Asset management companies are big businesses. All global assets under management total over USD 112.3 trillion. In Europe, investment funds maintain assets of over USD 26.5 trillion, while US funds manage over USD 55.8 trillion. BlackRock, one of the biggest asset management companies in the world, alone manages over USD 8.6 trillion in assets.

Global asset under management growth (in USD trillion)
Source: Boston Consulting Group

But what do asset management companies actually do, and are they worth it for the average investor?

What do asset management companies do?

Asset management companies offer a diverse range of funds for clients to invest in. Unlike hedge funds, they are open and accessible to every investor. Asset management companies pool clients’ contributions and issue units in each fund. The unit represents a share of the fund, with its price rising and falling according to the fund’s value.

Similar to a box of Swiss chocolates with many different flavors, asset management funds invest in a wide variety of asset types across a range of countries. Assets types include equity, bonds, commodities, derivatives, real estate, private equity, private debt, and even cryptocurrencies. Funds can specialize in a particular asset type and country, or they can blend assets and countries to create a fund to suit every investor’s needs.

Asset management companies generate revenue by charging fees and loaning securities to brokers and other funds. These securities can be used for short-selling, hedging, or as collateral.

To manage funds, an asset management company must perform the following central functions:

  1. Research and analysis
    From macroeconomic analysis to financial reports, ESG, investor calls, and machine learning, asset managers are continually assessing markets, asset classes, and individual assets.
  2. Asset allocation
    Determining the optimal mix of assets for each fund according to the desired levels of risk and return. For instance, a conservative fund will hold more cash while a growth fund will hold more equity and other growth assets.
  3. Security selection
    Buying and selling individual assets for a fund in accordance with the chosen asset allocation plan, as well as the results obtained from comprehensive research.
  4. Risk management
    Ensuring that a fund stays within its financial risk limits and that internal procedures are adhered to. High-flying fund managers need mid-level office workers to keep their feet on the ground and ensure compliance.
  5. Pricing and performance review
    Calculating returns and unit prices and assessing performance against goals while making changes as necessary.

Open-end vs. closed-end funds

Funds can have either an open-end or closed-end structure.

Open-end funds can issue new units throughout their lifetimes. They have no fixed maturity date and they offer liquidity to investors. ETFs (exchange-traded funds) are a type of open-end funds that have become very popular because of their low fees and solid performance.

Closed-end funds have a fixed number of units that are issued when the fund is formed. They also have a fixed maturity date, and they can’t be sold to investors who do not participate in the fund.

The price of a unit in a closed-end fund rises and falls with demand. On the other hand, with an open-end fund, the unit price rises and falls in line with the total value of assets in the fund (net asset valuation).

Units in an open-end fund are like ETFs – can be bought and sold throughout the day on an exchange platform. In contrast, units in a mutual fund can only be bought and sold from the fund at fixed points in time, ranging from the end of a trading day to a quarterly basis.

Active vs. passive management

There is a major dichotomy in how funds are managed: active or passive.

Active management is when fund managers select individual assets based on research and the fund’s asset allocation strategy, which determines how decisions are made about which assets to buy, hold, and sell. The primary goal is to maximize returns according to the desired level of risk. The secondary goals of the fund’s asset allocation strategy include tax and ESG considerations.

Passive management is when assets are selected to mirror the composition of a market index or sub-indexes.

When managed funds were first developed, they were all actively managed. Passive funds have gained popularity over the years because they offer lower fees and tend to outperform actively managed funds. However, some experts argue that actively managed funds perform better in times of uncertainty and in niche markets with less liquidity and coverage by analysts.

Advantages of asset management companies

  1. Expertise
    Asset management companies are managed by full-time financial professionals who are experts not only in investing but also in areas such as law and tax. It is hard for a part-time investor to match the experience and wealth of expertise of a full-time team of diverse professionals.
  2. Scale
    Large funds enjoy lower costs because of their size. They are able to secure cheaper brokerage fees and can afford to invest in areas such as risk management and research.
  3. Diversification
    Due to having more resources, it is easier for funds to diversify than for an individual to implement this strategy.
  4. Greater opportunities
    Funds are offered greater investment opportunities by other companies and brokers because of their size. When was the last time a company contacted an individual investor for a dark pool transaction?

Disadvantages of asset management companies

  1. Fees
    No one likes fees, especially when a fund is not performing well. Most funds charge fees for operating expenses that can be as high as three percent or more of assets under management. They may also charge fees for entry and redemptions. However, some fund managers take a different approach by only charging fees on returns, and there are even some ETFs with no fees at all.
  2. Loss of liquidity
    It is typically easy to retrieve funds from an ETF, but it can be much harder to sell your units in a mutual fund, especially during periods of market volatility.
  3. Lower returns
    Many actively managed funds trail benchmarks, while many passively managed funds model themselves off benchmarks. To outperform those benchmarks, it could be preferable to build your portfolio on your own.

Final thoughts

When entering the stock market battleground, it's wiser to have an army behind you than to go it alone. Investing in a fund via an asset management company could provide you with immense benefits that you can’t necessarily achieve on your own, including financial expertise, scale, and diversification. However, the lack of competitive returns, liquidity, and exorbitant fees can negate nearly all the returns.

In volatile market times, a meager return is still better than none. But, what if you could increase your earnings and simultaneously gain knowledge of investing on your own? The concept of “learning by doing” is an excellent starting point.

One way to achieve this is to leave the majority of your wealth to be managed by the big players, but take a smaller share (at least 10%) to make independent investment decisions, learn more, and potentially increase returns.

Le Bijou can assist in this endeavor. Imagine an ideal scenario: you plan to invest CHF 1 million in an asset management company that yields a 5% annual return. At the end of the year, you earn CHF 1’050’000. While CHF 50’000 is a good return, why settle for good when you can achieve greatness?

By allocating 90% of your assets to a reputable asset management firm and managing the remaining 10% on your own, you can capitalize on exceptional investment opportunities, such as the Le Bijou Bahnhofstrasse 89 project in Zurich, which boasts a remarkable 22.22% annualized return. This strategic approach could result in a staggering CHF 1’067’000 return, a remarkable 34% increase.

Furthermore, you can harness the power of compound interest and reap impressive investment returns. In over a decade, your initial investment could grow to nearly CHF 1.6 million, but by taking the latter approach, you could achieve over CHF 2 million, a potential increase of 29.23%.

While relying on professional managers may provide a sense of reassurance, it does not guarantee personal growth. True knowledge is something only acquired through practical experience.

“The best way to learn is by doing; never ask others to do what you’re not willing to do yourself.” — Ellen Sauerbrey

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