What is Asset Management
September 4, 2023
What is Asset Management?
The professional management of types of investments on behalf of clients such as organizations, institutions, and individuals is referred to as asset management. Asset managers are in charge of overseeing their clients’ funds and making strategic decisions such as asset allocation, stock selection, and risk management. Their primary objective is to maximize the value of these investments while mitigating risks, which requires strong expertise across different asset classes, financial markets, and the broader economy.
Key Learning Points
- Asset management is a service that companies with expertise in money management offer to various clients such as institutions, governments or individuals.
- The primary objective these firms have is to provide the best possible risk-adjusted outcome (return) for their clients.
- The asset management service can be specifically tailored (a solution usually used by institutional clients or wealthy individuals) or ready-made, where investors select from a range of available funds (normally used by retail investors).
- In exchange for providing a professional service that requires a high level of expertise, asset managers charge their clients management fees which typically represent a percentage of the total amount invested. In some cases, performance fees may also be applied.
How Asset Management Works
Information
Asset managers offer a range of investment products that aim to help investors achieve their financial goals. They should provide all necessary information to the client to allow them to make an informed decision. This may include:
• The structure, target return, and anticipated level of risk of the investment
• Who are the people involved in managing the funds and what is the broader resource at a firm level
• Investment philosophy, process, and risk management framework
• Reporting frequency and other channels of communication
• Management fees
Asset Gathering
Investors’ funds are pooled together into a pre-determined product/s. By doing this, asset managers are using economies of scale and can achieve better cost and efficiency.
Management
Money management is an asset manager’s core function. They do the research of different potential opportunities (for example, companies’ shares and bonds), make a selection on behalf of the client, and are responsible for the ongoing monitoring and management of the investment portfolio.
Wealth Creation
Asset managers can help investors accumulate wealth by using their expertise to make decisions and achieve the best optimal outcome for their clients. This involves investing across multiple asset classes and constantly monitoring and managing aspects of the portfolio like absolute and relative returns, level of income and risk exposure.
Growth Creation
Asset managers have a direct impact on the economy as they provide the necessary capital for companies to finance their expansion. This creates growth opportunities within the sector or region (for example, real assets financing such as infrastructure).
Engagement
Asset managers should act as stewards and maintain and enhance the long-term value of a business. This can be achieved by actively engaging with company management and promoting suitable practices in terms of strategy and value creation.
What does an asset manager do?
In order to achieve the best possible outcome for their clients, asset managers perform a number of activities such as:
Research
Research is a core function within the asset management industry. It involves a deep dive into the market, economic climate, specific asset class, specific regions, individual securities and how all those affect asset prices. High-quality research output is absolutely crucial for asset managers as making informed decisions and appropriately assessing risk is at the core of running a successful strategy. For example, a team of analysts is producing research on European large-cap equities. They filter the entire investment universe and come up with a list of best ideas, which serves as a starting point for portfolio managers in establishing what company to include in the portfolio.
Portfolio Construction and Management
Here, the portfolio manager of the strategy is making important decisions about the asset mix in the portfolio (i.e. asset allocation), security selection, the frequency of portfolio rebalancing, liquidity and capacity management, and any other matters that may impact the performance and risk profile of the strategy. An example of this is an Emerging Markets Small Cap equity fund, where the manager is trying to identify investment opportunities with strong growth prospects. They create a concentrated portfolio of around 35 high-conviction stocks, but in addition apply strict criteria on stock’s liquidity and cash levels in the portfolio (for instance no less than 5% in any given point) in order to maintain healthy liquidity at a portfolio level and smoothly manage any redemption requests.
Source: Allocation Spotlight Summary
Risk and Performance Monitoring
Within each asset management firm, there are various levels of committees that have been charged with the ongoing monitoring of performance and risk. For example, an investment risk committee would normally assess the risk in the portfolio on a regular basis, depending on the asset class mandate that may be in the form of standard deviation of returns or (leverage, typically measured as the company’s debt-to-equity ratio) in underlying holdings for equities, or credit risk and duration for bonds.
Compliance
The compliance function ensures that all regulatory rules are followed and that activities such as money laundering and insider dealing are not taking place internally.
Relationship Management
Relationship management is a broader function that aims at making sure that the client receives the best possible service. For example, timely delivered and appropriate information about a strategy they are invested in, or information about upcoming products or services.
What is Investment Management?
This video explores the investment/asset management process and looks at the differences between individually managed and ready-made portfolios.
Asset Management Process/Asset Management Phases
There are several channels through which asset managers offer their services depending on the type of client, their specific needs and the scale of the investment. We can summarize the process into the following stages:
Market Research
This is the first stage at which asset managers need to decide what sort of product they will be launching in order to satisfy their clients’ requirements. Again, at this stage there are different approaches used, depending on what the client is.
For example, should the product be marketed to retail clients, it is likely that asset managers would first analyze what are the current trends in the retail investment space through data from sources like investment platforms, retail investment forums, consultations with analysts. Considerations around regulation are also crucial at this point.
On the other hand, institutional clients, for example sovereign wealth funds or endowments, would be offered tailored solutions also known as segregated mandates, to meet their requirements. In addition, they would normally receive preferential terms around management costs due to large volumes of money invested (i.e., economies of scale).
Product Design
This second stage is about putting all the information together and constructing the product. This is where all strategic debates occur, like who will manage the strategy, what the philosophy and investment process will be, and how risks will be managed. The formal objective, investment horizon, and what typical performance would look like during different market environments is also outlined.
A mutual fund is an example of a product that is targeted at both retail and institutional investors. One such fund is the Fidelity European Dividend, which aims to achieve income and long-term capital growth principally through investments in income-producing equity securities. For more information click here
Implementation
At this point it is really about bringing all the work done so far into real life. Implementation is mostly around the operational side of asset management and involves things like receiving the funds from clients, executing trades that were instructed by the portfolio manager, and making sure that everything that’s been agreed at the design stage is implemented.
Ongoing engagement
At this stage the product is already functioning. The key point here is to make sure that execution of the investment process and risk frameworks is consistent, and the client is receiving the desired outcome. In addition, regular performance reports are also put together to address how market and company-specific events have impacted returns over the reporting period.
Types of Asset Managers
Generally speaking, there are two types of asset managers, namely traditional and alternative. The first offer products within the more popular asset classes such as equities, fixed income, money market or property. Their client base could be quite diverse and may include both retail and institutional investors (such as pension funds or wealthy individuals).
On the other hand, alternative asset managers invest in a range of non-traditional asset classes that are typically not regulated and involve higher risk. Such strategies are associated with hedge funds, quant-driven funds, private equity and venture capital, and private debt. The more exotic strategies would go even further and invest in assets such as rare commodities and fine art. Alternative investments are relatively illiquid compared to traditional ones (for example equities that are traded intraday) and would normally have lock in period during which investors would not have access to their funds.
Below are the key differences between public and private investments that are associated with traditional and alternative asset managers respectively.
| Public Investments | Private Investments | |
| Ownership | Wider public ownership that can change day to day | Private ownership that is typically concentrated |
| Engagement | Shareholders can be passive holders and/or have their say at the AGM | Investors set up the strategic direction for the company and are directly involved in making key decisions |
| Information Availability | Publicly available – all material information that can impact the company’s share price disclosed | Usually not publicly available and only disclosed if certain privacy conditions are met |
| Accessibility | Relatively easy to access through different investment platforms | Still difficult to access, but the emergence of new structures like European Long-term Investment Funds (ELTIFs) aim to democratize the process |
| Liquidity | Higher level of liquidity and can be typically traded intra-day | Typically, lower level of liquidity and more difficult to sell. Sell opportunities usually arise during specific periods. |
| Valuation | Priced intra-day | Priced on a pre-determined periods (for example monthly or quarterly) |
How Much Does Asset Management Cost?
The cost of asset management is subjective and depends on the firm, the type of investments being managed, and the specific services provided, for example managing a small cap equity portfolio tends to be more expensive than running a large cap one since many factors like specialist research (required for an inefficient space such as small caps) and higher trading costs are adding up to the costs.
Example
An investment portfolio has an AUM of $100 million and the management fee is 1% per annum. In that case, the annual fee would equal to $1,000,000. This fee may be charged quarterly or monthly based on the average total value of the portfolio’s assets during that period.
In a study on fees and expenses across multiple geographies, Morningstar found Australia, Netherlands and the United States has the highest fees, Switzerland, Japan and the UK have average fee rates, and the lowest fees were found in Italy and Taiwan. Source: Morningstar, Fund Research and Insight, 2022
In addition to management fees, some asset managers also charge performance fees should they exceed their performance target. We explain this in detail in our blog
Examples of an Asset Management
BlackRock is the largest asset manager globally with assets under management (AUM) of $8.6tn invested across a number of asset classes such as equities, fixed income, commodities and multi-asset. The firm is also the parent company of iShares which is one of the Big Three index fund managers along with Vanguard and State Street, offering passively managed solutions. Headquartered in New York, the company has physical presence in more than 30 countries that acquire clients globally.
When it comes to alternative asset managers, Blackstone is one of the largest firms operating globally with an AUM of $991bn, with its head office in New York. The company specializes in private equity (it has been one of the largest investors in leveraged buyouts over the last three decades), real estate (mostly commercial), credit, infrastructure, hedge funds, insurance, secondaries, and growth equity.
Career in Asset Management
The asset management industry offers a wide range of opportunities across different functions and levels of seniority. It is one of the preferred exit routes for investment bankers due to its better work-life balance, being interesting and intellectually demanding, and still providing higher earning potential. Download the free guide to roles in asset management and explore the range of roles within asset management, including a detailed job description, required skills, educational requirements, and salary. Explore the different types of financial certifications.
The Portfolio Manager is an online certificate designed for those working in or looking to break into the asset management industry, with the goal of becoming a portfolio manager. The course is comprehensive covering the fundamentals of the buy-side to advanced portfolio construction.
Conclusion
Overall, asset management is an essential service that finds its use in many aspects of the economy. For example, asset managers could be used in managing state or private pensions, sovereign wealth, charities, or simply providing solutions for retail investors to better utilize their savings. Having the knowledge and expertise in areas like risk management, asset allocation, trading and operations, along with investing large amounts of money, gives asset managers clear advantage, but investors should also pay attention to the ongoing costs and charges as the higher they are the more they erode total returns.