THE ASSET MANAGEMENT INDUSTRY: Structure & Evolution

Asset Management
Asset Management refers to the professional management of investment funds for
individuals, families and institutions
Investments include stocks, bonds, convertibles, alternative assets (such as hedge
funds, private equity funds and real estate), commodities, indexes of each of these
asset classes and money market investments
Asset managers specialize in different asset classes and management fees are paid
based on the asset class
Two Organization Forms/ Two Basic Ways or Approaches to Asset
Management
Contract directly with a management and advisory firm (Private Management
& Advisory firms)
Commingling of investment capital of several clients in an investment
company (Investment Companies)
Differences between These Two Forms
Private management and advisory firms develop a personal relationship with
clients, getting to know the specific investment objectives and constraints of
each
Investment company offers a general solution
PRIVATE MANAGEMENT & ADVISORY FIRMS
the most forthright structure resulted to individuals as well as the institutional
investors make contracts directly with this structure
These services can range from providing standard banking transactions (savings
accounts, personal loans) to advising clients on structuring their own portfolios to
actually managing the investment fund themselves.
An important feature of this structure is that each client of the management firm has
a separate account.
INVESTMENT COMPANIES
Financial intermediaries that pool the assets of individual investors and invest the
fund in securities or other assets
Major Duties
- Investment research
- Management of the portfolio
- Administrative duties
Invests a pool of funds belonging to many individuals in a single portfolio of
securities.
Issues to each investor new shares representing his/her proportional ownership of the
mutually held securities portfolio, which is commonly known as FUND.
Contract directly with a management and
advisory firm
-Relationship with client
-Assets under management (AUM)
-Separate accounts
-Customized

Commingling of investment capital of

several clients in an investment company
-Invest a pool of funds belonging to many
individuals in a single portfolio of securities
-Issue
new
shares
representing
the
proportional ownership of the fund

SOURCES/ REFERENCES:
Asset Management & Performance Evaluation by David Stowell (L2_assetMgt&perfEval.ppt)
Investment Analysis and Portfolio Management First Canadian Edition by Reilly, Brown,
Hedges, Chang, Pomeara, Copyright 2010 by Nelson Education Ltd. (C17_Reilly1ce.ppt)
Understanding Investment Analysis & Portfolio Management
BREAKDOWN BY FUND CHARACTERISTIC

By major Means of Distribution

Sales force
Direct purchase from the fund
Direct institutional marketing
By Investment Objective
Equity funds
Bond funds
Hybrid funds
Money market fund

Private Management and advisory firms

The larger management companies offer a broader range of services and products, the
majority of Private management and advisory firms are still much smaller and more narrowly
focused on particular niche of the market. PCM a growth oriented equity and fixed income
manager located in southern California, PMC utilize a bottom up security selection process,
with its portfolio manager looking for companies that have exceptional investors and net
worth individuals in both separate and commingled accounts.
Private Sector is principally the ownership owned by shareholders or entrepreneur. Public
Sector its a controlled by political forces and private sector controlled market forces so
issued the political communities.
Advisory Firms
A consulting firm is a firm of experts (consultant) providing professional advice to an
organization or an individual for a fee. The primary purpose of consulting firm is to provide
access to industry specialist / consultant and subject matter expertise.
"Management of Investment Company Shares"
Organization And Management Of Investment Company Shares
Investment company- is a company that issue securities and is primarily engaged in the
business of investing in securities
the management of the portfolio of securities and most of other administrative duites are
handled by a separate investment management company hired by the board of directors
of the investment company
Investment management company- company that actively manages an investor's asset
and/or equity in order to achieve the investor's financial objectives. these companies are
available to both private and institutional investors.
The major duties of the investment management company
investment research
management of the portfolio and
administrative duties such as issuing securities and handling redemptions and
dividends
Open-End Investment Versus Closed-End Investment
Open-End Investment-also known as Open-End Fund is a type of mutual funds that
does not have restrictions on the amount of shares the fund will issue. it demand is high
enough, the fund will continue to issue shares no matter how many investors there are.
Open-end investment also buy back shares when investors wish.
Closed-End investment- also known as Closed-End Fund is a publicly traded
investment company that raises a fixed amount of capital through an initial public offering.
the fund is then structured, listed and traded like a stock on a stock exchange.

Differences
Buying and selling shares When an investor wishes to buy or sell shares of a closed-end
fund, another investor must be located who wishes to sell or buy these shares. Normally, an
investor approaches a broker who places the order on an exchange in which the CEF is
traded, and waits until the order is executed. The pool of money collected by the CEF for
investment remains constant after the initial public offering.
In contrast, the number of outstanding shares of an open-end fund changes due to issuances
and redemptions. When an investor wishes to buy shares in an open-end fund, the fund
issues the investor new shares. Similarly, when an investor wishes to sell shares in an openend fund, the fund redeems these shares.
Share price The price at which an investor buys or sells shares of a CEF is the market price,
as determined by demand and supply market principles. For example, if many investors wish
to buy shares of a CEF and few shares are available for sale, an investor may be able to sell
the CEF at a premium to the net asset value (NAV).
In contrast, the price at which an investor buys or sells shares of a mutual fund is the NAV of
the assets under management at the close of a given business day.
CEFs may trade at a discount or premium to their NAV. (If the market price of a CEF is
greater than its NAV, it is trading at a premium. If the market price is less than its NAV, it is
trading at a discount.) A CEF is not required to buy back its shares from investors upon
request.
Global Investment Companies
Investing Global Companies
Diversifying globally is especially useful when countries have segmented markets
Alternative to country diversification: global sector diversification
MSCI developed the All Country Sector Indices using Global Industry Classification
Standard (GICS) system

Global investing benefits

Global stock market moves differently from domestic markets
Some international markets grow much faster than domestic markets
Global diversification: potential to cushion investor portfolios from downward
fluctuations in domestic markets
Adding foreign stocks to portfolio may enhance total returns while reducing overall
volatility.
Diversifying globally is especially useful when countries have segmented markets
Alternative to country diversification: global sector diversification

INTERNATIONAL FUND
A mutual fund that can invest in companies located anywhere outside of its investors'
country of residence. It is also referred to as a "foreign fund. Many people confuse an
international fund with a global fund. The difference is that a global fund includes the entire
world, while an international fund includes the entire world excluding the investor's home
country.
FOREIGN FUND
A mutual fund, closed-end fund or exchange-traded fund that invests in companies
located outside of the investor's country of residence. It is also known as an "international
fund. Foreign funds offer individual investors access to international markets. Investing
abroad poses risks, but can also help investors diversify their portfolios.

It is important to recognize the difference between global funds and foreign funds. Global
funds can invest in securities from any country, including the investor's home country.

CATEGORIES IN BOTH INTERNATIONAL AND GLOBAL FUNDS

MONEY MARKET FUND
A money market fund's purpose is to provide investors with a safe place to invest
easily accessible, cash-equivalent assets. It is a type of mutual fund characterized as a lowrisk, low-return investment. Because money market funds have relatively low returns,
investors such as those participating in employer-sponsored retirement plans, might not
want to use money market funds as a long-term investment option because they will not see
the capital appreciation they require to meet their financial goals.
Unlike stocks, money market fund shares are always worth $1
EQUITY FUND
It is a mutual fund that invests principally in stocks. It can be actively or passively
(index fund) managed. It is also known as a "stock fund". Stock mutual funds are principally
categorized according to company size, the investment style of the holdings in the portfolio
and geography:
Size is determined by a company's market capitalization, while the investment style,
reflected in the fund's stock holdings, is also used to categorize equity mutual funds.
Stock funds are also categorized by whether they are domestic (U.S.) or international. These
can be broad market, regional or single-country funds. There are so-called "specialty" stock
funds that target business sectors such as healthcare, commodities and real estate. The
need to invest in a diversified portfolio of emerging market, it is the ideal vehicle for the
asset allocation.
Given the need to invest in a diversified portfolio of emerging markets that
contains a number of them is an ideal vehicle for the asset allocation.
Emerging markets
Emerging markets: Securities markets in countries with rapidly evolving economics
Problems with investing in emerging markets: amount of investable assets available
much of the equity in emerging markets is not available to international investors
THOUGHT most of the Global and International funds are OPEN- END and CLOSE
END:
Open-end fund (or open-ended fund)
-is a collective investment scheme which can issue and redeem shares at any time.
An investor will generally purchase shares in the fund directly from the fund itself rather
than from the existing shareholders. It contrasts with a closed-end fund, which typically
issues all the shares it will issue at the outset, with such shares usually being tradable
between investors thereafter.
Closed-end fund
Despite the name similarities, a closed-end fund has little in common with a
conventional mutual fund, which is technically known as an open-end fund.
The former raises a prescribed amount of capital only once through an IPO by issuing a fixed
number of shares, which are purchased by investors in the closed-end fund as stock. Unlike
regular stocks, closed-end fund stock represents an interest in a specialized portfolio of
securities that is actively managed by an investment advisor and which typically
concentrates on a specific industry, geographic market, or sector. The stock prices of a
closed-end fund fluctuate according to market forces (supply and demand) as well as the
changing values of the securities in the fund's holdings

Understand the risks of international investing

Global Investing Risks
Market volatility
Liquidity risk
Political risk
Currency risk
Global Investment Choices
Focus on capital market securities (at least one year to original maturity)
Fixed-Income Investments
Equities
Derivatives
Indirect, Managed Investments
Ethics and Regulation in the Professional Asset Management Industry
The issue of ethical behaviour arises any time one person is hired to perform a
service for or look after the interests of another. Economists often refer to this potential
conflict as the principal-agent problem, which can be summarized as follows: A principal
(owner of the assets) hires an agent (manager) to manage her assets. She rightfully expects
that the manager will make decisions that are in her best interest. Although he is being paid
to protect the owners assets, the manager also has the incentive to take actions that may
be in his best interest rather than the clients. For instance, the manager might misuse the
owners assets in both subtle ways (e.g., generating unnecessary expenses for first-class
travel or office furnishings) and more blatant ways (e.g., expropriation of resources).
This sort of agency conflict occurs frequently in financial relationships. The
stockholders of a corporation (i.e., principals) are the owners of the firms assets, but they
usually hire professional managers (i.e., agents) to run the company. Thus, the stockholders
face the constant challenge of how they can keep the managers incentives aligned with
theirs. This topic is particularly important for the investment management business because
the entire industry is based on handling of someone elses money, meaning that agency
issues are always present. In this section, we consider how the industry addresses the
conflicts, both from legal (i.e., regulatory) and ethical standpoint.
Regulation in the Asset Management Industry
Professional portfolio managers are entrusted with the management of trillions of
dollar. It is therefore not surprising that the investment industry is highly regulated to ensure
a minimum level of acceptable practice. These regulations, which often involve a complex
interaction between state and federal laws, are designed for the primary purpose of
ensuring that portfolio managers act in the best interest of their investors.
In addition to monitoring compliance with existing statutes, the SEC performs the
following functions:
Maintains strict standards on the use of leverage so that funds do not take undue
risk;
Ensures that the funds maintain effective governance systems;
Requires understandable reporting and full disclosure to investors and works to
eliminate fraud and abuse;
Reviews required filings of investment companies; and
Develops and revises rules to adapt regulations to new circumstances.
Ethical conflicts arise when individuals are confronted with a collision between general belief
systems about morality, ethics or justice and their own personal situations. Right and wrong
are not always perfectly clear, and some situations involve choosing between two evils,
where, perhaps, the ethical decision might result in personal or social injury or where an

individual stands to gain from an unethical decision. Such conflicts could take place at the
individual,
professional,
or
societal
level.
Business ethics
Business ethics is knowing right from wrong in the workplace setting. It concerns the effects
of products and the needs of people who have an interest in the company (called
stakeholders). Business ethics also focuses on the well-being of everyone because of the
power over society that modern businesses hold.

Standards for ethical Behavior

The CFA (chartered financial institute)which was formerly known as the Association
for Investment Management and Research (AIMR)has developed for its worldwide
membership of security analysts and money managers a rigorous Code of Ethics and
Standards of Professional Conduct based on these principals. The Code of ethics contains an
expanded version of the four themes listed above and can be stated as follows:
Members of the CFA institute must:
Act with integrity, competence, diligence, respect, and in an ethical manner with the
public, clients, prospective clients, employers, employees, colleagues in the
investment profession, and other participants in the global capital market.
Place the integrity of the investment profession and the interests of clients above
their own personal interests.
Use reasonable care and exercise independent professional judgment when
conducting investment analysis, making investment recommendations, taking
investment actions, and engaging in other professional activities.
Practice and encourage others to practice in a professional and ethical manner that
will reflect credit on us and the profession.
Promote the integrity of, and uphold the rules governing, capital markets.
Maintain and improve their professional competence and strive to maintain and
improve the competence of other investment professional.
PERFOMANCE OF INVESTMENT COMPANIES
Total Return
When measuring performance, the actual rate of return of an investment or a pool
of investments over a given evaluation period. It includes interest, capital gains, dividends
and distributions realized over a given period of time.
Expense Ratio
The percentage of total fund assets that is used to cover expenses associated with
the operation of a mutual fund. This amount is taken out of the fund's assets and lowers the
return that fund holders achieve. These expenses include management fees and operating
expenses. The management fee is the fee that is charged to the fund by the portfolio
manager, and it is often a fixed percentage. The operating expenses are the expenses that
the fund incurs through operation and this can include brokerage fees, taxes, investor
services, and interest expense.
Also known as the "management expense ratio" (MER).
The amount of the MER is usually dependent on how active the portfolio manager is in
the trading of the fund; an actively managed fund will have a higher ratio than an index
fund, for instance. It is important for investors to be aware of the MER as it affects the rate
of return that an investor in the fund achieves. The amount of the MER must be stated in the
fund's prospectus.

Quantitative Risk Management

A form of analysis that uses financial information derived from a security's issuing
company's annual reports and income statements to evaluate the security's investment risk.
Functions of Portfolio Manager:
1. Help determine investment objectives.
2. Diversify portfolio to eliminate unsystematic risk
3. Maintain portfolio diversification within the desired risk class.
4. Attempt to achieve a risk-adjusted performance level.
5. Administer the account, keep records of costs and transactions, provide timely
information for tax purposes, and reinvest dividends.
6. Maintain ethical standards of behaviour at all time