Aimed at those interested in a summarised and broad overview of the asset management industry, this article briefly introduces what asset management is, the strategies they use, and the key trends and developments that have shaped the industry over the past few years.
What is asset management?
Asset managers — also referred to as the "buy-side" of the capital markets — are individuals within firms or divisions of banks who make investments on behalf of their investor clients with the goal of generating a positive investment return on the assets over time. Asset managers accomplish such objectives through buying, acquiring, maintaining, and trading investments with the potential to increase in value. Asset management firms use a wide range of investment strategies including ETFs, Index Funds and SMAs, etc. Some of the most prominent asset management firms include BlackRock, Fidelity Investments, and Vanguard Group. The following paragraph covers different asset classes in the asset management industry.
What are the asset classes in the asset management industry?
Equities, when referring to the stock market, are shares of a company's ownership. When a corporation offers equity, it refers to selling a portion of its ownership. Equities are the most common type of asset used in different types of investment strategies. According to Mordor Intelligence, in 2020, equities worth $1133.3 Billion USD were being managed in the UK, which accounted for more than 51.5% of the total funds under management in the UK. In Asia ex-Japan, domestic equities and international equities accounted for 12% and 19% of the total assets under investment in 2020, making it the second-largest asset class after bonds according to Coalition Greenwich.
Figure 1: Funds under management by Investment in UK (Source: Mordor Intelligence)
Figure 2: Percentage of Total Assets by Asset Classes for Asia ex-Japan in 2021
(Source: Coalition Greenwich)
2. Bonds/Fixed Income
Bonds are fixed-income instruments that represent loans made to borrowers by investors. A bond can be described as an agreement outlining the terms of the loan and the related payments between the lender and borrower. Bonds are used to finance operations and projects by companies, municipalities, states, and other sovereign governments. According to a report issued by Coalition Greenwich, in 2021, international fixed income and domestic fixed income accounted for 24% and 23% of the total assets under management, making it the largest asset class in Asia.
In addition to conventional investments in stocks and bonds, there are other assets that can be used. They can either be in the form of private assets including infrastructure, private real estate, private equity, and private credit, etc; or in the form of hedge funds, which primarily trade on public markets but employ less conventional strategies like short-selling and leverage. According to Coalition Greenwich, alternative investments accounted for 13% of the total assets under management in Asia in 2021.
A hedge fund is an investment fund of private investors whose capital is managed by professional fund managers. To produce higher-than-average returns than S&P 500 on investments, these managers use a variety of strategies, including borrowing money or trading in non-traditional assets. As of 2022, hedge funds Asset Under Management (AUM) totalled US$5.14 trillion, which, alongside private equity, form the two main types of alternative investments.
Ranked by AUM, the five largest hedge fund managers in 2022 include Bridgewater Associates, Man Group, Renaissance Technologies, Millennium Management, and Citadel. In Asia, some notable hedge funds include Hong Kong’s Value Partners with $7 billion USD AUM as of 2022. In Singapore, there are some relatively small but well-performing funds. One of which is Vanda Global Funds which was ranked the best-performing hedge fund in 2019 with a 300% return.
Private Equity and Private Equity Real Estate
Private Equities are investment partnerships that acquire and run businesses before selling them. These investment funds are managed by private equity firms on behalf of accredited and institutional investors. Private Equity stretches from venture capital, where working with early-stage companies or start-ups, to buy-outs, whereby a PE firm acquires a controlling interest in the company. In 2021, Private Equity was the best-performing private markets asset class, compared to private debt, real estate, and infrastructure investments. As of 2018, the dominant sub-investment strategies used by PE funds are buyouts (42%), growth (12%), others (24%), and venture capital (13%), ranked by the amount of aggregate capital raised.
A Real Estate Investment Trust (REIT), is a company owning or financing income-producing real estate. REITs are more liquid as they are often publicly traded with a lower investment threshold. In contrast to Real Estate Investment Trusts (REITs), private real estate investing requires a large amount of capital and may only be available to accredited or high-net-worth investors. REITs are valued daily such that they have a higher correlation to stocks while private real estate is less affected by stock market changes and shocks. For Private Equity, aggregate transaction value and the number of deals fell to their lowest levels in the last five years in 2022 at $35.43 billion, and 208 transactions after the activity peaked in 2021 during the COVID recovery.
Figure 3: Private Equity/Venture Capital backed M&A in Asia-Pacific excluding Japan, 2018-2022 (Source: S&P Global)
What are the types of investment vehicles?
1. Exchange-Traded Funds (ETFs)
An Exchange-Traded Fund (ETF) is a security that is tradable on a stock exchange, and it closely tracks the performance of a basket of securities. These baskets include stocks within the S&P 500, emerging market bonds, sector-specific equities, and even ESG-focused equities (thematic ETFs). The ETF industry has witnessed explosive growth over the past two decades – in 2021, assets invested in ETFs were approximately USD $10.02 trillion, compared to USD $1.355 trillion in 2011 and USD $204.3 billion in 2003. ETFs provide a number of important advantages over mutual funds, including often cheaper fees for investors and portfolio diversification. In 2020, the average expense ratio for an ETF is 0.18%, which is significantly lower compared to the 0.71% cost charged by actively-managed mutual funds on average and 0.27% for passively-managed mutual funds.
2. Index Funds
A mutual fund or exchange-traded fund (ETF) known as an index fund has a portfolio built to replicate or track the components of a financial market index. Index mutual funds orders are executed once per day and are therefore less liquid, with lower operating costs at the same time. However, index mutual funds offer broad market exposure at the same time. These funds continue to invest in their benchmark index no matter how the market performs. Therefore, for retirement accounts like Individual Retirement Accounts (IRAs) and 401(k) plans, index funds are typically regarded as the best core portfolio holdings. Famous Index Mutual Funds include the Vanguard Total Stock Market Index Fund, Vanguard 500 Index Fund, and Fidelity 500 Index Fund.
3. Separately Managed Account (SMA)
A professionally managed portfolio known as a separately managed account (SMA) offers diversified baskets of stocks or bonds managed by teams of professionals with direct ownership of these bonds or stocks. Unlike Mutual Funds, investors own the individual bonds or stocks inside the fund, not the shares of the fund. SMAs can be tailored to fit the personal goals, tax profiles, and values of investors.
Recent trends in Asset Management industry:
1. Data strategy and digital transformation
Asset managers are embracing digital transformation. To help them make sense of a mass of data, managers are turning to advanced analytics and machine learning tools. This involves automating manual processes, implementing artificial intelligence (AI), and utilising cloud-based technologies. This enables companies to remain competitive, gain a better understanding of their portfolios, and make performance-enhancing decisions based on data.
Although the idea of digital transformation is not new, the pandemic has brought it to the forefront of many asset managers' agendas. Businesses have to invest in digital transformation in order to enable work-from-home arrangements and satisfy the growing demands of digitally aware investors. An example in Asia is DBS Bank, which is the leader in Asia for digital wealth management with the widest range of services online. 90% of DBS’s Banking services can be accessed online including processing large transactions such as mortgages, with digital equipment such as iWealth App for digital accounts, digiPortfolio for portfolio management, NAV Planner for financial planning, and Vickers for online trading. Internally, DBS also makes use of robo-advisory with Hong Kong FinTech Quantifeed, together with Artificial Intelligence (AI) and big data analytics.
2. ESG Reporting and Disclosures
Sustainability has become a major concern. Investors want to know that their money is going into businesses and industries that are dedicated to making a positive impact on society and the environment. In many countries, environmental, social, and governance (ESG) reporting is now mandatory for publicly listed companies, and asset managers are following suit by being more open about the ESG components of their portfolios.
For example, the EU introduced Sustainable Finance Disclosure Regulation (SFDR) in May 2022 aimed to increase investment in social or environmental projects, standardise ESG reporting and prevent greenwashing. There will also be a Corporate Sustainability Reporting Directive (CSRD) finalised soon which extends the scope of mandatory ESG reporting to all large companies and SMEs listed on regulated markets and requires external auditing for ESG reports. In Asia, both Singapore and Hong Kong have adopted regulatory initiatives such as the MAS Sustainable Bond Grant Scheme and SGX Guide to Sustainability Reporting for Listed Companies in Singapore, and for Hong Kong, the ESG Reporting Listing Rules and ESG Reporting for Securities and Future Commission.
3. Tokenised funds
The rise of cryptocurrency in recent years has piqued the interest of many large institutional investors, not only in terms of a potential new asset to invest in but a potential transformation for funds, by adopting the blockchain technology used to power crypto transactions. Such has led to the rise of tokenised funds, which brings more liquidity and security to funds. Tokenised funds are blockchain-traded funds where shares or units of them can be traded on digital asset exchanges, providing more liquidity and making them more accessible to a wider range of investors regardless of minimum investment requirements or geographical constraints. Tokenised funds also provide more transparency for investors to track the assets over time via blockchain technologies at a lower fee compared to traditional funds.
Yuanzhe is a first-year Economics student at the London School of Economics. Prior to LSE, he interned at Lloyds Banking Group and conducted research on minimum wage and tensions within the UK job markets. He is also a Marketing Executive at LANSPH Plus Diversity Support Group aiming to help underrepresented groups break into the financial industry. He enjoys analysing the impacts of economic policies and recent market news on the economy in the long run.