1/8/11

What is Asset Management?

Before getting into the why, we first need to examine what exactly asset management is. In general terms, an asset manager is a fund that offers a wide variety of assets to investors. Here's how the traditional asset manager functions from @BlackHat:

The standard form of asset management is a long-only strategy designed to offer investors various levels of equity exposure in certain industries, company sizes, and whatever else they may please. In general, there are three different types of investors that utilize these services: retail clients via mutual funds, high-net worth individuals via separately-managed accounts, and institutional investors via large dedicated products.

Funds vary depending on the type of investors they serve and, by extension, the rates they offer. @BlackHat illustrates the three different types of funds:

  1. The first type of funds deal with the greatest amount of money, therefore they deal with institutional money. The typical rate is .5%, it only gets higher if the fund is absolutely top notch. How an asset manager secures institutional money (securing funds is also known as "flow")) is by a bidding war of sorts. Institutional money sends out a request for proposal to all of the top asset managers, smaller but well-known firms, and any specialty firms in the asset class they're trying to invest in. Pensions, endowments, brokers, and private wealth are all of the customers that dominate this type of asset manager, they form the bulk of the institutional money.
  2. The second type of asset manager is the mutual fund.

    Mutual funds generally cater to the retail investor as well as the institutions mentioned above. Fees here tend to be around 1% in most cases for actively managed funds, but can be significantly lower with funds that are a lot larger, and south of 15bps in most types of passive fund, usually 10bps and sometimes even lower.

  3. The last type of asset manager is high-net worth. High-net worth is less performance driven and more relationship driven.

    Clients have much different objectives than your typical institutional money and therefore things are a lot more sticky, fees can be slightly higher, etc. though more and more the industry is seeing high-net move away from being a direct relationship, as financial planners and consultants are making the investing decisions for these individuals and things become a lot more institutionalized and formal.

Why Asset Management?

Now we know the what, it's time to go over the why. Most of the buzz in finance is centered on investment banking, private equity, and hedge funds. The reality is that asset management isn't nearly as sexy as the above, and it never will be. But that perception exists primarily among undergrads; people worth their salt understand that asset management is a very rewarding career.

Compensation

Research associates (the most common position at an asset manager out of undergrad) make less than in bankers (less than $130k). Analysts make roughly comparable pay to associates $200-300k, although it's not the compensation that makes asset management a highly desirable career.

Lifestyle and Culture

Asset management isn't a highly desired career among undergrads, but the hours certainly aren't the cause. Asset managers typically have 40-60 hour work weeks. As a rule of thumb, the larger the fund, the more hours you'll put in. You start with around 3 weeks of vacation time and can work your way up to 5 weeks of vacation time. The lifestyle in asset management is without a doubt its most appealing trait.

Due in large part to the lifestyle in asset management, these funds tend to have a far better culture than the typical finance firm. There's significantly less turnover, and more development/promotion from within.

Career Path

While it depends on the fund, the general career path, in some form or another, is analyst to portfolio manager. Some may start out as a research analyst/associate pre-MBA, while others will start directly as an analyst. Most start as a research associate where they support analysts and portfolio managers. Post-MBA, you move into an analyst role and in 5-15 years get promoted to portfolio manager.

Geography

Unlike banking, private equity, and the like, asset management isn't exclusive to major cities. Want to work in a prestigious finance job with a view of the beach? There's a job in asset management for that (often times private wealth management).

Exit Opportunities

In asset management, the general exit opps for an analyst with 2-3 years of experience is to either get your MBA and CFA and move to a larger, more prestigious fund, or to transition to a hedge fund. Asset management may not offer the same versatility that investment banking does, but if you're pursuing investing as a career, then it'll suit you far better.

Breaking Into Asset Management

Prior to getting excited about pursuing asset management directly out of undergrad, understand that breaking in is a process that involves a lot of luck. Generally, top asset managers only recruit from top target schools. They look for people with a track record of investing, they want to be convinced that you are going to pursue investing as a career.

Boutiques, on the other hand, rarely have openings due to low turnover. The teams at an asset management boutique are very small and tight-knit, and they're willing to develop and promote talent from within. As such, finding a position with a boutique asset manager is more a shot in the dark than anything.

Besides on-campus recruiting, sending out your resume (you'll up your chances if you include a well-done stock pitch) via email is a solid option for sniffing out open positions with any boutiques. The next step in getting a full-time position in asset management is the interview.

asset management interview

If you prepare for one thing going into asset management interviews, prepare for the stock pitch.

Beyond that, here are the main topics of discussion that transpire in AM interviews from @Bowser.

  • Walk through your resume
  • Why buy side?
  • Why this firm?
  • Why their investment strategy?
  • Pitch a stock (aim for 2-3 minutes - know it extremely well and tailor it to their strategy. i.e. focus on tangible book, ROIC,FCF if value fund, EPS/margin upside if growth fund)
  • Be ready to pitch another stock (have seen a lot of people know one name perfectly, but then go completely silent when asked to pitch another idea. Best to know one name like the back of your hand, and have another name or two that you can pitch - long or short - from a high-level)
  • Be able to walk-through various valuation methods

If you keep up with the market and know these bullets cold, then you're in good shape for the interview.

Certifications During Undergrad

Popular thought dictates that the more certifications you have to prove your interest and capability in finance, the better. The reality is, the one certification that will help you most is largely unnecessary to fulfill during your undergrad stint. The CFA level 1 certification would, without a doubt, boost your appeal to potential employers and open plenty of doors, but you need to wait until senior year in college to take it. By this time, you'll hopefully have a full-time offer under your belt, so unless you want to eventually tackle the CFA it's not necessary. In the case that you don't have a full-time offer come senior year, completing the CFA level 1 can only help.

The best thing you can do to position yourself optimally is to get a good GPA, network when you can, and secure relevant internships. Any experience in case competitions, finance clubs, and investing clubs is tremendously helpful as it demonstrates your interest in finance, something that will get you past many resume screens.

In addition, keeping a paper portfolio can be massively helpful. It shows interest and passion, and it clearly separates you from the pack.

Asset Management vs Hedge Funds

We've already discussed what an asset manager is, but what exactly is a hedge fund and how do they differ? Primarily, the difference between the two lies in the performance fee hedge funds obtain. Hedge funds are incentivized to get the greatest returns in the shortest period of time, this leads to a greater risk profile and a greater deal of flexibility. Additionally, hedge funds promise absolute returns. Opposed to asset managers who benchmark themselves against the market or some monolithic performance standard, hedge funds vow to always produce the greatest return possible.

As you might have gathered, despite hedge funds trading the same types of securities, they're vastly different due to hedge fund's considerably more aggressive strategy.

So which type of fund would you be better off pursuing out of college? Here's @BlackHat on why asset management is the better choice, at least directly out of undergrad.

Asset Management gives you stability that you just won't find at 95% of hedge funds, and your development as an investor will be the primary focus of the research team rather than immediate expectations of concrete performance... unlike hedge funds, AM people don't tend to bounce around a lot (unless maybe at certain "up and out" types of places like Fidelity) and therefore developing young talent becomes infinitely more important than just scooping up experienced hires like HFs want. HFs are very rarely concerned with succession planning... and it couldn't be more different at an asset manager.

Technology vs Private Wealth Management

Private wealth management is an enticing career to pursue. You have to be able to sell to make a career out of it, which is something most people will struggle with. But for those who do end up making a career in PWM, the possibilities are lucrative. An MD at PIMCO will make something around $25m, more than pretty much any CEO on Wall Street. The top performers in PWM will make far more than their peers at equal levels in banking, and it's not even close.

There are concerns that technology, specifically fintech (financial technology), is going to wipe PWM off the face of the earth. This concern is based on a few things:

  • Regulations potentially harming the industry
  • Lower fees fintech can provide
  • Increased sophistication of tech

From the outside in, it makes sense that fintech will one day subvert private wealth management. The reality is, however, that human interaction is an intangible tech will never be able to provide. There are many individuals out there who would pay a premium fee for PWM rather than the cheaper fee fintech can offer. It's a business built on trust and investment advisory, and humans are far easier to trust with millions of dollars than robots.

Additionally, a good portion of PWM consists of tax advice and clever capital allocation. With the constantly changing political landscape, this is a service best provided by humans. That's just it, PWM is a service-based industry. While fintech will certainly take its slice of the pie, PWM is very much so here to stay.

Original Thread

Alright guys, interviews are coming up so im wondering what you guys think the best way to answer this question is. There are threads about ibanking and others but none that i found on Asset Management.

Comments (9)

1/8/11

Because I love making money, and taking one percent a year from ultra rich people too stupid to manage it on their own seems like one of the easiest ways to make a lot of money.

(and if they ask you which superhero you would be (see 25 weirdest interview q's), say "Robin Hood")

Financial Modeling

1/14/11
alexpasch:

Because I love making money, and taking one percent a year from ultra rich people too stupid to manage it on their own seems like one of the easiest ways to make a lot of money.

(and if they ask you which superhero you would be (see 25 weirdest interview q's), say "Robin Hood")

ROFL

this is pure gold

1/8/11

I like Alex's response. +1

"You stop being an asshole when it sucks to be you." -IlliniProgrammer
"Your grammar made me wish I'd been aborted." -happypantsmcgee

Best Response
1/8/11

The majority of people get interested in finance because they want to learn how to invest and make money off of betting on things. Along the way, that dream meets reality: most jobs out there are sell-side functions, i.e. Investment Banking or Sales and Trading, where you execute transactions for people who have money and charge a fee. Asset Management is the closest thing you will get to investing and that original dream, though it does have its pitfalls. Screw rich individuals and PWM where you have to assuage rich people who bother you all day; you are managing money for the most sophisticated companies and institutions with several billion dollars at your disposal to just bet on things over multiple time frames. As long as your shop is good and you have money at your disposal, you are the one calling the shots, instead of living off of the business of others like the sell-side.

1/8/11

You want to face clients, bend to their whims and not have to work retarded hours for the foreseeable future

If I had asked people what they wanted, they would have said faster horses - Henry Ford

1/11/11

how do i give that acljnle0 guy a silver banana? or reps or whatever

1/11/11

lol underneath my image in my post click on the banana thx

1/18/11

Nice call, Steve~
thanks for the answers, acljnle0 and alexpasch

1/22/11
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