What is Asset Management?
Asset Management (AM) usually refers to a firm that specializes in the investment, structuring, and management of an individual or corporation's funds. AM firms pool funds together and make strategic investment decisions on the behalf of their clients. An AM firm may invest in a multitude of asset classes some of which may include stocks, bonds, real estate, or private equity (PE).
AM's aim for consistent and stable returns with minimized risk to the needs of their clientele. Individuals typically invest with an AM if their investment goals pertain to low-risk, diversified portfolio under the management of investment professionals. Asset management firms can be independent managers (BlackRock) or a branch of an investment bank (Goldman Sachs).
Asset Management (AM) Definition
Asset Management firms invest funds on the behalf of their clients. They pool funds together and invest with a diversified, broad market perspective. Below are some of the frequently asked questions on AM along with the answers.
What is the goal of an AM?
The primary goal of an asset management firm is to maximize returns on their clients' portfolio with the information obtained from their research and analysis. The firm must also account for risk and minimize it when necessary. The goal of an asset management firm may slightly differ between firms.
What do AM invest in?
An AM firm may invest in a multitude of asset classes. The most common among the larger and more established firms are stocks, bonds, commodities, real estate, and private equity.
Why would someone invest in an AM?
The traditional asset management structure is long-only in stock and bonds and serves to focus on the needs of their clientele. The concept of an asset management firm is to deliver consistent returns with a broad market perspective, on the behalf of their clientele. The clientele of AM's consist of investors who are seeking stabilized, consistent returns.
The point of AM is to invest clients' funds with the knowledge, expertise, or unique opportunity provided by the firm. Usually, an AM is hired by a client to oversee and maintain their capital and distribute it into asset classes of the firm's choice. AM's provide a unique investment service that is based on in-depth and thorough research, analysis, and expertise. Nearly all portfolio managers (PM) at an AM firm hold degrees from top universities. With that said, an AM has a diversified team of industry experts that strive to allocate their clients' funds in the most optimal manner. All investments are executed with a deep understanding of the public and private markets.
What is the fee structure of an AM?
Asset managers charge different fees depending on the firm's assets under management (AUM) size. For example, a large firm of $50 billion AUM may charge a fee of <1% of the AUM. Meanwhile, a smaller firm of $100 million AUM may charge a fee of up to 2% of the AUM.
Do AM firms only invest in one industry?
Asset management firms can be oriented towards a particular sector or industry. For example, an asset management firm may be mostly invested in real estate. This will attract a specific clientele of investors who may seek real estate investments but do not have the knowledge, ability, or expertise to do so.
What are the most well-known asset management firms?
Some of the most well-known and respected asset management firms include Black Rock, Vanguard, and Fidelity. These are all independent asset managers, whose main objective of the firm is to manage its clients' assets.
How do asset managers make money?
Asset management firms generate income from several standard models, some being more utilized than others and vary depending on firm size. Most of the larger firms generate profit from a fee that is a percentage of the total AUM pool. This fee is known as a management fee and is the standard business model of an AM. As a result of AM being long-only in stocks and bonds, and the lack of trading activity, AM do not usually charge commission-based fees.
Typically, an Asset Manager would charge a fixed 1% fee. For example, if a firm has $1 billion AUM, they would charge a $10 million annual fee for their services. This fee may be greater or lesser than 1% depending on the size of the AUM and the firm's investment structure.
When an institutional investor or a mutual fund is seeking an asset manager, they will sometimes approach a wide variety of firms and force the firms to bid for a commission fee. Because the potential client's fund size is so large, asset managers will offer commission fees to secure the client. These bidding wars can often lead to commission fees below 0.5% of total AUM.
This business model implies that the larger the AUM, the more profit a firm will generate. As a result, AM firms rely heavily on their sales and marketing department to bring in a bulk volume of investors. Because the operational costs of AM are mostly fixed, the scalability of an AM firm is immense. As firms grow larger, they tend to focus more on client acquisition and lead generation.
Buy-side or Sell-side?
AM firms are classified as "buy-side" firms. They invest on the behalf of clients and make strategic decisions regarding which asset or asset class will benefit the firm's portfolio most significantly. The firm is buying assets on behalf of their clients. Other "buy-side" firms include PE, HF, and MF's. The main classification for a "buy side" firm is that the firm must purchase securities.
"Sell-side" firms (investment banks) on the other hand, sell their investment services (such as information, research, or analysis) to "buy-side" firms or individual investors. The most renowned "Sell-side" firms are investment banks.
Asset Management: Clients
Asset managers' clients usually belong to many different categories. The most typical investors in asset management funds are high net worth individuals (HNWI), mutual funds, or institutional investors. Some firms may attract specific clientele, while most are diverse in their type of clientele.
For example, an AM firm may attract more HNWI if the goal of the firm is to provide consistent, low-risk returns and focus on maintaining wealth. The opposite is true with mutual funds or institutional investors.
The type of client the asset management firm is working with will determine the investments they pursue.
For example, an HNWI's goal would most likely revolve around maintaining their wealth. This would translate to a more conservative approach of the asset manager. In this case, the firm may allocate funds towards real estate, bonds, or stocks. On the other hand, an institutional investor or mutual fund may have different goals for their investments. An AM firm with an institutional investor as a client may diversify its assets into private equity or speculative growth stocks, with a goal of bagging higher returns by undertaking higher risks such as liquidity risk.
|High Net Worth||Institutional investors|
|Investment Objective||Maintaining wealth with minimized risk and consistent satisfactory returns.||High growth.|
|Time Horizon||Short term: <5 years to Long term: >10 years||Perpetual life.|
|Taxes||Must account for taxes with every strategy and trade.||Maybe tax-exempt.|
|Risk Tolerance||Typically on the lower end. Focus on maintaining wealth with low risk.||High risk tolerance. Focus on growing capital with manageable risk.|
|Investments||Stocks, bonds, commodities, real estate.||Venture capital, private equity, hedge funds, private credit, private real estate, stocks, bonds|
Hedge Fund Vs. Asset Management
While hedge funds (HF) and asset managers (AM) share some similarities, such as their clientele and assets, they tend to differ in their goals. Both HF's and AM's invest on the behalf of their clientele and are classified as "buy-side" firms, the strategies differ significantly. An investor looking for consistent, less risky returns in a diversified portfolio should consider an AM to manage their capital. Alternatively, an investor seeking growth and can afford managed risk should consider an HF.
A hedge fund is typically growth-oriented and dedicates its funds to higher-risk asset classes and investment strategies. Hedge funds usually attract investors who can afford more risk. These may consist of ultra-high net worth individuals (UHNWI or an individual with $30+ million investable assets) and institutional investors. Similar to AM's, HF's typically invest in stocks, bonds, real estate, private equity, and venture capital. What makes them different from AM, is they frequently trade their assets in exchange for quick returns.
Each HF has a unique strategy they utilize in an attempt to beat the market. Here are the four typical types of hedge funds:
- Global macro
Focused on opportunities globally. These firms look for market inefficiencies or efficiencies in a worldwide context. These firms may hold positions in public markets, private markets, futures, currency exchanges, and commodities.
Attempt to make gains based on predicted, future market movement. Typically these firms do not hedge against risk. This implies high risk but a large upside potential and above market average returns.
Seek to discover pricing inefficiencies within the market and buy/sell positions accordingly. For example, a company has its earnings call approaching and the firm believes the company did better than estimated and the share price is undervalued, according to the hedge fund. The hedge fund would take a position on this belief/knowledge.
- Relative Value
Measuring and determining an asset's worth, finding inequalities between market price and the price valued by the firm. Then creating a position to leverage their research/analysis.
AM firms on the other hand, typically aim to maintain and grow their portfolio with more conservative and less volatile asset classes that match the needs of their clients. This usually consists of retirees (HNWI), pension/mutual funds, and/or institutional investors. AM's typically invest in real estate, stocks, bonds, and commodities and hold their assets rather than frequently trading them. This results in more stable returns and less risk for the portfolio of their clients.
HF's may also utilize call and put options to maximize their short-term growth. This implies more risk but also more potential for rapid growth. HF's, in comparison with AM's, are much more actively involved with trading the assets under their management. As a result, they charge more for their services. Typically, they charge a fixed percentage fee of the total AUM, similarly to an AM, but also charge a commission-based fee which tends to be on the higher side. This additional fee, known as a commission-based fee, is dependent on the annual performance of the firm and the profits generated from the previous year.
For example, if a HF that has $1 billion AUM generated a 10% return for its clients, the firm would charge a 20% performance fee or $20 million for their services. HF's clients allow this because the profits generated often surpass the average market return.
Some of the most well known HF's include:
- Renaissance Technologies
- Man Group
- Bridgewater Associates
Advantages of investing with an asset management firm
Asset management firms collect and pool funds together from several unassociated investors. As a result of pooling a large number of funds together, AM firms have access to opportunities an individual investor may not be able to access. These opportunities may require higher minimum investment amounts. This may result in larger returns as an individual investor would, most likely, not have the minimum amount to invest in such a project.
For example, let's assume that a new mall is being built, for which the client is seeking $50 million to complete the project. An AM firm could allocate funds to invest in this project, while an individual investor may not have the funds required to participate in such a big project.
- Access to unique, broad asset classes
An AM can invest in large multi-million/billion investment opportunities or projects, such as the construction of a skyscraper. An individual will typically not be able to invest in such projects because their funds are much less significant in regards to the volume.
- Experts of their respective industry
AM firms have a diversified team of analysts and portfolio managers who are experts in their respective fields. For example, an AM firm may have four portfolio managers who each specialize in real estate, stocks, bonds, or private equity. This benefits individual investors because they may not have vast expertise in every sector, whereas an AM firm does.
- Worldwide reach
Due to the sheer size of some AM firms, they can invest in many different markets. Some of the largest firms have offices worldwide with the ability and expertise to invest in foreign markets.
- Wide variety of investment opportunities and strategies
Some of the larger AM firms provide different funds that cater to the needs of the individual. For example, JPMorgan AM offers strategic funds to maximize your retirement fund. This fund maximizes returns while maintaining a justified level of risk.
Asset Management companies
Each asset management firm caters to a wide variety of customers, and hence, has to accommodate an equally wide range of services. This can range from asset classes to the fees a firm charges. Individual investors, institutional investors, and mutual funds may allocate their funds to several different asset managers based on the qualities a firm offers. This is fairly common because of each firms' specific goals and the client can diversify their funds accordingly.
Here are some of the most well-known asset management firms:
- Black Rock ($9.464 trillion AUM)
- Vanguard ($8.400 trillion AUM)
- UBS Group ($4.432 trillion AUM)
- Fidelity ($4.230 trillion AUM)
- State Street Global Advisors ($3.860 trillion AUM)
- Morgan Stanley ($3.274 trillion AUM)
- JPMorgan Chase ($2.996 trillion AUM)
Asset Management: Career paths
For example, some AM firms may not have access to good real estate investments, and hence may not be the ideal choice for investors looking for real estate in their portfolio. An investor looking for a firm to manage their capital should consider their needs and find an AM firm that offers the qualities they require. Each firm has a unique strategy and invests in different assets, and there is no one firm that fits the needs of every investor.
An AM firm is usually divided into three main, functional departments:
The investment department is typically divided by the asset class. Each analyst, portfolio manager, etc. has a specific focus on an asset class or industry. In theory, they are experts in the field and serve as an industry expert on behalf of the AM firm's clientele.
The most common career path to a portfolio manager (PM) is starting as an entry-level analyst at BlackRock, Vanguard, or a comparable large AUM firm. This will develop your fundamental skills that will be applicable to the next firm. An MBA is nearly required to become a portfolio manager. The University of Chicago Booth School of Business and MIT Sloan School of Management are the most common feeder MBA's to become an AM PM. These universities are finance oriented MBA universities with some of the top placements in AM. A career in AM from any top target university is very possible.
Working in asset management
Asset management is a desirable field to work in because of the lifestyle and work-life balance. A typical workload is 40-60 hours per week. Comparably, in investment banking (IB), it is not uncommon for analysts to work 100+ hours per week. These relatively low weekly hours is the main draw to a career in asset management.
As a result of the low hours, the pay is slightly lower. AM analysts can expect to make 30% less than a comparable field, such as IB or PE. This difference in salary is usually expressed in the bonus. This is because most aspects of an AM firm are fixed and not dependent on performance. Alternatively, HF analysts can expect large bonuses because their investments are dependent on high growth performance. However, because of the slightly lower pay, AM analysts work ~30% less hours than other divisions.
Below is an example of the typical salary breakdown at ~20 person firm with $5 billion AUM:
CIO & President: $3.5+ million
Senior PM: $2+ million
PM: $1+ million
Senior analyst: $100,000+