Asset management is both a science and an art, combining quantitative analysis with qualitative judgement to oversee complex portfolios that range from stocks, bonds and commodities to real estate holdings and intellectual property rights. The asset management industry does not consist of just the asset management firms themselves, but rather comprises their clients. In more general terms, asset managers are responsible for overseeing an organization’s assets and investing on behalf of clients or shareholders.
Asset management is the broad term used to describe the way a company invests and handles its assets, or reserves. Asset management can also be referred as financial management or investment strategy.
In finance, asset management has become a more important aspect in managing assets with increasing demands and constraints on returns in the industry. Financial managers will use asset management when they want to engage in riskier choices that increase return over time but incur large risks of loss instead. In pessimistic scenarios, financial managers may set their return goal at zero percent while banks may aim for high yield and investments which are less risky with lower returns but reliable ones (e.g., fixed income).
According to Fintalent’s Asset Management Consultants, Asset Management also includes the functions of risk management, which is the process by which banks set appropriate risk parameters across all the available assets. Asset trading and management, which dictates how to trade and manage assets in a manner that drives bank earnings. Liquidity management, which determines how to deploy capital and liquidity within a company’s operations. Legal compliance, if applicable.
In short, asset management focuses on managing financial assets such as cash or securities as well as other non-financial assets such as real estate or intellectual property rights. In this sense it has become an important part of business operations for banks and over time will also become part of business operations for other organizations like insurance companies or hedge funds among others.
Understanding Asset Management
Asset management can be defined as the investment of financial assets on behalf of a client or shareholders. In other words, investment managers are responsible for identifying and investing in the most profitable underlying securities that will generate the highest return and lowest risk.
The market is constantly changing, which means that asset management strategies are always in flux. Following the 2008 financial crisis, regulations were put in place by the SEC to make investing less risky, but it also hurts performance rates since it limits what investments managers can employ.
Assets Have a Purpose
There are many types of assets that asset managers manage, such as public company securities, derivative contracts and private company interests. The overarching purpose of these assets is to generate revenue. “In a sense, the asset management industry is similar to an investment bank,”. “Investment banks can create securities and use them to raise capital or generate interest on loan payments. Asset managers can do the same thing by creating securities that are used to generate interest on loans or simply provide a return for shareholders.”
A private equity firm, for example, buys shares in a company and then holds onto those shares until it’s sold at a profit. Similarly, a mutual fund can buy and sell shares of publicly traded companies based on the value of their underlying assets.
The Science and Art of Asset Management
Investment management is definitely an art form; it relies heavily on qualitative factors such as advisors’ expertise and judgment. Quantitative factors fall into two categories: asset allocation and security selection.
Asset allocation is the process of dividing assets among geographic and industry sectors. Securities are divided according to their risk levels, and then classified within different asset classes such as equities and fixed-income securities. Some asset classes are more volatile than others, so investors may want to allocate their assets accordingly.
Security selection is the decision of which individual securities will be purchased from that pool of potential investments. Investment managers need to consider a number of factors, including liquidity, the length of time for the investment, the expected rate of return on the investment and default risk. Liquidity means how quickly an investment can be bought or sold without affecting its price. The longer it takes to sell a security (i.e. the less liquid it is), the greater the risk of incurring a loss.
Investment managers must be aware of the risks involved with an investment and what will happen if the underlying security goes into default. It’s also important to understand that individual securities can have different rates of return, so it’s crucial to pick correctly. “In choosing their portfolio, asset managers have to understand how these assets interact with one another,”. When you’re thinking about asset allocation, you’re thinking about how two securities will perform relative to each other.
The Future of Asset Management
Asset management has a huge potential for growth due to ongoing market changes and new regulations in place. Given the amount of regulations, the asset management industry is still trying to figure out how to remain profitable in this new environment. Entering into uncharted territory is definitely a challenge, but as long as asset managers are able to adapt their strategies and maximize returns, there will be an abundance of opportunities for growth.