Investment companies use a number of different ways to cut the costs of research, and these cost cutting measures are becoming increasingly popular.
One group of investment companies uses the services of a company that serves all the funds in the group. Another investment company has, for some years, employed an advisory council to make recommendations. The council consists of leading security analysts of brokerage firms, who are expected to receive their compensation from orders that the firms with whom they are associated may execute. The council only has advisory functions. Decisions are made by the board of directors.
In recent years, greater attention has been given to economic research. An economist is more frequently employed as a member of the research staff or, in other instances, may be named as a member of the board of directors. A perceptive economist can undoubtedly be useful in the management of investment funds. His function is not to judge individual securities. Rather, he considers the broad influences on the economy, such as Federal Reserve credit policy, the role of imports, changes in commodity price levels, trends in population, productivity, antitrust policy, and the like.
The research staff and the board of directors may also be periodically furnished with data on gross national product, production and profit trends, and similar information. This provides a survey of the general economic environment rather than a judgment on the wisdom of a particular investment. For example, the outlook for construction may appear to be dubious to the economist, but the analyst may conclude that the stock of a building materials company has declined to a point where it merits consideration as an investment.
It has taken some time for investment company managers and security analysts to realize that economists are not "too theoretical" in their approach. During the early 1930s, economists lost favor because so many both in the academic and the financial world had completely failed to recognize the financial abuses of the late 1920s or to appreciate the severity of the Great Depression.
The ultimate decision on portfolio changes, i.e., on purchases and sales, is outside the scope of the research department. Some investment companies are devoted to the committee method of decision; they believe that no single person is competent to weigh all the factors that enter into a decision and that committee participation reduces the likelihood of error. Other companies allow individuals to assume primary responsibility for such decisions.
Whether one man or a group decides, an investment company official who makes or participates in making the final decision on investment policy should be trained in the interpretation of financial statements, and be something of an economist, sociologist, constitutional lawyer, student of industrial developments, and judge of comparative values.
No one individual possesses all of these qualifications. Yet, the most difficult task in investment company management is optimum use of the specialist coupled with awareness of the limitations imposed by the very nature of the specialist's work. This calls for wisdom in applying the results of specialization by putting the segments into their proper places in the general scheme. Judgment cannot be gained from books. It is the result of more than factual knowledge or experience alone.
Judgment involves knowing what to reject as well as what to accept. It is an intricate process, often involving courage to go contrary to general opinion even in well-informed circles. The ability to discard preconceived notions, to weigh facts and forces objectively and to be flexible enough to admit even tacitly the error of previous judgments is a rare quality, yet vital in achieving more than run-of-the-mill success.