Course Code and Title : Special Topics in Financial Management

Lesson Number : 2

Topic : Asset Management

Professor : Jusffer Alexander De Leon, LPT, MBM, DBA*

Romualdo Del Agua , MBA

LEARNING OBJECTIVES:

1. Recognize the general characteristics of asset management firm

2. Identify the different type of investment companies
3. Explain the economic benefits of investment companies

PRE-ASSESSMENT:

Answer the question below with justification.

What is the role of investment in country's economic development?

INTRODUCTION:

Asset management firms (also

called money management or fund
management firms) manage the
funds of individuals, business,
endowments and foundations, and
governments.

An asset management company

(AMC) is a firm that invests pooled
funds from clients, putting
the capital to work through different
investments including stocks,
bonds, real estate, master limited
partnerships, and more. Along
with high-net-worth
individual portfolios, AMCs manage hedge funds and pension plans, and—to better
serve smaller investors—create pooled structures such as mutual funds, index funds,
or exchange-traded funds, which they can manage in a single centralized portfolio.

Asset management companies are colloquially referred to as money managers or

money management firms. Those that offer public mutual funds or exchange-traded
funds (ETFs) are also known as investment companies or mutual fund companies.
Such businesses include Vanguard Group, Fidelity Investments, T. Rowe Price, and
many others.

LESSON:

OVERVIEW OF THE ASSET MANAGEMENT BUSINESS

Large institutional clients diversity their

portfolios by using different asset
management firms, which may specialize
in different asset classes. Asset
management firms are ranked according
to assets under management (AUM).

The largest firms have several trillion

dollars under management. Asset
management firms receive their
compensation primarily from management
fees charged based on the market value of the assets. Increasingly, performance-
based management fees are becoming more common.

Asset management firms receive the compensation primarily from management fees
charged based on the market value of the assets managed for clients.

Example:

If asset manager manages $100 million for a client and the fee is 60 basis points, then
the annual dollor management fee is $600,000 (100 million times 0.0060)
Understanding asset management starts with defining the word “asset.” In the
broadest sense, an asset is anything that delivers value to its owner and the
stakeholder(s) it serves. Stocks, bonds, residential properties, and commercial office
buildings are all examples of assets.

In finance, asset management describes managing money on clients’ behalf. The

financial institutions managing the money are called asset managers, and they
develop and execute investment strategies that create value for their clients. Broadly,
this process involves “putting money to work” by buying, holding, and selling financial
assets with the potential to achieve a client’s investment goals. Examples of financial
assets include stocks, bonds, commodities, shares in private funds, and more.

Types of Asset Managers

There are several different types of asset managers, distinguished by the type of asset
and level of service that they provide. Each type of asset manager has a different level of
responsibility to the client, so it is important to understand a manager's obligations before
deciding to invest.

Registered Investment Advisers

A registered investment adviser (RIA) is a firm that advises clients on securities trades or
even manages their portfolios. RIAs are closely regulated and are required to register
with the SEC if they manage more than $100 million in assets.

Investment Broker
A broker is an individual or firm that acts as an intermediary for their clients, buying
stocks and securities and providing custody over customer assets. Brokers generally do
not have a fiduciary duty to their clients, so it is always important to thoroughly research
before buying.

Financial Advisor

A financial advisor is a professional who can recommend investments to their clients, or

buy and sell securities on their behalf. Financial advisors may or may not have a fiduciary
duty to their clients, so it is always important to ask first. Many financial advisors
specialize in a specific area, such as tax law or estate planning.

Robo-Advisor

The most affordable type of investment manager isn't a person at all. A robo-advisor is a
computer algorithm that automatically monitors and rebalances an investor's portfolio
according, selling and buying investments according to programmed goals and risk
tolerances. Because there is no person involved, robo-advisors cost much less than a
personalized investment service.
How Much Does Asset Management Cost?

Asset managers have a variety of fee structures. The most common model charges a
percentage of the assets under management, with the industry average at about 1% for
up to $1 million, and lower for larger portfolios. Others may charge a fee for each trade
they execute. Some may even receive a commission to upsell securities to their clients.

Because these incentives can work against the client's interests, it is important to know if
your management firm has a fiduciary duty to serve the client's interests. Otherwise, they
may recommend investments or trades that do not serve the client's interests.

How Asset Management Companies Work

Asset management companies compete to serve the investment needs of high-net-worth

individuals and institutions.

Accounts held by financial institutions often include check-writing privileges, credit cards,
debit cards, margin loans, and brokerage services.

When individuals deposit money into their accounts, it is typically placed into a money
market fund that offers a greater return than a regular savings account. Account-holders
can choose between Federal Deposit Insurance Company-backed (FDIC) funds and non-
FDIC funds.

Largest Asset Management and Wealth Management Firms

You might recognize the names of the largest asset management firms in the world as
they are also some of the world’s largest financial institutions overall. The top five asset
management firms globally are:

1. BlackRock (USA)
2. Vanguard Group (USA)
3. Fidelity Investments (USA)
4. State Street Global Advisors (USA)
5. Morgan Stanley (USA)

When it comes to the world’s largest wealth management firms, you will see some
overlap with the top asset managers list because global banks typically have both
asset management and wealth management lines of business to serve both their
institutional and individual consumer bases. Morgan Stanley is a good example of this.
The top five wealth management firms globally are:

1. UBS Global Wealth Management (Switzerland)

2. Edward Jones (USA)
3. Credit Suisse (Switzerland)
4. Morgan Stanley Wealth Management (USA)
 Source: Adv Ratings
5. Bank of America Global Wealth & Investment Management (USA)
as

The types of roles in asset management

Asset management firms are made up of several key individuals who enable the
business to attract, manage and act on behalf of clients.
Financial analyst

These individuals play an integral role within asset management firms: researching
investment options, conducting due diligence on potential opportunities and
determining when best to buy and sell assets.

Economist

Keeping a watchful eye on the current market situation and outlook is essential for
asset management companies. This is why many firms have a dedicated economist.
Asset managers

Armed with insights from financial analysts and economists, asset managers have the
final say in asset management decisions. They liaise with clients and ensure their best
interests are cared for.

The skills asset management firms look for

• Analytical skills – you look behind the headlines and data to identify meaningful
trends
• Confident decision-making – you are decisive, able to make informed choices
based on facts
• Strong communication – you are able to explain your decisions and foster good
relationships
• Time management – you deal with pressure well and can react quickly to events
• Initiative – you’re always on the lookout for new opportunities and solutions
Objective:

2. Identify the different type of investment companies

INVESTMENT COMPANIES

Types of Investment Companies Investment companies are financial intermediaries

that sell shares to the public and invest the proceeds in a diversified portfolio of
securities. There are three types of investment companies.

Open-end funds or mutual funds(commonly referred to as mutual funds):

These are portfolios of securities, and investors own a pro rata share of the overall
portfolio. These funds continuously stand ready to sell new shares to the public and to
redeem their outstanding shares on demand at a price equal to the net asset value
(NAV), which is computed daily at the close of the market.

The NAV is calculated as: NAV = [(Market value of portfolio) (Liabilities)] (Number of
shares outstanding).

"Net asset value," or "NAV," of an investment company is the company's total assets
minus its total liabilities. For example, if an investment company has securities and
other assets worth $100 million and has liabilities of $10 million, the investment
company's NAV will be $90 million. Because an investment company's assets and
liabilities change daily, NAV will also change daily. NAV might be $90 million one day,
$100 million the next, and $80 million the day after.

Closed-end funds:

These funds that sell shares like any other corporation and usually do not redeem their
shares. Investors pay a broker commission. The market price may differ from NAV,
because of supply and demand conditions for that particular fund's stock, future tax
liability of the fund, the leverage and risk of the fund, or because the fund has access
to markets that investors are willing to pay a premium for.

Unit trusts:

This type of organization is similar to a closed-end fund in that the number of unit
certificates is fixed. The portfolio securities are typically bonds but differ from both a
mutual fund and a closed-end fund that specializes in investing in bonds as follows:

(1) there is no active trading of the assets of the unit trust;

(2) unit trusts have a fixed termination date while mutual funds and closed-end funds
do not; and

(3) unlike the mutual fund and closed-end fund investors, the unit trust investor knows
that the portfolio consists of a specific collection of assets and has no concern that the
trustee will alter the portfolio. Fund Sales Charges and Annual Operating Expenses
Investors in mutual funds bear two types of costs: sales charges and annual operating
expenses.
Sales charges:

These charges are one-time costs associated with the method of distribution. The two
types of distribution are sales force (or whole sale or direct). It occurs via an
intermediary such as an agent, a stockbroker agent, or entity who provides investment
advice and incentive to the client actively.

The other is direct distribution (from the fund company to the investor.) The client
approaches the mutual fund company, most likely by a toll-free telephone contract, in
responsible to media advertisement or general information, and opens the account.

3. Explain the economic benefits of investment companies

Several things must be made clear, however. First, investment companies have
generally tried to encourage the purchase of their shares by investors, not savers.
Many funds point to the need for adequate cash reserves, insurance, and perhaps
additional savings or government bonds before placing the remainder in a mutual fund.
Second, the funds can make no claim to superiority over the market averages, which
are in a sense investment trusts with fixed portfolios; e.g., the stocks composing the
particular “average.” They state, rather, that their performance must be judged against
what the individual could have done at the same cost over the same period, with the
same objectives as has a given fund.

Third, it is evident that the open-end investment company cannot attain perfect
fulfillment of all the objectives stated below, but makes available the most adequate
combination of facilities for the individual investor; that is, it offers the package with the
greatest total amount of management, diversification, income, liquidity, and dollar
appreciation. There will be no claim in this thesis that the management of the investor’s
capital will produce better results than that of an investment counsel who handles large
accounts individually; that the diversification will be sounder than that of insurance
companies under legal list requirements; that the income will be as stable as that of
government bonds or as high as that from a given common stock; that the liquidity will
be as great as that given by a savings bank; nor that the share will appreciate in value
with the cost-of-living as a closed-end leverage share does. The only claim will be that
the investment company offers the best combination of these facilities to the individual
investor.

In offering to the investor a greater degree of diversification and more expert

management than he could otherwise obtain, investment companies present a wide
variety of fund types with diversified objectives, from which the investor may choose.
He may pick the balanced fund, which attempts to plan its portfolio with regard to
current conditions, especially by shifting its ratio of “aggressive” common stocks and
“defensive” bonds; or the common stock fund, which maintains a largely fully invested
position with a view toward selecting seasoned issues; or the bond fund, which
maintains a portfolio solely of bonds. If the investor prefers to exercise a greater
degree of management, he may choose the specialty fund, of which there are two
types: the industry type, in which a share is backed by a diversified list of issues in an
industry of the investor’s choice; and the objective type, in which the investor picks his
objective and participates in a diversified list of stocks most likely to fulfill it. Thus, the
mutual fund offers the investor a wide variety of shares from which to choose, to suit
his objectives of either capital appreciation, capital preservation, or reasonable income,
or varying combinations of each.

The advantages of management, diversification, income, liquidity, and inflation hedging

which the funds provide will be discussed in separate sections. However, the
investment companies perform several additional minor functions which may be
mentioned here: their portfolio shares are held by a custodian—usually a bank—and
are thus safe from damage or loss (but not depreciation in value, as the recent
Securities and Exchange Commission Statement of Policy indicated2); the dividends
are quarterly, not scattered and small, and the investor need not be concerned with
proxies, warrants, and stock splits; and finally, there is convenience in income tax
returns, with the investment company required to send a year-end statement of the
taxability of dividends. This chapter will now proceed with an analysis of the degree of
success the funds have attained in providing the more important advantages to the
investor.

REINFORCEMENT:
Visit this page for more information • https://www.investopedia.com/terms/n/nav.asp
REFERENCES:
• Capital Markets: Institutions and Instruments by: Frank J. Fabozzi and Franco Modigliani