The business of investment management involves a multitude of functions, each critical to its overall operation. Some of these facets include employing professional fund managers, conducting extensive research on individual assets and asset classes, handling dealing and settlement processes, marketing strategies, internal auditing to ensure compliance with regulations, financial control, and the preparation of comprehensive reports for clients. Large financial fund management firms exhibit a high level of complexity due to their scale, involving various specialized roles such as compliance staff, internal auditors, financial controllers, computer experts, and "back office" employees responsible for transaction tracking and fund valuations for numerous clients.

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However, there are several key challenges associated with running such businesses:

1. Revenue Volatility: Revenues are directly tied to market valuations. A significant drop in asset prices can lead to a sharp decline in revenues relative to costs.

2. Sustainability of Performance: Maintaining above-average fund performance consistently is challenging. During periods of poor performance, clients may lose patience and seek alternative options.

3. High Cost of Talent: Successful fund managers are in demand and can be expensive. Competitors often headhunt these talented individuals, posing a challenge for firms to retain skilled professionals.

4. Dependency on Individual Skill: Superior fund performance may be attributed to the unique skills of a specific fund manager. However, clients prefer firm-wide success driven by a unified philosophy and internal discipline rather than relying solely on individual capabilities.

5. Wealthy Analysts Exiting Corporate Employment: Analysts achieving exceptional returns might accumulate substantial wealth, leading them to manage their personal portfolios instead of working for corporations.

Regarding shareholder representation, institutions often hold significant shareholdings but act as fiduciary agents rather than direct owners. Although shareholders theoretically possess substantial power through voting rights, in practice, they often do not exert influence due to the dispersed ownership structure, with financial institutions sometimes acting on their behalf. There's a growing belief that these institutions should actively engage in influencing companies in which they hold shares to hold management accountable and ensure effective board functioning.

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However, determining how institutions should exercise this power poses challenges. Whether to vote based on majority opinion, proportionally split the vote, or respect abstainers' views remains an ongoing debate. Large active managers' actions, such as selling significant positions in a company, can send price signals that contribute to management change. Some institutions accumulate substantial minority shareholdings (10% or more) to pressure management for significant business changes, while others believe in a more persuasive discourse approach rather than directly influencing management decisions. Some major investment managers advocate for a strategy of owning every company without exerting control to foster better investment decisions through a more open relationship with management teams.

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The national context greatly influences shareholder representation considerations. For instance, the USA, with its litigious nature, sees shareholders using legal leverage to pressure management, while in Japan, management and labor often tend to prioritize their interests over shareholder rights, operating within a stakeholder mentality emphasizing consensus among various parties.

Size of the global fund management industry 

As of the latest available data up to my last update in January 2022, the global fund management industry had been experiencing steady growth over the years. In 2021, the industry's assets under management (AUM) reached significant figures, reflecting its substantial size and impact within the financial landscape.

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At that time, the global fund management industry's assets under management were estimated to be well over $100 trillion USD. This included a wide array of investment vehicles such as mutual funds, exchange-traded funds (ETFs), pension funds, hedge funds, sovereign wealth funds, and various other types of managed assets.

The industry's growth trajectory was influenced by various factors, including market performance, investment trends, regulatory changes, and shifts in investor preferences. The continuous influx of funds into investment vehicles managed by professionals and institutions contributed to the overall expansion of the global fund management industry.

Please note that the specific figures may have changed since then due to market fluctuations, changes in investor behavior, or other global economic factors. For the most current and precise data regarding the size of the global fund management industry, I recommend referring to recent reports from reputable financial research institutions, industry associations, or financial publications. The three elements—Philosophy, Process, and People (the 3-Ps)—are crucial aspects that help elucidate why a manager or an investment organization may achieve above-average results.

Philosophy encompasses the fundamental beliefs guiding investment decisions. It involves the overarching principles that dictate the manager's approach, such as preferences for growth or value shares, perspectives on market timing, reliance on internal or external research, and supporting these beliefs with evidence-based statements. A clearly defined philosophy forms the bedrock upon which investment decisions are made.

Process refers to how the investment philosophy is put into action. It involves the practical steps taken to implement the overarching beliefs. This includes defining the asset universe considered for investment, the criteria for asset selection and timing of purchases and sales, decision-making protocols (individual or committee-based), and establishing controls to prevent aberrant fund behavior that deviates significantly from the intended strategy.

People are the individuals executing the investment strategy, particularly fund managers and the supporting team. Understanding who comprises the team, their selection criteria, hierarchy, experience, and how well they comprehend and align with the philosophy and process are vital. Longevity and stability within the team are especially crucial, as consistent

performance might not necessarily correlate with the current team if there has been significant turnover.

Ethical Principles can significantly influence investment decisions. Ethical or religious beliefs often guide how money is invested. For instance, Christians may follow Biblical principles, while certain religions may adhere to laws that restrict interest charging. Ethical investment concepts, like those initiated by the Quakers against involvement in the slave trade, have led to the development of ethical investment practices.

Aligning investment strategies with ethical principles allows investors to not only pursue financial gains but also to invest in a manner that resonates with their values and beliefs. Ethical considerations increasingly play a role in investment decisions, giving rise to the field of socially responsible investing (SRI) or Environmental, Social, and Governance (ESG) investing, which takes into account ethical, environmental, and social criteria alongside financial returns.

Investment management firms often communicate their approach to the 3-Ps and ethical principles to clients, providing transparency and clarity regarding their investment strategies, decision-making processes, and alignment with clients' ethical considerations.