Asset management is a reasonably modern industry, tracing its roots to various developments in the early 20th century. The field of asset management addressed the growing need for professionally managing assets that were either pool of funds or unique structures like trusts. While endowments and trusts have existed for a long time, they primarily invested in rent-yielding assets or bank deposits. Similarly, pensions have been offered since the late 19th century but became more prevalent in the mid-20th century. The watershed moment for pensions in the US was establishing the ERISA act in 1974, which in turn gave way to the defined contribution plans such as 401(k). Personal savings were traditionally invested in bank deposits or real estate. Personal finance, too, changed with the advent of mutual funds and other professionally managed investment schemes. Similar developments in Europe and other parts of the world have led to asset management becoming a pillar of the financial services industry. The field has grown rapidly, and there is over $100 trillion in assets under management now. The AUM is expected to jump to $145 trillion by 2025. The following graph breaks down the AUM region-wise.
Source: World Bank, PWC, Lipper
The asset management industry plays a crucial role in modern finance. Modern asset management caters to both institutions and non-institutions – more widely known as retail money. Institutions include large bodies like government pension plans that rely on asset managers to meet their obligations. Other institutions such as endowments and trusts rely on asset management to meet their spending requirements and generate regular income. A large class of employees and retail investors depend on asset managers to meet their financial goals and grow their investments. Some of the largest pension plans include Government Pension Investment Fund (GPIF), Japan, the Canada Pension Plan Investment Board, and the California Public Employees Retirement System. Asset management also increases the efficiency of the overall financial systems, especially the publicly traded markets for stocks and bonds. The price discovery mechanism, a result of the asset managers' research functions, aids in making the markets more efficient.
Recently, passive asset management has become a vital component of the global investment management space. Passive management refers to investing assets into instruments that track major indices and invest in the same proportion as the index’s components. This is done to reduce the management cost and remove the idiosyncratic risk from active management. Since most active managers underperform their stated benchmark, passive investing provides a low-cost solution for investments in publicly traded securities. Both retail and institutional investors have flocked to passive products, and the AUM under these products has ballooned in recent years. In the US, passive funds managed roughly $1 trillion in assets in 2007, compared to over $3 trillion in active funds. By 2019, the AUM was equally split between the two styles, at roughly $4.5 trillion apiece. While index funds hold the bulk of the passive money, ETFs are becoming equally prevalent. On the other hand, active management has been forced to cut down costs and offer more transparent services.
Active asset managers offer a variety of investment products that are aimed at outperforming stated benchmarks. Most of these are offered as mutual funds, including institutional class of funds. Many active managers also offer separately managed strategies for retail investors. Some of the largest companies that offer actively managed investment products include:
Franklin Templeton Investments, originally founded in 1947, acquired Templeton, Galbraith & Hansberger in 1992 to attain its current form. The firm has $1.42 trillion in AUM.
T.Rowe Price, established in 1937, is one of the oldest asset managers in the US. The firm is known for its growth-oriented strategies. It has $1.52 trillion in AUM.
Ameriprise Financial Services is a holding company and owns the Columbia Threadneedle family of funds. It has $920 billion in AUM.
Manulife is a Canadian financial services company and offers investment products through the John Hancock division. It has over $1 trillion in AUM
Charles Schwab is a financial services company offering both asset management and brokerage services.
Affiliated Managers Group owns a stake in multiple boutique investment managers and offers a variety of products. It has close to $800 billion in AUM.
Passive investment products are the fastest-growing class in the asset management industry. Most of these products are offered as either index funds or ETFs. Some of the largest asset managers in this space are privately held, including Fidelity and Vanguard. Some of the publicly traded companies operating in this field include:
Blackrock is a behemoth in the asset management industry, with over $9.0 trillion in AUM. It is the largest asset manager in the world and has offices in 30 countries.
State Street has close to $3.15 trillion in AuM. In addition to passive investment products, the firm also offers other services to the asset management industry, such as custodianship and trust banking.
In addition to the management of investments, the asset management industry is also made of service providers. These include data providers and indexing companies. Some major companies in this include
MSCI provides equity, fixed income, and hedge-fund indices. MSCI’s indexes are used as a benchmark by most of the large asset managers in the world.
FactSet is a major provider of data to the asset management industry. It also offers analytics tools.
S&P Global is another major index provider and offers the S&P and Dow Jones family of indices.
As the asset management industry continues to grow, the landscape is evolving rapidly. Fintech, which encompasses a rather large umbrella of technology-driven solutions, has revolutionized the asset management industry. While it has primarily targeted retail investors, institutional investors are increasingly open to adopting tech-driven solutions such as Robo-advisory and AI-based portfolio management processes. Other new avenues include model portfolios, through which retail investors get the same level of sophistication as their institutional peers. Custom indexing is another development through which indexes are customized for individual preferences and optimizing capital gains taxes. Socially aware investing through the use of ESG frameworks is also increasingly prevalent.
For a deeper dive into the Fintech revolution in retail investing, read our earlier blog on that topic.
Investment into the asset management industry can be done by directly investing in the stocks. Here is a snapshot of the recent performance of the companies involved in the asset management industry.
ETFs dedicated to the asset management industry are not available. However, an investor looking to get exposure to the industry can do so by either the broad financial sector ETFs such as Financial Sector SPDR ETF (XLF), or Vanguard Financials ETF (VFH). A more specialised ETF like SPDR S&P Capital Markets ETF (KCE) offers exposure to asset managers, brokers, and other entities that form the basis of capital markets.
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