How Asset Management Companies Make Money

What is an Asset Management Company and How Do They Make Money?

Asset management companies are investment firms that offer a range of solutions to their clients. Generally, they sell products such as mutual funds or exchange-traded funds and manage private accounts for other companies. In exchange for these services, they charge fees that most often represent a percentage of the assets under management.

Due to economies of scale, clients of larger firms may be able to benefit from lower fees. Fees also depend on other factors such as the asset class, the sector being invested in, or the transaction’s complexity. For example, clients are charged higher fees when their investment strategy involves sophisticated tools such as trading derivatives or taking short positions.

Asset management companies provide investment solutions to a range of clients such as retail, institutional (pension or sovereign wealth funds), insurers, banks, private clients, and wealth managers. Asset management products are pooled investments, often mutual funds or exchange-traded funds, where the company’s involvement can be active or passive.

What Do Asset Management Companies Invest In?

Investors’ demand drives the creation and design of products. Usually, asset managers focus on a specific asset class, market segment, or are generalists. For example, smaller firms may concentrate only on equities and specialize in emerging markets or a distinctive investing style such as value or growth. Usually, the larger the company, the broader the range of products it offers across the active and passive space. For example, the world’s largest asset manager, BlackRock, has assets under management totaling over $1tn, offers products across multiple asset classes – fixed income, equities, alternatives, etc.

What is an Asset Management Company (AMC)?

An Asset Management Company (AMC) is a firm that invests pooled funds from clients into a variety of securities and assets. The main goal of an AMC is to provide investors with more diversified investment options and professional management of their investments.

Types of Asset Management Companies

There are several types of Asset Management Companies, including:

• Mutual Fund Companies
• Hedge Fund Companies
• Private Equity Firms
• Real Estate Investment Trusts (REITs)

Benefits of Asset Management Companies

The benefits of Asset Management Companies include:

• Professional Management: AMCs employ experienced professionals to manage investments, which can lead to better returns.
• Diversification: By pooling funds from multiple investors, AMCs can invest in a wider range of assets, reducing risk.
• Convenience: Investors can benefit from the expertise and resources of AMCs without having to manage their investments themselves.

Expenses and Fees

Clients pay fees to cover the costs incurred by the asset management company. Trading fees (also referred to as transaction costs), administrative expenses, salaries for staff (for example, a mutual fund would need the support of research analysts) are all examples of possible costs. To cover these costs and make a profit, asset managers apply various fees to their products.

Ongoing Charge Fee (OCF)

The ongoing charge fee (OCF) takes a percentage of the total assets. Sometimes this can be a tiered structure, and fees may decrease when size grows.

Ongoing Charge Fee (OCF) Example

For example, a fund of $100m with an OCF of 0.8% would charge $800 000 in fees.

Performance Fees

Performance fees are another way of generating income. Performance fees align the asset manager’s interests with their clients’. Generally, performance fees are a percentage that is charged in addition to the ongoing management fee, but only when the fund outperforms its target.

Performance Fees Example

For example, if a fund has an objective to outperform the FTSE 100 index by 2% annually, any return above that can be subject to a performance fee of 20%. So should the strategy outperform by 6%, the asset manager will charge a 20% performance fee to the additional 4% return.

Other Charges

Some funds may also apply initial and exit charges. They usually represent a percentage of the sum that the investor wants to invest in or withdraw paid upfront.

 What Are the Different Types of Roles in Asset Management?

There are various types of roles that fall into two or sometimes three categories – front office, middle office, and back office.

• Front Office Roles: These roles involve managing money and client-facing activities. Positions include portfolio managers, research analysts, product specialists, and relationship managers. These roles require strong market and investment knowledge, as well as presentation and communication skills.
• Middle Office Roles: These roles focus on investment advice, performance and analytics, research analysis, trade management, dealing and execution, sales and distribution, compliance, relationship management, client reporting, and marketing.

Back Office Roles: These roles involve fund accounting and NAV reporting, corporate actions, reconciliations, financial management and ad hoc reporting, and settlements. In the free download you will find typical activities and responsibilities across the front, middle, and back office of an asset management company.

Additional Resources

Types of Roles in Asset Management

How to Get a Job in Asset Management

Portfolio Management Course