Asset management – a comprehensive guide

Asset management is the strategic handling of a client’s money with two core objectives — capital appreciation and risk mitigation — in a bid to create wealth over time. Fund houses start the process by identifying the client’s financial goal. They then seek diverse investments across stocks, bonds, commodities, and other financial and physical assets to align with the objectives.

In recent years, the industry has witnessed significant growth. The top 500 asset management companies saw a sharp jump in assets under management in just five years. The figure rose from approximately $18.1 trillion in 2017 to $113.7 trillion in 2022, according to studies by Thinking Ahead Institute, and Pensions & Investments. The surge underscores the growing investors’ confidence in fund houses.

Why is asset management important in finance and investment?

Asset management is pivotal in financial planning as it provides structured oversight and strategic direction for investing money.

Though today’s investors have access to various financial instruments, they lack the expertise to choose the right investment tools that aid capital growth. Asset managers play the role of experts here. Through rigorous analysis, they help the investors maximize returns while mitigating risks, thereby preserving wealth over the long term.

Asset management firms typically serve a wide range of clientele, from affluent individuals to major institutional investors (such as pension funds, insurance companies, educational institutions, nonprofits, and sovereign wealth funds).

What are the different types of assets?

There are different types of assets that serve different purposes and carry distinct risk profiles, including:

• Stocks: Stock investments represent ownership of company stocks and offer the opportunity to earn high returns through capital appreciation and dividend income. However, they carry high volatility risk and the potential for loss; and the returns are not guaranteed. Stock investments are considered good bets for long-term investment.
• Bonds: Bonds are debt instruments issued by governments, corporations, or municipalities to raise capital. They are fixed income securities and, hence, carry lower risk than equities. Nevertheless, they are subject to interest rate, credit, and inflation risks, which can affect their value and returns.
• Real estate: Real estate investments, which involve the acquisition of physical properties, including land and buildings, bring income through rental payments and capital appreciation over time. Though such investments are great for portfolio diversification, they are illiquid, incur high maintenance costs, and fluctuate in value according to market conditions.
• Commodities: Commodities are tangible assets such as metals, energy resources, and agricultural products traded on commodity exchanges. Supply and demand dynamics impact their trading prices directly. These assets act as a hedge against inflation and provide diversification benefits, but investors need to be cautious of high volatility and price fluctuations.
• Cash and cash equivalents: Cash and cash equivalents are highly liquid assets like physical currency, checking account balances, and short-term government securities. These assets are ideal for emergency funds and meeting short-term goals, but they offer minimal returns and, hence, are susceptible to inflation risk.
• Mutual funds: Mutual funds are pooled investment vehicles managed by professional fund managers. By investing in mutual funds, investors automatically get access to a diversified portfolio of stocks and bonds managed by experts. However, they should also consider factors like management fees, market volatility, and potential underperformance relative to benchmarks.
• Gold: Gold serves as a strategic component in a diversified portfolio. It is a reliable hedge against inflation, preserving wealth during economic instability.

What are the objectives of asset management?

The key objective of asset management is wealth creation through strategic investment decisions. Other objectives include:

• Maximizing returns: The primary goal of asset management is to maximize financial returns by investing the existing assets. This can be achieved through strategic planning, continuous monitoring, and periodic reassessment to align investments with evolving market conditions and one’s goals.
• Lifecycle management: Along with pursuing maximizing return, asset management should be focused on wealth creation so that assets survive throughout their entire lifecycle and continue to provide income even after 30 or 40 years, or even more.
• Risk management: Asset managers must also develop comprehensive risk-management strategies to safeguard investments. This includes identifying potential risks, assessing their impact, and implementing mitigation measures to protect the assets.
• Asset monitoring: Financial instruments that are providing prudent returns today might not yield similar returns tomorrow; or the investment tools that are suitable for an investor today might turn out to be risky tomorrow. Hence, periodic reassessment to align assets is critical.
• Transparency and accountability: To operate a clear and transparent business, fund managers need to keep their books in good shape, with accurate record-keeping, regular audits, and transparent reporting practices. Clear and transparent processes in asset management build stakeholder trust and ensure accountability.
• Regulatory compliance: Asset managers must adhere to relevant laws, regulations, and industry standards while managing investments to avoid legal penalties.
• Data-based decision making: Like everything else, asset management is also data-driven today. Data-backed decisions about acquisition, schedules, maintenance, and selling reduce uncertainties and improve performance. However, human intervention and monitoring remain critical to spot technical errors and other discrepancies.

What are the challenges in asset management?

Asset management firms face multiple challenges, from market volatility to regulatory compliance. According to Deloitte, they include:

• Volatile markets: Market fluctuations and economic unpredictability can significantly impact asset value and performance. Hence, developing strategies, such as diversification and maintaining liquidity, are critical to help mitigate risks during economic downturns.
• Regulatory compliance: The regulatory environment for asset management is intricate and ever-changing. Hence, fund houses have to adapt continuously, and keep changing their processes to align with international, national, and local regulatory changes.
• Data management and security: The cybersecurity threat is a massive challenge as it involves dealing with huge amounts of data daily. Robust data management systems and cybersecurity measures are vital to safeguard sensitive information; such risk management measures are continuous processes and need constant upgrading.
• Geopolitical risks: Globalization has broadened the scope of asset management but also introduced new risks — geopolitical tensions (such as the Russia-Ukraine war), trade disputes (such as the United States versus China). Hence, changes in international policies can significantly affect asset values.
• Cost management: Balancing cost efficiency with high-quality asset management services is an ongoing challenge. Asset managers must seek ways to reduce operational costs without compromising service quality.

Benefits of automation and technology in asset management

The use of AI and ML has taken asset management solutions to a new level by enhancing efficiency, accuracy, and overall organizational effectiveness. Deloitte has outlined the significant benefits of automation and technology in asset management:

• Streamline operations: AI and ML have reduced the time spent on manual tasks involved in asset management, such as data entry, tracking, and reporting. This simple change helps the organization focus more on strategic initiatives and achieve higher productivity.
• Enhances accuracy: AI and ML eliminate manual data entry errors and provide real-time tracking and predictive maintenance in asset management. Moreover, integrating all systems and processes ensures a consistent flow of data across departments, allowing investors to make informed and, hence, more accurate decisions.
• Minimizes risks: Technology-enabled systems allow companies to identify potential risks and compliance issues quickly, enabling timely mitigation actions. They also enhance asset visibility and minimize the risk of loss, theft, or underutilization.
• Scalability and cost savings: The pattern of organizational growth and business is evolving rapidly. Using the right technology in asset management provides scalability and adaptability to manage increased asset volumes and complexities effectively and leads to substantial cost savings. Automation reduces the need for manual intervention and other infrastructural expenses, making it a crucial component in modern asset management.

Future trends in asset management

The asset management industry requires a strategic reassessment and alterations due to the evolving digital landscape, financial constraints, and global changes. This requires improving efficiency, forming innovative partnerships, and balancing resilience with large-scale innovation to capitalize on new opportunities.

BNY Mellon’s trend report on the future of asset management delves deeply into the evolving priorities and challenges that are foremost on the minds of over 200 industry leaders today.

“With the prospect of optimized digital solutions to engage better with ‘mass affluent’ and high‑net‑worth (HNW) individuals, asset managers are keen to level up this capability. But in the short term, traditional intermediaries will continue powering growth here – along with service providers, from whom asset managers increasingly (54%) expect to receive help both with distribution channels and a range of advisory services,” the report said.

The report identified four major future trends in asset management solutions, which include:

• Data and technology: Data and analytics will be the leading trend in asset management for the next 3–5 years. Asset managers are under pressure to use opportunities arising from big data and advanced technologies like cloud computing, AI and ML for effective analysis. They are also focused on enhancing the adoption and development of technology-related tools.
• Product and asset allocation: There’s a noticeable uptick in interest towards expanding the utilization of Exchange Traded Funds (ETF) structures, alternative investments, and values-based investing within the asset management industry. However, asset managers and owners exhibit differing perspectives on alternative investments. While asset managers express optimism with growing interest in real estate, private credit, and hedge funds, asset owners strongly prefer infrastructure investments. 68% of asset owner respondents anticipate increasing their allocation to infrastructure, compared to 33% among asset managers. Conversely, while 42% of managers foresee growth in private credit offerings over the next two years, only 26% of owners share as much optimism, the report says. The survey findings also underscore a persistent emphasis on values-aligned investing and Environmental, Social, and Governance (ESG) criteria.
• Outsourcing: The study reveals a widespread consideration for outsourcing nearly all in-house functions, including core alpha-generating investment activities. While most asset managers and owners currently retain portfolio management and asset allocation in-house, significant minorities—25% of asset managers and 30% of asset owners—are either exploring outsourcing or planning to expand it in these critical areas. The fund houses say that by outsourcing activities crucial to generating investment alpha, managers can potentially enhance their focus on delivering value to clients and stakeholders.
• Distribution: Asset managers anticipate significant changes in the distribution landscape, shifting their growth focus from intermediaries to institutions, particularly by expanding their direct-to-consumer (D2C) channels, the report says. Currently, 89% of asset managers already have D2C distribution capabilities, with 72% planning to enhance these capabilities over the next three years.

Key Takeaway

In coming days, asset management is likely to see a massive change owing to automation, expanding product offerings, outsourcing, and improving distribution channels.