Introduction to Asset Management

Introduction to Asset Management

• Involves managing a large pool of assets and investments to minimize risk and maximize returns.
• A holistic finance approach with a focus on long-term growth and client needs.
• Key aspects: client expectation, future anticipation, and maintaining steady growth.
• Primary focus is buying and holding, with selling as a secondary consideration.
• Passive management follows rules like indexes, while active management is more hands-on with client discretion.
• Portfolio Managers (PMs) oversee and manage most of the work.

Understanding Portfolios

• A collection of various assets and investments used for a single purpose.
• Defined by their goal and purpose.
• Wealth management manages the overall wealth of clients more broadly, considering factors like tax and inheritance.
• Asset managers grow the value of investment portfolios.

Assets: Public vs. Private

• Divided into public and private categories.
• Public assets include equities, bonds, and currencies listed on public markets.
• Private assets include alternative assets like private equity and natural resources.
• Public assets generally have lower risk and volatility compared to alternatives.
• Public assets are more liquid, making them easier to convert into cash.
• Private assets offer complexity and are more difficult to understand.

Fund Creation: Key Steps

• Figure out investor wants and overall plan.
• Raise the money and ensure legality.
• Execute the plan.

Fund Lifecycle

• Fund Formation is the initial stage where strategic and financial decisions are made
• Decisions in this stage include investment strategy, fund structure, client base, and asset selection.
• Fundraising involves raising capital from investors to implement the fund's strategy.
• Allows asset managers to maximize returns through economies of scale.
• KYC (Know Your Client) and Anti-Money Laundering (AML) checks are essential during fundraising.
• Investment and Management is where the raised capital is invested in chosen assets.
• Portfolio managers execute strategies, allocate funds, monitor returns, and manage risk during investment and management.
• Wind Down is the final stage where the fund is liquidated and divested to maximize returns for investors.

Fund Formation: Required Elements

• Establishing a fund strategy, structure, client base, and assets requires extensive research and analysis.
• Research analysts work in teams with specific specializations to create a pool of research for decision-making.
• Strategic decisions involve determining who will manage the fund, how it will be managed (passive or active), and the fund's objective.
• Portfolio construction involves using the raised capital to invest in chosen assets.
• Rebalancing the weighting of assets is required to maintain maximum returns.
• Maintaining liquidity capacity is crucial to meet withdrawal or redemption requests.
• Portfolio managers decide which securities to buy and how much to invest in each, based on research and risk appetite.
• They anticipate market risks and volatilities.
• Risk management involves predicting and planning for problems, regularly checking for issues, and solving them quickly.
• Client relations involves sales and ensuring client satisfaction.
• Providing good service is crucial for retaining clients.
• Ensuring every decision and expenditure is legal and compliant with government regulations.

Asset Management: Key Aspects

• A process that involves finding a balance between increasing value and reducing risk.
• Investment Staff (front office) are client-facing and responsible for generating revenue and managing funds.
• Strong industry knowledge and soft skills are required for Investment Staff (front office).
• Core Staff (back office and middle office) support the investment staff with tasks like HR, accounting, and compliance.

Investment Staff Roles

• Portfolio Managers are in charge of the fund and make important decisions.
• They often start as research analysts.
• Expertise varies, focusing on different asset classes, investment strategies, or fund types.
• Research Analysts are responsible for conducting research and play a large role in the investment and management stage.
• Client Relationship Managers handle interactions with clients.
• They bring in new clients and ensure the firm keeps existing ones.
• Soft skills and client knowledge are essential for Client Relationship Managers.
• Product Specialists combine the roles of portfolio manager and analyst, with in-depth knowledge of a specific product or strategy.
• Trade Executors (dealers) execute trades and orders from portfolio managers.
• They operate with less discretion.
• Buying Microsoft at the best price and selling Apple at the best price are example responsibilities.
• The primary difference between them and the rest of the investment staff is that they operate with far less discretion.

Core Staff Roles

• Roles include risk, compliance, legal, and administration.
• They handle admin, keep records, and work as accountants and HR officers.
• Brokers act as middlemen who bring firms and clients together.
• Play a large part in the fundraising stage.

Asset Management Companies

• Financial institutions that manage large pools of capital.
• They can operate solely as asset management firms.
• They can exist as divisions within larger financial institutions.
• Provide access to investment without requiring knowledge or experience from the investors.
• They act as market makers, facilitating market liquidity.
• Most people use asset management companies through pension funds or index investments.
• AMCs save time by monitoring markets and adjusting portfolios.

Advantages of Using AMCs

• They make investing simpler, efficient, and effective.
• They allow for diversification, reducing risk by spreading investments.
• They benefit from economies of scale, lowering costs for investors.

Disadvantages of Using AMCs

• Management fees, which are charged regardless of fund performance, can reduce overall returns.
• Reduced control as investors rely on fund managers to make decisions.
• Large AMCs can struggle to adapt quickly to changing market conditions.

Understanding Funds

• Funds are the grouped pools of capital managed by asset management companies.
• Benchmarks are standards used to compare the value of an asset over time and measure performance.
• Common benchmarks include broad market indices like the S&P 500 or the FTSE 100.
• Fund's goal may be to either match or outperform its chosen Benchmark.
• Mutual funds pool money from multiple investors to buy a diversified selection of assets.
• They follow a specific investment strategy.
• Returns depend on the fund's overall performance.

Net Asset Value (NAV)

• A key measure used in mutual funds.
• It represents the per unit value of the fund.
• Open-ended funds allow investors to withdraw their money from the firm itself.
• Close-ended funds do not allow investors to withdraw their money until a specific time period.
• Index funds are designed to track the performance of a specific market index.
• Automatically follow the composition of their chosen index.
• Index funds are known as passive management.

Benefits of Index Funds

• Diversification.
• Lower costs.
• Predictability.

Limitations of Index Funds

• Lack of flexibility.
• Lack of downside protection.
• Inclusion of potentially overvalued stocks.
• Weighted by market capitalization.
• Not all mutual funds are also index funds.

Exchange Traded Funds (ETFs)

• Investment funds that trade on stock exchanges.
• They track an index sector or asset class.
• Allow investors to react quickly to Market movements.
• Offer greater access to Everyday investors.
• Not all index funds are ETFs.
• Most ETFs are index funds in practicality.
• ETFs can be bought and sold throughout the trading day at market prices, unlike mutual funds.
• ETFs generally have tower management fees then actively managed funds but incur trading fees.

Investment Options and Strategies

• Individual stocks can be bought and sold easily when prices rise.
• Mutual funds require a minimum purchase of one unit at the net asset value (NAV).
• Buying mutual funds happens at the end of the trading day; management fees apply.
• Exchange-Traded Funds (ETFs) can be traded like stocks with lower minimum investments.
• Trading fees apply to ETFs.
• Various alternative funds exist beyond mutual funds, indexes, and ETFs.

Mutual Funds vs. Hedge Funds

• Both mutual funds and hedge funds pool money from multiple investors.
• Both aim to generate returns through a diversified portfolio and professional management.
• Mutual funds and hedge funds both follow a defined investment strategy.
• Both rely on fund managers for investment decisions.
• Hedge funds aim for absolute returns in any market condition.
• Mutual funds aim to outperform a benchmark.
• Hedge funds use strategies like leverage and short selling, leading to higher risk and returns.
• Hedge funds have fewer restrictions and are available to accredited investors only.
• Mutual funds offer daily liquidity at the end-of-day NAV price.
• Hedge funds typically have lock-up periods restricting withdrawals.

Clients of Asset Management Firms

• Asset management firms serve retail and institutional investors.
• Retail investors include individuals investing for long-term goals.
• Institutional investors manage large capital pools for entities like pension funds and insurance companies.
• Institutional investors receive preferential pricing, lower fees, and access to exclusive investment opportunities.
• Institutions use sophisticated models and teams of analysts for long-term strategic approaches.
• Retail clients may make emotional decisions and lack the resources available to institutions.

Fiduciary Responsibility

• Asset managers must act in the best interests of their clients.
• Investment decisions must align with client objectives.
• Conflicts of interest must be avoided, and full disclosure of risks and fees provided.
• Fulfilling fiduciary responsibilities ensures transparency and accountability.
• Consequences of not adhering to fiduciary responsibilities are legal action, damage to reputation, and loss of clients.

Risk Appetite

• Risk appetite reflects the level of risk an investor is willing to take.
• Three main categories of risk appetite are conservative, balanced, and aggressive.
• Conservative investors prioritize capital preservation and seek low-risk investments such as government bonds and dividend stocks.
• Conservative portfolios aim to minimize volatility.
• Conservative investors focus on income investment strategy.
• Aggressive investors seek higher returns, accepting short-term volatility involving large proportion of equities.
• Equities are commonly found within conservative portfolios to offset inflation.
• Fixed income securities are often found within aggressive portfolios to diversify and mitigate the risk.

Active vs. Passive Asset Management

• Active asset management involves strategic decisions to outperform the market.
• Passive asset management tracks a market index through index funds or ETFs.
• Active management offers higher potential returns.
• Passive management offers lower management fees and reliable, predictable returns.
• Passive management is also known as index management.
• Both approaches (active and passive) have strengths and weaknesses.

Investment Strategies

• Growth investing focuses on capital appreciation by selling assets for more than their initial worth.
• Growth investing suits longer time horizons, open to market fluctuations for companies with innovative ideas.
• Typical industries for growth investing are technology, healthcare, and emerging markets.
• Value investing aims to increase long-term value by identifying and investing in undervalued stocks.
• A key tenet of value investing is the markets are influenced by people and their emotions.
• Value investors look for stable businesses that are undervalued by the market.
• Income strategy focuses on generating regular cash flow through dividends, interest, and other income streams.
• Income strategy focuses on the present and is common for retirees.