Asset Management Company (AMC)

What Is an Asset Management Company (AMC)?

An asset management company pools money from investors and invests it into various asset classes. The investment objective of the company is predefined.

The company can be privately operated like hedge funds, mutual funds, investment houses, or a government entity like pension funds & sovereign wealth funds.

The objective of AMC is to invest in securities that generate an optimal return for the investor in exchange for a fee.

AMCs are referred to as money managers or money management firms. Those offering public mutual funds or ETFs are also known as investment or mutual fund companies. Vanguard and Fidelity are two of the biggest fund houses in the world.

Each fund has its specific investment object be it growth, income generation, or capital protection, and it is defined as what asset class the fund will invest in, its risk appetite, benchmark, etc.

For example, an equity-oriented fund will invest in stocks with high risk and high returns. On the other side, a debt fund invests in bonds and risk-free Government bonds to maintain the minimum bet. 

Types Of Asset Management Companies (AMCs)

AMCs come in different forms and structures, such as

• Hedge funds
• Mutual funds
• Index funds
• Private equity funds
• Exchange-traded funds (ETF)
• Other funds

In addition, AMCs invest on behalf of various types of clients, such as

• Retail investors (Individuals)
• Institutional investors (FIIs & DIIs)
• Public sector (government) 
• Private sector
• High-net-worth clients

Buy-Side vs. Sell-side

When discussing an Asset Management Company, it is essential to know the difference between the buy and sell sides. These two sides together make the complete picture of the ins and outs of the financial market, and both are indispensable to each other:

Pros Of AMCs

There are various benefits of pooling capital together, including

1. Diversification
Due to the availability of significant investment capital, they can diversify their portfolio much better than individuals. For example, AMCs can invest in multi-billion-dollar infrastructure projects, such as railway or roadway expansion.

However, the investments are so significant that an individual investor will not usually be able to access them.

2. Economies of scale

These are the cost advantages a company can gain from increasing the scale of operations. With more extensive procedures, the per-unit operating costs are lower.

3. Specialized expertise
It refers to asset management companies hiring finance professionals with extensive experience managing investments that most individual investors lack.

For example, an AMC can hire professionals specializing in certain asset classes, such as real estate, fixed income, sector-specific equities, etc.

Cons Of AMCs

AMCs come with a few downsides, such as

1. Risk of underperforming
The performance of AMCs is evaluated by comparing it to a benchmark. Benchmark is a standard used to compare performance against, usually in the form of a broad market index.

There is the risk that fund managers underperform the markets, and including the management fees mentioned earlier can become very costly for investors. The majority of the actively managed funds have failed to beat their benchmark.

2. Management fees
Most fund managers charge flat fees that are collected no matter their performance. As a result, the prices can become very expensive for investors. The fees are high to compensate asset managers with a profit because of the expertise required and the costs of the resources to run an AMC.

3. Loss of Flexibility
After the fund grows beyond a certain point, it isn't easy to find highly liquid assets, somewhat limiting its flexibility. This is the reason a lot of funds have caps for maximum AUM.

How does an AMC manage the funds?

The AMC is principally responsible for the performance of the mutual fund and making decisions that will benefit the investors.

A fund manager invests the money in line with the scheme's investment objectives. The process is broadly listed below.

1. Asset Allocation

An MF has specific investment objectives, which help the fund manager decide the assets in which the investments will be made. For example, most balanced funds invest in a mix of stocks and fixed-income securities.

Another example is that most debt-oriented funds have a sizable proportion of their assets under management in bonds and other fixed-income securities.

2. Research and Analysis

Building a portfolio comprises a lot of research and analysis of the asset class performance. In addition, experts conduct studies on the market, micro, and macroeconomic aspects.

3. Portfolio Construction

An AMC comprises a team of researchers and analysts who report their market findings and trends to the fund manager. Based on these findings and the fund's investment objectives, the fund manager then decides which securities to buy or sell.

This is how an AMC builds its portfolio, which depends solely on the fund manager's experience and expertise.

4. Performance Review

AMCs must provide investors(unitholders) with information directly impacting their mutual fund holding. AMCs must also send regular updates on sales and repurchases, NAV, portfolio details, and so on to investors.

In simple terms, an AMC must answer to the investors(unitholders) of the mutual funds and look after their interests. Moreover, they must attend to customer grievances regarding their mutual fund schemes.

What is Asset Under Management (AUM)?

The acronym AUM stands for "Assets Under Management," which refers to the total market value of assets managed by an investment advisor or financial institution, either from one client or many.

The AUM is the total assets under management or the help that an investment advisor, wealth manager, or mutual fund manager is employing on behalf of their clients.

AUM keeps fluctuating as the value of the assets managed changes with market performance. They may increase when investment performance is favorable or new customers and new assets are brought into the firm.

Conversely, AUM is reduced by negative investment performance and redemptions or withdrawals, including fund closures, client defections, and other generally adverse events, and lower AUM generates lower fees.

A fund's management fees (including expenses) are often calculated as a percentage of AUM.

On what basis should an investor choose an AMC?

Before choosing an AMC, you must check the AMC's track record and assets under management (AUM).

It helps if you select an AMC with significant assets under management that can handle the sudden pressure of large investors and perform well even during the bear run.

Market-savvy investors must check the offerings of the AMC and the history of various mutual fund schemes' performance managed by the AMC during both bull and bear runs to get an idea of performance across market cycles.

Investors should consider the following points before choosing an AMC:

1. The reputation of the AMC: An AMC does not earn its status in a day; it takes years to do so. For example, an AMC makes a good reputation after performing consistently over 5 - 10 years and beating the benchmark.
2. Check the reviews: Check the fund house reviews by talking to investors from the fund houses they have invested in or doing self-research. It includes checking past performance, various offerings, management changes, and any grievances/ legal issues against the AMC.
3. Fund manager's credentials: Checking the fund manager's track record and investment style is a must.

The fund manager's investment style and skill dictate the mutual fund scheme's performance. Investors should never invest in a mutual fund if they are not comfortable with the fund manager's investment style.

Moreover, mutual funds display the investment style box to help gauge the fund manager's investment style. 

The Biggest Asset managers in the world

The following is a list of the top 10 asset managers in the world (as of 2022), ranked by total assets under management:

AMC Fees

In most cases, AMCs charge a fee as a percentage of the client's total AUM. This fee is a defined annual percentage calculated and paid monthly.

For example, if an AMC charges a 2% annual fee, it would charge $20,000 in yearly payments to manage a portfolio worth $1 million. However, since portfolio values fluctuate daily and monthly, the management fee calculated and paid monthly will also fluctuate monthly.

Continuing with the above example, if the $1 million portfolio increases to $1.2 million next year, the AMC will make an additional $2,000 in management fees.

Conversely, if the $1 million portfolio declines to $0.8 million due to a market correction, AMC's fee would be reduced by $2,000.

Therefore, charging fees as a percentage of AUM helps to align the AMC's interests with that of the client; if the AMC's investors prosper, so does the AMC, but if the investors' portfolios make losses, the AMC's revenues decline as well.

In addition, some AMCs, such as hedge funds, charge performance fees for generating returns above a set level or beating a benchmark like the "two and twenty" fee model is standard in the hedge fund industry.

Asset Management Companies (AMCs) vs. Brokerage Houses

AMCs and brokerage houses overlap in many ways. For example, along with analyzing and trading securities, many brokers manage and advise client portfolios through a particular "private investment" or "wealth management" division.

The difference between the two can be seen as:

Conclusion

Asset Management Companies (AMCs) are vital businesses that give investors with expert management of their funds and access to a varied array of investment choices.

Investors should give top priority to aspects like the company's track record, reputation, investing techniques, and fee structure when choosing an AMC.

Reputable AMCs, like industry titans BlackRock and Vanguard, are demonstrated by their vast experience and ability to manage trillions of dollars in assets worldwide.

Given their direct impact on investment returns, fees are an important factor for investors to take into account.

While AMCs normally charge management fees based on a percentage of assets under management (AUM), investors should ensure that these fees are reasonable and justified by the value offered.

Furthermore, it's critical to comprehend AMCs' fiduciary duties since they emphasise their dedication to serving their clients' best interests.

AMCs have several advantages over brokerage companies, such as greater norms of responsibility, transparency, and fiduciary duty. This distinction highlights the importance of choosing an AMC that aligns with an investor's financial goals and risk tolerance.

Ultimately, selecting the proper AMC helps investors navigate unpredictable markets, achieve portfolio diversification, and pursue long-term wealth growth with confidence.

By conducting thorough due diligence and understanding the nuances of different AMCs, investors can make informed decisions that optimize their investment outcomes.

AMCs are essential to the financial ecosystem because they maintain the highest standards of integrity and act as a link between investors and the larger market.

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