Asset Management

portfolio management Apr 29, 2021

“Asset management refers to a systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It may apply both to tangible assets and to intangible assets.” -Wikipedia

Asset management is a systematic process of developing, operating, maintaining, upgrading and liquidation of assets in the most cost-effective manner. The tangible assets may include real estate, vehicle or equipment. The intangible assets may cover financial assets, goodwill, human capital or intellectual property.

 Types of Asset Management Segments:

-          Financial asset management

-          Physical and infrastructure asset management

-          Enterprise asset management

-          Public asset management

-          Intellectual and non-physical asset management

-          Digital asset management

We are going to focus on financial asset management in this note. The asset management in this segment essentially has a dual-mandate – create growth in client’s investment portfolio via realistic returns, while minimizing any potential risks.

 Asset Management

Asset management is a service offered by professional managers, who are entrusted with investor’s capital to invest in a variety of investment products within the guidelines of the client's mandate. These institutions offer investment services along with a wide range to traditional and alternative products that might not be available to the average investor. The portfolio managers within the asset management company are given a limited power of attorney by the investor. The limit in this authorization is up to trading on investor’s behalf, without requiring his consent for every trade.

The most commonly used term “asset manager” refers to investment management, the financial services sector that manages investment funds (mutual funds, REITs, infrastructure funds or private equity funds) and segregated client accounts (separately managed discretionary accounts). The asset management company Asset management is part of a financial company that is dedicated to manage money and handle client investments. An Asset Management Company (AMC) can be part of a bank, brokerage house or it can be an independent entity.

Due to higher minimum account size (except in the case of mutual funds), the asset management service is generally available to only high net worth individuals, corporations, financial intermediaries, government entities, pension funds, and family offices.

 How Asset Management Works

Asset managers manage client portfolios based on client’s unique circumstances, risk tolerance, preferences, and specific financial goals. Portfolio managers identify suitable positions to meet client’s growth or income requirements, liquidity expectations, and tax management mandate.

In many cases, a client's ethical and moral values and personality also affect the asset manager’s decisions. For instance, an Islamic investor may ask the asset manager to follow the Sharia principles while managing his portfolio. This would then bind the portfolio manager to avoid tobacco, alcohol or even banking stocks. Or an environmentalist client may ask the portfolio manager to avoid investing in nuclear or nuclear-related companies.

High-end asset management firms have the resources and ability to cater to an affluent client’s extraordinary demands, which gives the client a bespoke treatment and experience. And, thus it is quite common for the relationship between investor and asset management firm to span over generations as client’s managed assets are inherited by heirs.

 Asset Management Firms for Average Investors

Some asset management firms opt to serve smaller investors as the latter do not have complex investment objectives. These firms create pooled investment structures such as exchange-traded-fund (ETFs), index funds, or mutual funds, which can be managed in a single centralized portfolio. This makes it easy for smaller investors to invest directly in the fund, or through an intermediary such as his financial planner or investment advisor. Since these products are not customized to any particular investor, and they are managed as a pool, the onus of selecting the right investment is entirely on either the client or his/her investment advisor.

Vanguard, one of the world’s largest asset management firms, focuses on lower-and middle-income investors, who might not have a large asset base to engage other asset management institutions.

Combination Asset Management Firms

Some asset management firms offer combined services for both – average small investors and high net worth individuals. J. P. Morgan is one such example where the company offers solutions such as mutual funds and other pooled structures to regular average investors (retail) while it also has a private client division for its high net worth clients.

 

Role of An Asset Manager

The role of an asset manager consists of understanding  macro and micro trends, identifying investment products suitable for the growth of a client's portfolio, and managing the client’s portfolio on an ongoing basis.  Understanding a client’s assets and his risk endurance level are also part of the asset manager’s job.

Types of Investment Products

AMCs are mostly known by the category of clients they serve. And, clients generally fall into one of three categories: (1) mutual funds (retail), (2) high net worth entities (individuals or corporates), or (3) institutional investors (e.g. pension funds). Generally, the asset manager will invest in equities, debt, mutual funds, commodities, alternative investment funds (AIFs), and real estate. The portfolio in most cases is a discretionary one, wherein the asset manager has the authorization to trade on investor’s behalf, with the former keeping the latter’s best interest at heart.

Difference Between Asset Management and Wealth Management

An asset manager focuses on investments typically for high net worth clients, while a wealth manager examines the financial situation of an individual (or family for that matter) to prescribe a wealth management plan best suited to protect and grow client’s wealth over the long term. The need to engage either of the two primarily depends on the investor's financial goals, and more importantly, the size of the wealth involved.  

Difference Between an Asset Management Institution and a Brokerage House 

Brokerage houses accept almost all types of clients. Although they are legally bound to maintain the high ethical standards, and serve their clients in line with the stated investment objectives and risk tolerance parameters, yet they are (in most cases) not responsible for their client’s losses. The brokerage business runs on the advisory model, wherein the broker obtains client’s consent for any and all trades. Brokerage houses earn their revenue by way of charging commission on trades.

Asset management firms have a fiduciary responsibility and thus have to maintain higher legal standards than brokerage houses. The main reason behind the bigger responsibility is the discretionary authority to trade investor grants to the asset manager. Failure to act in the best interest of clients can result in criminal liability for the asset management firm. They also tend to have higher investment thresholds than the brokerage houses, and they charge fees rather than commission. Fees can be either a fixed percentage, variable slab or a combination thereof.

Asset Management Companies and Specialization

Each asset management firm has its own investment philosophy, style, process and policy to manage client’s money. They all have their area of specialization. Some firms design financial services or products believed to have takers. These firms are more generalists than specialists..   

Some firms have a focused approach to investing such as passive investing or value investing.

Some firms only serve affluent investors through the separately managed accounts, which are actively managed discretionary portfolios. Some focus solely on hedge funds as they prefer to produce absolute returns. Some concentrate on managing money for institutions such as pension plans. And, some asset management companies provide their services to specific firms, such as managing assets for a property and casualty insurance company.

Who Are the Top Asset Management Institutions?

 Some of (believably) the best AMCs are based in the US that have global coverage of clients, markets or distribution. The five largest asset management institutions, based on global assets under management (AUM), in 2020 were BlackRock ($7.3 trillion), Vanguard Group ($6.1 trillion), UBS Group ($3.5 trillion), Fidelity Investments ($3.2 trillion), and State Street Global Advisors ($3 trillion). Pacific Investment Company (PIMCO), and Invesco Ltd, too, have substantial AUM . 

- Ramesh Sadhwani

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