By Hannah Inyoung Oh
Before jumping into an introduction to asset management, let's first get an intuition for what it’s all about. Most people are familiar with the phrase “money makes money.” That’s exactly the goal of asset managers - that is, to maximise the amount of money their existing pool of capital can make. Typically, asset managers work for governments, institutions, corporations, or high net worth individuals (HNWIs) in developing, operating, maintaining, and selling their assets.
In this article, we ask and answer several important questions about asset management. We will cover what assets refer to, what asset management really is, and understand some strategies that asset managers use. To wrap things up, we will provide some examples of asset management firms, and give an outlook on the asset management industry for 2021.
What are assets?
The whole point of asset management is to manage assets. So to know exactly what kind of assets we are dealing with is important. In financial accounting, an asset is a resource owned by an economic entity. This economic entity could be anything from a government to an individual. When assets are mentioned in the context of asset management, it is typical to be referencing financial assets. It is helpful to understand assets in two ways.
Tangible Assets and Intangible Assets
One way to think about assets is to evaluate whether an asset is tangible or intangible.
Tangible assets are assets that have a finite monetary value. They are in physical form which means their value is easy to measure. Tangible assets usually form the majority of a firm’s assets. Tangible assets include a firm’s cash, inventory, equipment and buildings, amongst others. They can be located in a firm’s balance sheet.
Intangible assets are not in physical form. As such, the valuation of intangible assets is trickier, more subjective and requires more technical expertise. Typically, a firm determines an intangible asset’s value based on their own valuation methods. As they do not physically exist to produce potential future revenue for the firm, intangible assets make up a lower proportion of a firm’s assets than tangible assets. Some examples of intangible assets are copyrights, trademarks, patents, intellectual property, human capital and financial assets etc.
Current Assets and Fixed Assets
Another way to understand assets is to evaluate whether an asset is fixed (long-term) or current. The categorization here is not as straightforward. Put simply, current assets have higher liquidity than fixed assets which means current assets are relatively easier to convert into cash in a shorter period of time.
Current assets are the assets a company can sell or use when conducting standard business over the next year, due to their liquid nature. They can be sold, consumed, used, or exhausted. Some examples of current assets are cash, cash equivalents, accounts receivable, stock inventory, bonds etc. Baseline, current assets are used to fund a business in its yearlong operations because they have high liquidity.
Fixed assets are less liquid than current assets. The term fixed assets is used interchangeably with long-term assets because they tend to be in use by the firm for at least a year. Examples of fixed assets are vehicles, office furniture, machinery, buildings, land etc. In more professional terms, these are referred to as PP&E (property, plant, and equipment). Some fixed assets such as office furniture, buildings, etc. can wear out and depreciate in value over time but others such as land do not depreciate in value.
Put together: both tangible and intangible assets could be a current asset or fixed asset; both current and fixed assets could be tangible or intangible assets. Asset Management deals with all of these assets.
What is asset management?
Now that assets are defined, we can think about what asset management is. As broadly defined above, asset management is the practice of managing investments on behalf of others. The goal is to make sure that depending on the client’s needs and financial status, the best financial solution is provided. Managing assets well is important, especially for businesses, because assets determine a company’s balance sheet and balance sheets determine a business’s net worth.
(Here’s a more dictionary-esque definition: “Asset management is a systematic process of developing, operating, maintaining, upgrading, and disposing of assets in the most cost-effective manner (including all costs, risks, and performance attributes)”)
What do asset managers do?
An asset manager’s job is to make sure that their client’s investment portfolio can grow in value without taking on too much risk. In order to do so, asset managers conduct rigorous research on market trends, micro trends, and macro trends. However, there are no limits to the research an asset manager can conduct; if one deems something beneficial for a client, that’s the qualifier.
But here are some of the typical tasks an asset manager will undertake. An asset manager will work on a client’s portfolio by considering their client’s preferences. Throughout the process, asset managers will keep track of an economic entity’s assets by constantly monitoring their asset’s value, develop a strategy for managing these assets, and execute the strategy they have created. This strategy will depend on the client’s preference and financial status.
What are some asset management strategies?
Active Management and Passive Management
Asset management strategies can be broadly identified under two branches: active management and passive management.
Active management entails the frequent buying and selling of shares to outperform a specific benchmark or index. Investors attempt to beat the index (e.g. S&P 500) by constantly following market trends, political events, shifts in the economy, etc. to respond to the market accordingly.
Passive management sees an asset manager trying to match a certain market index (e.g. S&P 500, NASDAQ. etc) by owning all the stocks in the given index. Unlike under an active management strategy, a passive strategy does not have a management team making investment decisions. This is because there is a lot more risk and research involved in active management and is a lot more costly.
The characteristics of active management and passive management are reflected in the types of investments that fall under each respective category.
Under the active management category, there are actively managed mutual funds, hedge funds, private equity, and venture capital. Under the passive management category, there are passively managed mutual funds, and ETFs (exchange-traded funds).
While these two strategies are distinct, when managing one portfolio, an asset manager could adopt both strategies to manage the risks and rewards both strategies entail. Traditionally, an active management strategy has thrived in a turbulent market while passive management has thrived in a predictable, stable market. Hence, which strategy brings the most returns depends partially on the prevailing market environment.
A dose of real life
Now that we have a broad understanding of assets, asset management, and asset management strategies, let’s return to the real world and give these concepts some actors.
Some of the biggest asset management firms presently include BlackRock, Vanguard Group, UBS Group, Fidelity Investments, J.P. Morgan, BNY Mellon, PIMCO, etc.
Clearly, COVID-19’s impact on the global markets have been huge and the asset management industry has not been spared either. Asset management firms are digitally transforming themselves to support cost savings (e.g. by having employees work in a remote, low-contact work model). Without a centralised physical office location where employees meet with one another daily, this has implications for the company’s culture. Digital transformation is also underway as companies seek to update their investment strategies and how they manage their portfolios.
At the same time, compared to other industries, asset management has not taken a large hit from COVID hardships. Given market volatility, the active management strategy has kept its status - having a “hunch” as an asset manager has widely benefited their clients. In an unpredictable market, some asset managers have played safe by using the passive management strategy. We hope to see what 2021 has to bring.
Hannah Inyoung Oh
Hannah is a first year Economic History undergraduate at the London School of Economics. She writes articles on the daily for Brandy Wraps, a daily newsletter on current affairs and markets. With a particular fascination for making finance more relevant and accessible to the average reader, she enjoys finding connections between policies, current events, culture etc. with finance and writing about them.
Disclaimer
This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. You are advised to perform your own independent checks, research or study.