In the world of financial services, the term Asset Management refers to the investment of securities and cash in a managed way. A wide range of financial products is available for investment purpose under asset management. Asset management is considered as a service that is generally handled by a firm that directs or handles investment portfolio or wealth of clients on their behalf. The clients are mostly high net worth individuals. In other words, Asset management refers to a systematic approach of developing, maintaining, operating, disposing, and upgrading assets in the form of the most cost-effective way.
Asset management companies (AMCs) are investment firms that pool investments or funds from different stakeholder, i.e. institutional and individual investors. These firms further do investment management of these funds by investing in various investment options available such as equities, real estate, stocks, gold, bonds, debt. In professional terms, these companies are known as fund managers as they decide where to invest the pooled money. It is the responsibility of fund managers to identify suitable investment options to meet the investor’s objectives. For this, fund manager of asset management companies performs evaluation task of different aspects like industry risks, market scenario, before deciding upon the right investment options as per investment goals. The ultimate aim of doing such an evaluation is to make investment decisions that are profitable in terms of providing maximum ROI (return on investment) to investors. AMCs are considered as buy-side companies as they support clients in purchasing investments, i.e. which investments to buy.
The evolution of asset management companies is discussed below:
- The origin of Asset Management companies can be seen at the time of the introduction of first mutual fund in 1924 in the US, i.e. MFS Massachusetts Investors Fund. If we talk about the origin of Mutual fund or Asset management industry in India, then it was initiated in 1963 with the foundation of UTI (Unit Trust of India) which was the initiative of RBI (Reserve Bank of India) and Indian Government as the first mutual fund company in India. In 1987, the emergence of the public sector, Non-UTI mutual funds were held by the LIC (Life Insurance Corporation of India), public sector banks, and GIC (General Insurance Corporation of India).
- In the 1960s, alternative assets i.e. hedge funds were introduced in the US and it became an asset class by the 1980s. In the Indian context, asset class like hedge funds was introduced as AIFs (Alternative Investment Funds) in 2012.
- In 1980, the first IPO (initial public offering) was initiated in the US by an asset manager through State Street Corporation. In India, Reliance Nippon Life Asset Management listed for the same in 2017.
The evolution is discussed in the chart below:
Business Model of Asset Management Companies
The business model of Asset Management Companies is described below.
Different elements mentioned in the above business model canvas of Asset management companies are as under:
- Risk reduction: Investment management demands risk management and is considered as a crucial element of any type of investment. Asset management companies are able to reduce risk by creating a pool of savings from a lot of investors and supporting individuals to diversify their financials in different assets. Asset managers identify and track risks as per past experiences and by doing so; they can identify and shrink the critical factors that may harm the investment.
- Professional analysis: Asset management companies provide valuable guidance in making important decisions related to investments. Decisions related to assets of clients are being assessed by professionals carrying a vast experience and knowledge of how the investment market revolves.
- Outperforming the market possibility: Asset management companies offer a much better opportunity of outperforming the market, which can result in a higher return than average return. This can be possible by taking more risks and asset managers are efficient at handling those risks.
- Protection of Portfolio in the market slow down: Nowadays the market is quite uncertain and insecure. Unexpected changes can be there in politics and environment that lead to uncertainties. Asset management companies provide a way to protect investments in such an uncertain and unstable market environment.
- Investment expertise services: The manpower of asset management companies is finance professionals carrying extensive knowledge and experience in handling investments and these professionals have specialization in certain asset areas like equities of specific sectors, real-estate, etc.
Asset management companies mainly serve the following three categories of customers or clients:
1.Retail Investors: These are individual investors who are non-professionals and usually sale and purchase the mutual funds, securities or exchange-traded funds by taking services of Asset management companies. Securities are purchased by retail investors for their own personal accounts and generally, they trade in comparatively fewer amounts as compared to big investors.
2.Institutional Investors: These are big investors or large entities that are indulged in the trading business in the financial markets. Different corporate and other business entities come under this category of clients. Credit unions, mutual funds, insurance companies, investment banks, etc. generally fall under this category of investors. Institutional investors carry a large pool of resources, and they do a lot of financial analysis and research while deciding upon investments. A large pool of assets that are represented by these clients are utilized for pension funds at the corporate level, government pension funds, foundations, etc.
Institutional investors are broadly classified in below 6 types:
- Pension funds: This investment pool is aimed at paying employees at the time of retirement.
- Mutual funds: This is an investment tool that includes a portfolio of bonds, stocks, or other securities. There are three ways to earn money from these funds i.e. capital gain due to security sale, dividend payouts, and actual mutual fund sale. The different variety of mutual funds includes bonds in terms of fixed-income, stocks or equity, money market funds, etc.
- Hedge funds: This includes capital that is pooled from investors for investment purpose. These are financial partnerships carrying the purpose of earning active returns through the investment of their investors by using pooled funds and adopting different strategies.
- Investment Banks: Different banks such as CitiBank, JP Morgan, Bank of America, etc. fall under the category of Institutional investor clients of Asset management companies. These facilitate capital market access and support corporations with financial decisions of investment.
- Insurance companies: These invest the premium paid by their clients into more stable sources like bonds. They also invest in the stock market.
- Endowment funds: Different funds gathered from donations, grants, contributions, etc come in this category and are invested further.
3. High-Net-worth Individuals (HNIs): These are the fastest-growing type of clients of AMCs. In India, HNI clients are those individuals who have 2 crores plus investible capital. These clients have assets more than liabilities and of a huge margin.
Asset management companies are in collaboration with different organizations and businesses such as
- Advisory and supplier partnership: This includes suppliers related to technology, tools, and various other services to assist AMCs in developing and offering their products and services.
- Strategic and Alliance partnership: This covers various financial service and technology firms as well as other service companies with whom AMCs are in partnership for resource sharing and collaboration on JV (joint venture) projects.
- Channel partners: This includes various 3rd parties that are indulged in providing products and services on behalf of Asset management companies.
Below are the various activities an Asset management company performs:
- Allocation of asset: AMCs invest the money of clients or distribute assets in equity and debt based on the market conditions and rate of interest. Depending upon the financial goal of the mutual fund, asset manager or fund manager decides for suitable assets for making an investment. For this, knowledge and professional expertise of asset managers play a significant role in resource allocation to various asset segments efficiently.
- Formulation of the portfolio of investment: One of the key tasks or activities of AMC is to develop or create an investment portfolio. It requires extensive research and analysis of the performance of different asset segments so that a risk-adjusted portfolio can be created. For this, experts review macro and microeconomic aspects, the market, and the performance of funds on a regular basis. They further transfer the relevant reports to the asset managers or fund managers who take decisions for generating good returns on investments.
- Performance assessment: Asset management companies are answerable to investors and trustees for justifying investment-related decisions. To ensure this, fund performance assessment is done by considering fund returns, asset allocation, etc. AMCs further make this performance review available to all the trustees and investors.
Asset management companies have different key people who are the main resources that enable the business to manage and act on their client’s behalf. These key individuals include:
- Financial analysts: These play a significant role within an AMC. The activities of Financial Analysts include conducting research on various investment options and due diligence on futuristic opportunities, identifying the best opportunities to sell and purchase of assets.
- Economists: These individuals keep track of the current scenario of the market situation, which is an essential activity for AMCs.
- Asset managers: These people are responsible for final decisions related to asset management based upon the insights from economists and financial analysts. Liasioning with clients and ensuring their best interest come under the portfolio of Asset Managers.
- Website: All relevant information and important contact details are available on the website of Asset management companies for their clients. One can apply online for their services through the website, even.
- Mobile app: Asset management companies provide a Mobile app facility to its clients for providing all reports, digital transactions, and host of other related services. The partner portal is also facilitated by AMCs for their partners to support report generation and transactions.
- Information technology: AMCs use best and advanced IT systems and processes as its resources for customer services, research activities, dealing, risk management, saving time in their operations, and other functions. These companies upgrade their application software and IT infrastructure on periodic intervals.
The channels of AMC are:
- Brokers: These are the individuals that develop and maintain a relationship with investors through trade execution, providing research, and advice. For this brokers get a commission from the AMCs.
- Salesforce team: AMCs internal sales team also provides clients the access of AMC’s entire range of mutual funds
- Websites: Asset management companies are using the internet for maintaining direct contact with their clients via website. Through these websites of investment plans like mutual funds, investors make an investment in direct plans. Websites of AMCs contain all information related to their products and services as well as global operations.
- Financial Advisors: Different Tax consultants, Chartered accountants are also distribution channels of AMCs.
- Mobile App: AMCs also offers its products and services through mobile apps that can be easily downloaded on smartphones.
The customer relationship of AMC is maintained through:
- Asset management companies provide different services to their clients through both mobile and online platforms that facilitate customers to access and manage accounts, payment set-up, money movement, etc. Customers can even apply for financial products without direct interaction with the sales staff of AMCs.
- AMCs also provide personal assistance in the form of technical assistance and ongoing support to their customers through their staff working in various branches. Customers are able to interact with support teams through email or phone. Moreover, Asset management companies also provide different online resources such as news releases, reports of market insights, data visualizations. In order to keep customers informed and up to date with the activities of the market, social media connection is provided via Twitter, LinkedIn, Facebook, Instagram, etc.
- 24*7 customer support services are available through the use of technology like mobile apps by AMCs. Customers can be connected with these companies through their other ways too, like network branches, call centres, service centres, SMS systems, etc.
The various expenses incurred by Asset management companies are related to the operation of their branches, Maintenance of communication and IT infrastructure, market schemes implementation, partnership management, salary and benefits cost of staff, payment of professional fee, etc.
The revenue model can be described through the chart.
- Asset management companies generate revenue mainly through annual management fees. Few AMCs earn money through this only. Wherein, some of the AMCs earn money from commissions and transaction fees.
- AMCs generally take a fee equivalent to a percentage of total AUM (Assets under management) from their customers. AUM is basically the total capital amount that investors provide.
- Revenue from PMS (Portfolio management services) of AMCs:
PMS is basically an investment portfolio in debt, stocks, and fixed income products which are operated and managed by a professional fund manager to meet specific investment goals. Individual securities are owned by an investor while investing in PMS. A PMS fee charged by AMCs is part of their revenue. Three types of the fee are charged by PMS services i.e.
- Entry Load: At the time of purchasing the PMS, AMCs may charge an entry load of 3%.
- Management Charges: Fund management charges or fee are also collected on each PMS scheme. It may differ from 1%-3% and is charged to the PMS account on a quarterly basis.
- Profit-Sharing: In addition to a fixed fee, few PMS schemes involve profit-sharing revenue too, in which the AMC provider takes a certain fee amount or profit on the return earned in the fund.
- Other than the above charges, investors are also charged Custodian fee, Transaction brokerage, Audit charges, and Charges for opening Demat account, etc. by PMS.