2.3 Traditional versus Alternative Asset Managers Asset managers are categorized as either traditional or alternative: Focus on long-only equity, fixed-income and multi-asset investment
Trang 1Reading 5 Overview of the Asset Management Industry and Portfolio Management
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The asset management industry serves as a critical link
between providers and seeker of investment capital
across the globe The industry provides professional
investment services for a diverse client base with varying objectives and risk tolerances
2 The Asset Management Industry
North America and Europe manage the largest
proportion of global assets while the assets markets of
Asia and Latin America are the fastest growing
The estimated global investable capital market size has
grown The universe of firms in the industry is broad and
include:
• pure-play independent asset managers,
• diversified commercial banks,
• insurance companies, and
• brokerages
Clients are diverse in nature and include:
• large multinational corporations,
• sovereign wealth funds,
• public funds meeting employee pension
obligations, and
• individual investors planning for retirement
Asset managers offer a broad range of strategies
Specialist managers focus on a specific asset class or
style A multi-boutique firm owns several investment firms
each with their own specialized investment strategy
2.2 Active versus Passive Management
Asset managers offer either active management or
passive management or both Active management
exceeded passive management in terms of global
assets under management and industry revenue
Passive managers attempt to replicate the returns of the
market index The market share of passive management
has risen but its share of industry revenue remains small
given low management fees relative to active
management
Smart beta strategies: involve the use of simple,
transparent, rules-based strategies as a basis for
investment decisions They have higher management
fees and higher portfolio turnover compared to passive,
market-cap weighted strategies
2.3 Traditional versus Alternative Asset Managers
Asset managers are categorized as either traditional or alternative:
Focus on long-only equity, fixed-income and multi-asset investment strategies
Focus on private equity, hedge fund, and venture capital strategies Generate most revenue
from asset-based management fees
Generate revenue from asset-based
management fees Have a higher proportion
of global assets under management and generate a low total of industry revenue
have lower proportion of global assets under management and generate a high total of industry revenue Difference between the two categories is becoming blurred as traditional managers are offering higher-margin products to clients and alternative managers offer a retail version of their institutional alternative strategies or liquid alternatives and long-only investment strategies
• Liquid alternatives are offered through regulated pooled vehicles and feature less leverage, no performance fees, and more liquidity compared to alternative products
The majority of asset management firms are privately owned by individuals Privately owned companies are structured as limited liability companies or limited partnerships Private equity firms take a stake in privately owned asset management firms and engage in
management buyouts
Publicly traded asset managers are less common than privately owned managers but have more assets under management
Trang 2
2.5 Asset Management Clients
Clients are divided among institutional and individual
(retail) Investment strategies are offered to individuals
via highly regulated pooled vehicles such as mutual
funds
Institutional-focused managers package investment
strategies in less regulated and more customizable
product structures such as separately managed
accounts and limited partnerships Products are directly
marketed to institutions or their investment consultants
2.5.1) Individual/Retail Investors
Asset managers distribute products directly to investors
through financial advisers and/or retirement plans
Distribution network for individual investors varies
globally:
• US: Financial advisers are independent or
employed by broker-dealers, banks and trust
companies Many asset managers distribute
investment strategies to investors through
major online brokerage and custodial firms
• UK: Products are sold to independent advisers
• Asian countries: Distribution is dominated by
large regional banks and global banks with
private banking divisions
• Global: High-net-worth individuals are
targeted
2.5.2) Institutional Investors
2.5.2.1) Pension Plans Pension plans are categorized as defined benefit (DB) or
defined contribution (DC) Plan sponsors favor DC plans
due to lower risk for the company DB plans are losing
market share to DC plans but remain sizeable sources of
funds for asset managers
Geographical distribution:
• US, UK and Japan comprise the largest
proportion of global pension assets
• US and Australia have a higher proportion of
assets in DC plans
• Canada, Japan, the Netherlands, and the UK
are weighted towards DB plans
2.5.2.2) Sovereign Wealth Funds (SWFs)
SWFs are state-owned investment funds or entities that
invest in financial or real assets SWFs do not manage a
specific liability obligation (s) and have varying
investment objective and constraints based on investor’s
goals
The largest SWFs are concentrated in Asia and in natural resource-rich countries
2.5.2.3) Banks Banks are financial intermediaries that accept deposits and lend money Banks’ excess reserves are often invested in conservative and short-duration fixed-income investments They seek to earn an excess return on investments > interest obligations due to depositors Liquidity is important for banks as they are required to meet depositor requests for withdrawals Large banks often have asset management divisions offering retail and institutional products to their clients
2.5.2.4) Insurance Companies Insurance companies include two types: life insurers and property and casualty (P&C) insurers
Insurance Company’s General Account:
• The account comprises of insurance premiums from policy holders
• The account is required to be invested conservatively in a diverse range of fixed-income securities
• Portfolio allocations of the account differ among life, P&C, and other specialty insurers because of the varying duration of liabilities and unique liquidity considerations
Insurance Company’s Surplus Account:
• Difference between assets and liabilities
• Typically targets a higher return than the general account
• Invests in less conservative asset classes such
as public and private equities, real estate, infrastructure and hedge funds
Many insurance companies have in-house portfolio management teams for managing general account assets Some insurance companies offer portfolio management services and products in addition to their insurance offerings Insurers increasingly outsource their portfolio management responsibilities to unaffiliated asset managers Insurers may also manage investments for third-party clients
2.5.2.5) Endowments and Foundations Endowments and foundations allocate a sizeable portion of their assets to alternative investments The large allocation to endowments and foundations reflects their long-term horizon
Trang 32.6 Major Investment Products
2.6.1) Mutual Funds
Mutual funds are a primary investment product of
individual investors globally Advantages of mutual funds
include:
• low investment minimums
• diversified portfolios
• daily liquidity
• standardized performance and tax reporting
2.6.2) Separately Managed Accounts (SMAs)
SMAs are managed for the benefit of an institution or
individual Large institutional investors are the largest
users of SMAs
SMAs enable managers to implement strategies that
matches an investor’s specific objectives, portfolio
constraints and tax considerations
2.6.3) Exchange-traded Funds (ETFs)
ETFs are investment funds that:
• trade on exchanges and are structured as
open-end funds,
• enhance tactical decision-making as they
are priced intraday and can be sold short,
• represent the fastest growing investment
product in asset management industry, and
• are used by investors to build diversified
portfolios
2.6.4) Hedge Funds
Hedge funds are often used by investors for portfolio
diversification purposes Hedge fund strategies are
diverse Hedge fund characteristics include:
• Short-selling: Short positions are established
directly or synthetically using derivatives such
as options, futures, and credit default swaps
• Absolute return seeking: often seek positive
return in all market environments
• Leverage: Rely on financial leverage (bank
borrowing) or implicit leverage (using
derivatives) The use and amount of leverage
depends on the investment strategy
implemented
• Low correlation: Historically, some hedge
funds have demonstrated a low correlation
with equity and/or fixed-income asset classes
• Fee structures: Hedge funds charge the
following fees:
o Traditional
asset-management-based fee (AUM fee):
o Incentive (or performance) fee:
o Traditionally hedge funds have charged AUM fees of 2% and incentive fees of up to 20%
2.6.5) Private Equity and Venture Capital Funds
Private equity and venture capital funds seek to buy, optimize and later sell portfolio companies to generate profits They have a lifespan of 7-10 years approximately and take a hands-on approach to their portfolio companies
The majority of private equity and venture capital funds are structured as limited partnerships Limited partnership exist between the fund manager (or general partner) and fund’s investors (or limited partners) Revenue/fees
of funds include:
capital (or net asset value or invested capital) and range from 1-3% annually Fees may decrease some years after investment
to the fund for corporate and structuring services A percentage of the transaction fee
is shared with LPs offsetting the management fee
20%) on sale of portfolio companies which they usually don’t receive until LPs recover their initial investment
generated on capital contributed to the fund
by the GP
2.7 Asset Management Industry Trends
Three key trends in the asset management industry as discussed in this section
2.7.1) Growth of Passive Investing
The growth of passive investing is attributed to low cost for investors as management fees for index funds are only a fraction of those for active strategies as well as the fact that efficiently priced markets make it difficult for active asset managers to generate ex ante alpha
2.7.2) Big Data in the Investment Process
The digitization of data and exponential increase in computing power and data storage capacity have expanded additional information sources for asset managers Massive amount of data containing information of potential value to investors are created and captured daily which includes structured and unstructured data
Trang 4Asset managers are relying on advance statistical and
machine learning techniques to help process and
analyze new sources of data Third-party vendors also
supply a vast amount of new data for asset managers
New popular sources of data include:
• social media data: real-time media and
content outlets provide meaningful market
and company-specific announcements for
investors and asset managers
• and imagery and sensory data: satellite
imagery and geolocation devices provide
vast real-time data to investment
professionals
Asset managers and investment market participants are
participating in an information arms race and managers
must discover data with predictive potential and do so
faster than fellow market participants Substantial
investments are required to convert structured and
unstructured data into alpha generating and
security-level decisions
2.7.3) Robo-Advisers: An Emerging Wealth Management
Channel
Robo-advisers are technological solutions which provide
wealth management services such as investment
planning, asset allocation, tax loss harvesting and
investment strategy selection
Robo-adviser platforms range from exclusively digital investment platforms to hybrid platforms which offer digital investment advice and the services of a human financial adviser
Rapid growth in robo-advisory assets is driven by:
• Growing demand from mass affluent and younger investors: The efficiency of robo-advisory and scalability of technology means that customized but standardized investment advice can be offered to a wide range and size of investors
• Lower fees: Robo-advisors charge lower fees compared to traditional investment advisors In addition, robo-advisors use low fee underlying portfolio investment options such as ETFs or index funds when constructing client portfolios
• New entrants: Due to low entry barriers, large wealth management firms have introduced robo-adviser solutions to service certain customer segments and appeal to a new generation of investors Insurance companies and asset managers are also developing robo-adviser solutions
3 The Portfolio Management Process
The portfolio management process includes the
construction and monitoring of an asset owner’s or asset
manager’s portfolio The process:
• applies regardless of whether the asset
manager relies on an external party to make
the investment decision or otherwise makes
decisions internally;
• the process rests on a foundation of good
investment governance and includes
assignment of decision-making responsibility
to qualified individuals
• portfolio management process must
reconcile asset owner objectives with
possibilities offered by the investment
opportunity set
• begins understanding asset owner’s
(individual or institution) entire circumstances,
objectives, constraints, and other
preferences
• combines client circumstances with capital
market inputs to construct portfolios This
further aids in making passive and active
investment decisions
Portfolio managers need to consider the following:
• The financial goals of clients
• The client’s financial resources (income and assets)
• The client’s financial obligations (expenses and liabilities)
• The client’s entire economic balance sheet including conventional and
non-conventional assets and liabilities
• How client assets are invested – clients manage a portion of assets themselves or rely on more than one advisor
• Client-specific constraints such as taxes and liquidity
• Risk tolerance of clients The IPS is then created which represents a summation of circumstances, constraints, objectives, and policies that govern the relationship between the portfolio manager and the client
Trang 5To determine the strategic asset allocation for a client’s
portfolio, managers must consider capital market
expectations (CME) for proper structuring of the
portfolio CME represent the macro expectations
concerning risk and return of asset classes Insights from
CME can help form micro expectations in security
selection and valuation
One the asset portfolio is structured it must be monitored regularly and rebalanced as appropriate Regular reporting of portfolio performance and risk evaluation to the client should be made
4 Fundamentals of Investment Governance
Investment governance represents the organization of
decision-making responsibilities and oversight activities
Governance ensures that:
• assets are invested to achieve the asset
owner’s investment objectives within the
asset owner’s risk tolerance and constraints
and in compliance with all applicable laws
and regulations
• decisions are made by individuals or groups
with the required skills and capacity
Research has found a link between good governance
and good investment performance Sound governance
aims to align asset allocation and its implementation to
achieve the asset owner’s stated goals
The reading focuses on investment governance
structures relevant to the pension plan as these tend to
be commonly formalized and articulated in detail
4.1 Governance Structures
Governance focuses on clarifying the mission, creating a
plan, and reviewing progress towards achieving long-
and short-term objectives Management, on the other
hand, focuses on the execution of the plan to achieve
the agreed upon objectives and goals
The three levels of a governance hierarchy for an
institutional investor include:
• Governing investing committee: may
comprise a subset of the board of directors or
an internal committee of staff members
• Investment staff: staff may comprise of
individuals which have full asset
management capabilities or a few individuals
who are responsible for overseeing external
investment managers and consultants
• Third party resources: refers to a range of
required professional services that may not
be available in-house such as investment
managers, investment consultants and so
forth
The six common elements of effective governance models are discussed in the sections 4.2 – 4.6
4.2 Articulating Investment Objectives
Articulating long- and short-term objectives for an investor requires an understanding of purpose For example, the investment objective statement of a pension plan would be to ensure that plan assets are sufficient to meet current and future pension liabilities
A manager needs to understand the following factors when developing the IPS:
• client’s return requirement
• the obligations the assets are required to fund
• nature of cash flows into and out of the portfolio
• asset owner’s willingness and ability to withstand interim declines in portfolio value
The manager needs to find the best risk/return tradeoff that is consistent with the client’s resource constraints and tolerance for risk Both long- and short-term objectives need to be understood
The status of the pension plan (active or frozen) and funded ratio (plan assets/plan liabilities) has a bearing
on future contributions and benefit payments A plan sponsor operating in a cyclical industry may prefer conservative asset allocation to minimize volatility of pension contributions
The nature of inflows and outflows differs across investor types Endowments have some control over outflows but little control over timing and amount of inflows
When determining risk tolerance, multiple risk dimensions should be considered such as liquidity risk, volatility, and the risk of abandoning a course of action at the wrong time
Effective governance requires considering the liquidity needs of the fund and liquidity characteristics of the fund
High risk/high expected return allocations is likely to lead
to wide swings in interim valuations and should be considered in the asset allocation decision
Trang 64.3 Allocation of Rights and Responsibilities
Rights and responsibilities needed to execute the
investment program are decided at the highest
governance level Decisions should be delegated to the
most qualified individuals to make them Allocation of
rights and responsibilities depends on the following
factors:
• size of the investment program
• knowledge, skills and abilities of the internal
staff
• amount of time staff can devote to the
investment program especially with
competing responsibilities
The resources available to an organization will affect the
scope and complexity of the investment program and
allocation of rights and responsibilities For example:
• A small asset size for the investment program
will make diversification difficult across asset
classes and investment managers
• Complex strategies may not be feasible
when an entity:
o lacks developed internal investment
expertise or
o has an oversight committee which
lacks individuals with sufficient investment understanding Organization willing to invest in attracting, developing,
and retaining staff resources and developing internal
controls are better able to adopt complex investment
programs
For large investors, their size may limit their ability to carry
out effective oversight of many investment managers or
otherwise create other governance issues
When allocating rights and responsibilities across the
governance hierarchy, effective governance requires
that decision-making should be delegated to those with
the required knowledge to thoroughly evaluate
alternative courses of action, the capacity to assume
ongoing responsibility of these decisions, and the ability
to timely execute those decisions
Refer to Exhibit 13 of the reading for a systematic way of
allocating duties and responsibilities of running the
investment program
Note: The allocation of rights and responsibilities is
influenced by:
• available knowledge and expertise at each
level of the hierarchy,
• resource capacity of decision makers, and
• ability to act on a timely basis
4.4 Investment Policy Statement
The investment policy statement (IPS) is the foundation of
an effective investment program, serves as the foundation for ongoing fund management and assures stakeholders program assets are managed with care and diligence Features of an IPS:
• Introduction: describes purpose and scope of the document itself and describes the asset owner The purpose and scope section should provide a link between goals and objectives of the asset owner and execution
of the investment program The description of the asset owner should address the:
o context in which the investment program exists,
o business environment of the asset owner, and the
o sources and uses of program assets
• Investment objectives statement: described the asset owner’s philosophy with respect to pursuing returns and the willingness to endure volatility in achieving these objectives
• A statement of duties and responsibilities: outlines allocation of decision rights and responsibilities among investment committee, investment staff and third-party service providers
• Explanation of investment guidelines to be followed and any assets excluded from investments
• A section specifying frequency and nature of reporting to the investment committee and
to the board of directors
IPS will also provide direction for the risk management of investment funds
The IPS is revised slowly over time but variable aspects of the program such as the asset allocation policy and investment manager guidelines will be contained in a more easily modifiable index
4.5 Asset Allocation and Rebalancing Policy
Strategic asset allocation is generally approved by the investment committee Proposals for the strategic asset allocation consider obligations, objectives, and
constraints; simulates possible investment outcomes over
an agreed upon horizon and evaluates risk and return characteristics of the possible allocation strategies Good governance also considers rebalancing decisions IPS should consider general information relevant to rebalancing Specifying rebalancing responsibilities is good governance
Trang 74.6 Reporting Framework
The reporting framework should allow individuals to
evaluate how quickly and objectively the investment
program is progressing towards agreed-upon goals and
objectives The reporting should answer the following
questions:
• Where are we now?
• Where are we relative to goals and
objectives?
• What value has been added?
Key elements of a reporting framework should address
performance evaluation, compliance with investment
guidelines, and progress toward achieving stated goals
and objectives
• Benchmarking – necessary for performance
measurement, attribution, and evaluation
Effective benchmarking allows the
investment committee to evaluate staff and
external managers
• Management reporting – indicates which
parts of the portfolio are performing ahead of
the others and whether assets are managed
in accordance with investment guidelines
• Governance reporting – addresses strengths
and weaknesses in program execution
through regular committee meetings which
can address any concerns
The purpose of the governance audit is to ensure that
established policies, procedures, and governance
structures are effective Governance audits should be
performed by an independent third party
The governance auditor:
• examines the fund’s governing documents,
• assesses the capacity of the organization to
execute effectively within the confines of
those documents, and
• evaluates the existing portfolio for efficiency
given the governance constraints
Effective investment governance:
• Ensures the durability of the investment
program
• Avoid decision-reversal risk: the risk of
reversing a chosen course of action at the
wrong time – the point of maximum loss
• Considers the effect of investment committee
and staff turnover on the durability of the
investment program
• Prevents key person risk: overreliance on one person or long-term illiquid investments dependent on a staff member
• Assures responsibility and prevent the avoidance of personal responsibility
Practice: Example 1 & 2, CFA Curriculum, Volume 1, Reading 5