Asset Management in a nutshell
23 October 2015
Any one of us managing his/her personal assets is in essence performing some sort of asset management. Asset management in the financial world is understood to mean the professional management and trading of securities and other types of assets to achieve a specific investment goal as set out by the investor. Asset management exists because investors with assets (retail or institutional) don’t always have the expertise and knowledge necessary to invest their assets in order to receive a good return in their investment and increase their wealth.
One of the basic goals of asset management therefore, is to channel funds from those that have saved to those that have a shortage of funds. Those who need funds can be companies, governments and households. Those that save, can be the average person, high net worth individuals, pension/retirement funds, insurance companies or governments with surplus. In fact, the biggest clients for asset managers are sovereign wealth funds, like SAMA (Saudi Arabia’s monetary agency which manages the sovereign wealth fund). SAMA’s assets were valued at $532.8 billion as of January 2013, making it the fourth-highest-valued sovereign wealth fund in the world, behind Norway’s Government Pension Fund, with a global worth of $664.3bn, the UAE’s Abu Dhabi Investment Authority (worth $627bn) and China’s State Administration of Foreign Exchange (worth $567.9bn).
Asset managers according to the Financial Stability Board (the international body that monitors and makes recommendations to the G20 on financial stability), unlike banks are not systemically important because they are the managers of third-party assets, not the owners of assets and risky balance sheets like the banks. Funds managed by asset managers are not inherently leveraged as banks are, therefore the capital rules that have been applied to banks and insurers cannot be logically applied to asset managers. This is good news for asset managers because it means they are not subject to the rigorous CRR regulations applicable to banks.
Asset management can be exercised either on an own account or for third parties. If it is done on an own account, investors have to manage their own portfolios. Alternatively, private and institutional investors may delegate the management of their portfolios to companies specialized in asset management and so rely on the expertise of these third-party asset managers for the management of their assets.
Portfolios can be made up of investment funds (pools of assets with specific risk levels and asset allocations into which one can buy and redeem shares) or any other type of asset.
In 2013, total assets under management in Europe reached an estimate of EUR 16.8 trillion, growing at a steady rate of almost 10% per year. Typically asset managers receive mandates from institutional investors and high net worth clients, whereas investment funds serve both retail and institutional investment needs. Institutional investors represent the largest client category, accounting for 76% of total assets under management (half of the institutional investors are insurance companies and pension funds acting on behalf of millions of households).
External asset managers are usually regulated entities which have to follow specific organizational and operational requirements. In Cyprus they can be investment firms (IFs) (provided they are licensed to provide the investment service of portfolio management), UCITS management companies or Alternative Investment Fund Managers (AIFM). For small funds with a limited number of investors, it can be any company which, in accordance with its instruments of incorporation, has as its sole purpose the provision of the portfolio management service to the specific alternative investment fund with limited number of persons. In this case, the expertise and overall appropriateness of the manager of the alternative investment fund with limited number of persons is assessed by the Cyprus Securities and Exchange Commission, on the basis of the information submitted in the file of the application to grant authorization.
Whatever corporate structure the asset manager chooses to take (IF, or UCITS management company, or AIFM) it will have to satisfy some basic obligations. It has to have adequate initial capital (the amount of which is stated expressly in the Law), it has to have suitable shareholders that will need to be approved by CySEC, suitable persons with knowledge and expertise who will effectively direct the business, suitable staff who can perform their tasks, and adequate organizational procedures.
According to CySEC, there are currently nine licensed Alternative Investments Fund Managers operating in Cyprus. There is also one UCITS management company and more than a hundred IFs which are licensed to carry out portfolio management. Plus, more are waiting in the pipeline to receive authorization, showing a growing interest to develop this part of the financial industry in Cyprus, not previously considered.
Successful asset managers are therefore, those that invest their client’s money wisely in a variety of financial or non-financial products, while being careful to diversify enough their portfolio in order to minimize potential risks, while at the same time maximizing the return their investors get from their investments.
