,000,000 × 1% = £10,000. Ending value: £1,000,000 + £60,000 − £10,000 = £1,050,000. Net return under these assumptions: £50,000 ÷ £1,000,000 = 5%.
Real charges can use different valuation dates, tiers, expenses and performance-fee terms. This example teaches gross versus net, not a universal fee calculation. A quoted return already net of this fee must not have it deducted again.
Now try the choices in this lesson. If your answer changes, identify the reason. Calculate a simple fee and distinguish gross from net return. Use the case activities to put the idea into your own words, and return to the evidence when more than one conclusion is defensible.
Firm, fund, portfolio
A firm has its own business model, staff, costs and clients. A fund pools investors' money under a specified structure and set of terms. The portfolio is the collection of underlying holdings. Funds are not the only way assets are managed: an owner can appoint a manager for a separate account or manage assets internally.
The fund's objective matters. A global share fund should not be assessed as if it promised the stability of a short-term cash instrument. Equally, an exciting performance story does not excuse breaching agreed constraints.
The decision and its support
Research explores business quality, finances, price and risks. Portfolio construction considers position sizes and how holdings interact. Execution concerns how and when a trade is placed, including price and transaction costs. Risk monitoring examines exposures and potential losses. Compliance supports adherence to applicable rules and arrangements.
Fund accounting and administration maintain records and calculate relevant fund information. Settlement is the completion of a transaction through the exchange of securities and payment. Custody concerns safeguarding and servicing assets. Responsibilities vary by structure, market and service agreement.
The commercial model
Assets under management, or AUM, describe the value managed within a stated scope. A manager may charge a percentage of those assets. Other arrangements include performance-related charges. Product expenses and trading costs can also matter. A growing AUM total can reflect new client money, acquisitions or market movements. It does not alone prove good investment decisions.
Gross return is measured before specified costs; net return is measured after them. Always ask which costs and period are included. A benchmark is a reference for comparison, not a guarantee or necessarily an investable portfolio without costs.
Different services, different questions
Investing teams select and oversee assets for portfolios. Investment banking includes services such as capital raising and transaction advice. Wealth management can include broader advice and portfolio services for individuals. Custodians safeguard and service assets; consultants can help owners design arrangements and select managers. Index providers define indices and data providers supply information.
“Buy side” commonly refers to organisations investing capital; “sell side” commonly refers to businesses providing research, execution or market services to investors. These labels are shorthand. Assess the actual service, client relationship and potential conflicts rather than assume every firm fits one box.
A fee is a cost, not a performance measure
A simplified portfolio starts with £1 million. It earns 6% before a fee of 1% of beginning assets. Ignore all other costs and cash flows. What is the ending value?
- Gross investment gain: £1,000,000 × 6% = £60,000.
- Specified fee: £1,000,000 × 1% = £10,000.
- Ending value: £1,000,000 + £60,000 − £10,000 = £1,050,000.
- Net return under these assumptions: £50,000 ÷ £1,000,000 = 5%.
Real charges can use different valuation dates, tiers, expenses and performance-fee terms. This example teaches gross versus net, not a universal fee calculation. A quoted return already net of this fee must not have it deducted again.
Put it into practice
1. Assemble the team
Assign the most relevant function: investigate falling margins; decide position size; execute the purchase; check cash/securities delivery; safeguard assets; maintain fund records.
Apply the idea: discuss your reasoning, or add a short note where the task asks for one.
Compare with a model response
Analyst; portfolio manager; execution trader; settlement/operations; custodian; fund accounting/administration. Several teams can contribute and some functions may be outsourced.
2. Firm or fund?
A firm has 200 employees. One fund holds 40 shares. A second fund lends to private companies. Which statement describes the firm, which a strategy, and which a portfolio?
Apply the idea: discuss your reasoning, or add a short note where the task asks for one.
Compare with a model response
Employee count describes the firm. Private lending describes the second fund’s strategy. Forty share holdings describe the first portfolio. None establishes its quality or suitability.
3. Compare performance
Manager A reports 7% after fees. Manager B reports 7.5% before a specified 1% beginning-assets fee. Ignore other effects. What can you compare, and what remains missing?
Apply the idea: discuss your reasoning, or add a short note where the task asks for one.
Compare with a model response
Under the simplified fee basis, B nets 6.5%, so A has the higher net return for the stated period. We still need comparable risk, assets, mandates, currencies, cash flows and periods. A single period does not establish persistent skill.
Jargon buster
Fund
An investment vehicle pooling capital under stated terms.
AUM
Assets under management within a specified scope and date.
Gross return
Return before specified costs.
Net return
Return after specified costs.
Benchmark
A reference used to assess performance or exposures.
Settlement
Completion of a trade through delivery of securities and payment.
Custodian
A provider safeguarding and servicing investment assets.
Knowledge check
Choose on the page. Read the feedback, reconsider mistakes and use Try again to reset a question.
What to take forward
Understand the firm, the vehicle and the holdings separately. Assess the full investment process and compare returns on a consistent, cost-aware basis.