Asset management

Asset Management, also called investment management and money management, refers to the professional management of investment funds for individuals, families, and institutions. Investments include stocks, bonds, convertibles, alternative assets (such as hedge funds, private equity funds, and real estate), commodities, indexes of each of these asset classes, and money market investments.

Asset Management products are offered through separately managed accounts and through commingled vehicles such as mutual funds and private investment funds. Invested funds are generally lumped into the following categories when placed in Asset Management accounts at an investment bank: fixed income, equity, alternative investments (comprised principally of hedge fund, private equity, and real estate investments), and money market.

Asset Classes and Fees

Asset managers specialize in different asset classes, and management fees are paid based on the asset class. For alternative assets, additional fees are paid based on investment performance as well. Fees types can be broken down into four major categories,based on asset class:

1. Alternative assets: Management fees can range from 1% to 2% of assets under management (AUM), and additional fees are charged based on the fund manager’s performance. Some alternative asset managers receive performance fees of 10% to 20% on the annual increase in value of assets. This means that if a high-net-worth investor entrusted $10 million to an alternative asset manager, and the value of this investment increased to $11.5 million in one year (a 15% increase), the asset manager would be paid as much as 2% x $10 million = $200,000 management fee, plus 20% x ($11.5 million – $10 million) = $300,000 performance fee. So total fees paid would be $500,000, which is, in effect, a 5% fee on the original $10 million investment. Although this may seem high, the investor’s net return is still 10% after fees. Therefore, despite the high fee percentage, this may be a suitable fee arrangement for an investor if the net return is better than net returns from other investment choices. Of course, this determination should be made in the context of the riskiness of the investment and the diversification objectives of the investor.
2. Equity and convertible investments: Fees are generally lower for this asset class than for alternative asset investments. Management fees typically range from 0.75% to 1.75% of AUM, depending on the type of equity or convertible investment (U.S. domestic, international, large cap, small cap, etc.). Although it is less common for additional fees to be charged based on the fund manager’s performance for this asset class, depending on the type of fund and the manager of the fund, performance fees may be paid.
3. Bond and commodity investments: Fees are generally lower for this asset class than for equity and convertible funds. Investment fees typically range from 0.50% to 1.5% of AUM, depending on the type of fund (U.S. high grade, U.S. low grade, distressed debt, international, etc.). Performance fees are unusual in bond or commodity investments, but possible, depending on the risk and complexity of the investment process.
4. Indexes: Fees for managing indexes are usually even smaller, ranging from 0.10% to 0.50% of AUM.

Performance Measurement

Fund performance is a key metric when evaluating Asset Management capabilities. Investors measure this by relying on different performance measurement firms, such as Morningstar and Lipper, who compile aggregate industry data that demonstrate how individual mutual funds perform against both indexes and peer groups over time. For alternative asset classes such as hedge funds and private equity, there are specialized industry research firms that track fund performance (e.g., Hedge Fund Research and Alpha Magazine track hedge fund performance, while Preqin Global Private Equity Review, among others, track private equity performance). Most funds are ranked into quartiles based on their relative performance each quarter and each year. Inevitably, top quartile funds draw disproportionately more investable funds whenever rankings are announced.

For most asset classes, performance is measured against a benchmark. This benchmark can be either a well-known index for the asset class being managed, or a benchmark created by averaging the returns of a peer group of funds. For mutual funds, where the focus is on relative returns, performance is compared against indexes and peers. For alternative assets such as hedge funds, it is common to measure performance not only on a relative basis but also on an absolute return basis. These funds attempt to achieve a positive (non-negative) return (and not just beat a certain benchmark) through the use of derivatives and by creating short positions in different asset classes. As demonstrated by the average industry return of –19% in 2008, hedge funds are not always successful at generating absolute returns.

Performance measurement is often not just focused on returns but on risk-adjusted returns as well. Modern portfolio theory has established the qualitative link that exists between portfolio risk and return. The Capital Asset Pricing Model (CAPM) developed by Sharpe in 1964 highlighted the concept of rewarding risk. This led to the creation of risk-adjusted ratios including the Sharpe ratio, which measures the return of a portfolio in excess of the risk-free rate, compared to the total risk of the portfolio. Subsequent efforts to measure risk-adjusted returns have led to improved performance measurement practices.

Rankings

BlackRock is the world’s biggest asset-management firm, a $3.45 trillion powerhouse. One of the ways BlackRock became so huge—swamping its nearest competitors, State Street Corp. and Pacific Investment Management Co. -- was by acquiring other companies. In 2004 it purchased State Street Research & Management (no relation to State Street) for $375 million from MetLife Inc.; two years later it acquired Merrill Lynch & Co.’s investment unit for $9 billion, bringing its assets above the $1 trillion mark. In 2009 BlackRock Completed $15.2 Billion Acquisition of Barclays Global Investors.

BlackRock is a $3.7 trillion asset-management colossus. BlackRock has dodged the worst storms of the crisis: it is now the largest financial institution in the world measured by assets under management.

In 2009 Barclays, a capital-hungry British bank, agreed to sell its investment-management unit, Barclays Global Investors (BGI), to BlackRock for $13.5 billion. The deal more than doubled BlackRock’s assets and diversified the firm’s product line-up: BGI owned iShares, the biggest name in exchange-traded funds (ETFs), a rapidly growing $1.4 trillion industry.

The twenty largest asset managers in 2010 (listed by assets under management):

Rank	Firm	AuM ($mln)
1.	BlackRock	$3,346,256
2.	State Street Global Advisors	$1,911,240
3.	Allianz Group	$1,859,351
4.	Fidelity Investments	$1,699,106
5.	Vanguard Group	$1,509,119
6.	AXA Group	$1,453,285
7.	BNP Paribas	$1,326,730
8.	Deutsche Bank	$1,261,234
9.	J.P. Morgan Chase	$1,252,915
10.	Capital Group	$1,179,695
11.	Bank of New York Mellon	$1,114,511
12.	Credit Agricole	$918,121
13.	UBS	$875,731
14.	Goldman Sachs Group	$871,000
15.	HSBC Holdings	$857,000
16.	Bank of America	$749,852
17.	Natixis	$724,063
18.	Legg Mason	$681,614
19.	Prudential Financial	$667,386
20.	Northern Trust Global	$627,183

Market Overview

Total worldwide assets from the top 100 managers increased by 9.5% to $37.54 trillion in 2010, according to the survey. However, that gain lags the 13.4% jump in the total worldwide assets for all managers, which reached $43.11 trillion during the same period.

Worldwide institutional assets among the 716 money managers surveyed by Pensions & Investments rose 11.5% to $29.24 trillion in 2010, surpassing the pre-crisis high mark set in 2007. Bolstered by a continuing market recovery in 2010, results of the latest annual P&I survey easily put total institutional assets above 2007's total of $27.5 trillion.

The top three managers remained the same as last year. BlackRock led the pack with $2.55 trillion in worldwide institutional assets under management as of Dec. 31, a 3.8% increase over the previous year. State Street Global Advisors came in second again with $1.74 trillion in assets, up 3.7%, while BNY Mellon Asset Management placed third with $1.04 trillion, a 6.3% gain.

According to the survey, cash as a portion of total worldwide assets totaled 12%, compared to 15.2% in the previous year. Fixed-income assets remained stable at 34.7% compared to 34.2%, while equities rose by one percentage point to 41.3%. Hedge fund assets rose to 1.6% from 1.3% of total worldwide assets compared to the previous year. Private equity remained the same at 1%, and real estate assets slightly declined to 2.2% from 2.3%. Other investments also grew by 1.5 percentage points to total 7.2%.

See also

• Wealth management