ASSET MANAGEMENT
What is Asset Management?
Often referred to as the "buy-side", Asset Management is the professional management of assets through investment. "Investment Management" is usually the term to describe the process, and "Asset Management" is generally the term used to describe the industry at large.
Asset Managers manage money on behalf of high-net-worth individuals and a variety of institutions: pensions, 40l(k) platforms, endowments, insurance firms, and other corporate institutions. This is achieved through a variety of vehicles, including mutual funds, hedge funds, separate accounts, and private equity funds, to name a few.
Asset Management is a highly coveted field because it is an industry that offers a degree of stability that is not present in most other financial services sectors, while still offering significant financial rewards and constant intellectual challenge. Additionally, Investment Management is decentralized from a geographic perspective. While major metropolitan centers are still where most firms are located, many mid-size firms, satellite offices of bulge bracket firms, and boutique firms are located throughout the United States.
Depiction of Investment Management Functions
What are the Different Roles in Asset Management for MBAs?
Portfolio Management: This function carries out the actual investment decision-making process. Major responsibilities include buy/sell decision, asset allocation, attribution analysis, and often significant c1ient interaction. The most common roles in portfolio management include Portfolio Manager, Portfolio Manager Associate, and Analyst. Analyst roles are usually filled with undergraduates from top academic institutions who leave after approximately two years to head to business school or switch careers. The Portfolio Manager Associate role is one of the roles where MBA students can start their career. This is most often achieved by securing a summer internship at a mutual fund, an investment management department of a Wall Street investment bank, or a hedge fund.
Research: This function conducts the analysis that allows the portfolio management team to make informed investment decisions. Depending on the firm, Analysts are often assigned: (1) a certain sector of equity or fixed income markets for purposes of specialization, or (2) a specific strategy (Growth, Value, etc.) that allows the Analyst to follow companies in different industries with similar business models or valuation characteristics.
Responsibilities include economic forecasting, financial model building and maintenance, and the sourcing, preparation, and presentation of investment ideas. The most common roles in research include Senior Research Analyst, Investment Research Associate, and Investment Research Analyst. The Investment Research Associate role is the most common way for an MBA student to break into the buy-side. Associates spend several weeks ramping up their knowledge of the industry or area they will be responsible for covering. This is usually accomplished through rigorous classroom training, reading industry publications, and attending trade shows.
Associates are then given a small universe of stocks to cover. Coverage includes preparing and updating financial models and interacting with firm management, including participating in earnings calls and on-site company visits. Research Analyst and Associate positions may focus on fixed income bond portfolios instead of (or in addition to) stock portfolios. Associates either migrate to the portfolio management side of the industry after a few years, or otherwise progress to the Senior Research Analyst role and become a career Research Analyst.
Marketing/Sales/Product Development: Marketing and Sales within the Asset Management business can take several forms. The largest difference in these functions is the nature of the business itself. Asset Management firms are typically either retail businesses or institutional in nature. Retail businesses rely heavily on mass marketing across a variety of media. Institutional Asset Managers rely primarily on marketing personnel who can effectively communicate the strategies and methods of the investment professionals within the firm. Some firms have created roles which abstract the client contact from the Portfolio Manager (as described above).
These roles rely on careful analysis of the investment strategies and performance of investment personnel, ensuring that they are holding to their portfolio mandate and that these strategies can be communicated to clients both in a sales and relationship management capacity. In addition, these roles may involve surveying the investors on a regular basis for new portfolio ideas, performing tasks such as assessing their potential, surveying investors on a regular basis for new portfolio ideas, assessing potential performance via back testing and scenario modeling, and assessing the commercial feasibility of these ideas.
What Skills are Needed?
While people in the Investment Management industry come from a variety of backgrounds, the people who are most successful in the industry have a passion for investing and the markets. Communication skills are critical, as Research Associates spend countless hours presenting their investment recommendations, and Portfolio Managers are constantly meeting with clients and making press appearances. Quantitative aptitude is a must, as is a strong foundation in economics, accounting, and finance. Portfolio Managers must also have the ability to handle the stress of managing large amounts of capital and to deal with the consequences when things go badly.
What are Hedge Funds?
If you are in business school, you have undoubtedly heard the term hedge fund thrown around, most likely by one of the finance jocks in your class. However, what exactly is a hedge fund? Generally, hedge funds are private pools of money that are structured to facilitate loose regulation. Hedge funds have the ability to take on leverage by taking on both long and short positions and using derivatives. In order to invest in hedge funds, an investor must be accredited, which usually is interpreted as having at least one million dollars in investable assets. Hedge funds earn fees in two ways: the first is a fee, usually a percentage of total assets under management (AUM), and the second is a performance fee. The standard bundled fee is "2 and 20", which is a 2% fee on AUM and 20% of profits over a high-water mark. Measuring the performance of hedge funds can be challenging because there is no standard benchmark and there are less reporting requirements. Hedge funds employ a variety of strategies, including equity market neutral, convertible arbitrage, fixed income arbitrage, distressed securities, merger arbitrage, hedged equity, global macro, emerging markets, and fund-of-funds.
Breaking into the hedge fund industry is extremely difficult, as many firms are small and hire infrequently.
Quantitative vs. Fundamental Investment Management
The Asset Management business, like many industries, has undergone a revolution in recent years with the computing power that is now accessible to investors. Quantitative funds, or "quant funds" as they are known throughout the industry, rely on sophisticated algorithms to screen stocks and other investing ideas, and can execute hundreds of thousands of trades a day. Fundamental Investment Management has existed as long as stocks have existed. Its current form can most likely be traced to the publishing of Benjamin Graham's The Intelligent Investor. This text describes in detail many of the tenets of fundamental investment analysis and is considered required reading throughout the industry.
A Day in the Life of an Investment Management Research Associate
7:00 am: Arrive at the office and read the Wall Street Journal and Financial Times, paying close attention to news on the companies you follow
7:30 am: Listen to morning call and read emails from sell-side analysts 8:00 am: Attend morning in-house investment strategy meeting
9:00 am: Listen to a coverage company earnings conference call
10:00 am: Read sell-side company reports, management presentations, and earnings transcripts for a company being covered
11:00 am: Phone calls with industry analysts or company management 12:00 pm: Lunch
12:30 pm: Conduct industry research for the company you are researching
2:00 pm: Pitch a stock you researched all last week to your Portfolio Manager and team
3 :00 pm: Continue researching the company you are following, including reading news, financials, or sections of their most recent annual report
4:00 pm: Review the day's market activity, paying close attention to the industry you cover
4:30 pm: Build/adjust the financial model for a company you are covering
5:30 pm: Check news for any after-hours company news, then continue building out your model and stock pitch support, filling in any research gaps
7:00 pm: Leave the office