1.
Understand the positioning of asset management within the financial industry
Asset management refers to the professional management of an investment portfolio, on behalf of a
third party, in order to maximize its value while maintaining an acceptable level of risk and minimizing
the cost of investing. Investment portfolios are usually composed of listed financial assets, typically
stocks and bonds, as well as non-listed assets such as private equity, commodities or real estate for
example.
We usually consider two forms of asset management : individual or collective. Individual asset
management refers to a portfolio management under a mandate from an individual, company or
institutional investor. Collective asset management refers to an investment strategy where investors
acquire a small outlay of shares in a portfolio, in order to gain access to sophisticated management
techniques, risk sharing and other advantages, by using collective investment scheme (mutual funds,
pooled accounts…).
ASSET MANAGEMENT
THIRD PARTIES
OWN ACCOUNT
MANAGEMENT
INDIVIDUAL
COLLECTIVE MANAGEMENT
MANAGEMENT UNDER A
MANDATE
CREATING ADDED VALUE
Passive investment refers to a buy-and-hold portfolio strategy for long-term
COST investment horizons, with minimal trading operations. Index investing is a form
MINIMIZATION of passive investment. It refers to a type of investment where investors seek to
replicate and hold a board of market index (ETF).
Active investing refers to an investment strategy that involves ongoing buying
RETURN and selling activity by the investor. Active investors purchase investments and
ENHANCEMENT continuously monitor their activity to exploit profitable conditions.
RISK It refers to investment strategies designed to minimize the risk by using tool such
MINIMIZATION as diversification or hedging for example.
ASSET MANAGEMENT
INDIVIDUAL INSTITUTIONAL
RETAIL MARKET WHOLESALE MARKET
Pension funds
Mutual funds
Insurance companies
ETFs
Banks
Advisory services
Endowments, foundations,
Private banking segmented by level
supranational…
1
The asset management market is amounted at 103$ trillion in 2019. The retail sector is representing
41% of global assets at 42$ trillion while institutional investment reached 61$ trillion representing 59%
of the market. The global market is led by North-America in terms of volume and growth.
The wholesale market is essentially composed of discretionary mandates that refers to a delegation of
authority given from the investor to an investment manager to manage his assets within predefined
guidelines. An institutional investor can find an investment manager through a Request For Proposal
(RFP).
PURPOSE OF ASSET MANAGEMENT
Linking investors and Serving the needs of Engaging with Channeling savings
companies investors investee companies towards investment
1
Pension funds : Pension funds are investment funds which provide retirement incomes. The most common type
of traditional pension is a defined-benefit plan. After employees retire, they receive monthly benefits from the
plan, based on a percentage of their average salary over their last few years of employment.
Endowment fund : Endowment funds are investment portfolios where the initial money is provided by donations
to a foundation. It is established by a foundation and makes consistent withdrawals from the invested capital.
The capital or money in endowment funds is often used by universities, nonprofit organizations, churches, and
hospitals.
A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest
in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by
professional money managers, who allocate the fund's assets and attempt to produce capital gains or income
for the fund's investors. It allows diversification, reduce fees. Stictly regulated.
AM liaise economic agent with financial capacity and agent with financial needs (saver and borrower)
and invest money on financial markets on behalf of a third party. It is an intermediary. Example of
major AM companies are Blackrock, Vanguard, JP Morgan AM, Amundi, for example.
AM is assuming traditional function of Investment banks by providing market liquidity and private
loans.
ASSET MANAGEMENT ORGANIZATIONAL STRUCTURE
FRONT OFFICE MIDDLE OFFICE BACK OFFICE
Treasury, corporate
Analyst, managers, actions, subscriptions, Portfolio reconciliation,
traders, strategists redemptions, trade accounting
validation
2. Understand the different asset management products and differentiate short term money
market and long-term financial market
DIFFERENCE SHORT-TERM MONEY MARKET VS. LONG-TERM FINANCIAL MARKET
MONEY MARKET (SHORT-TERM) CAPITAL MARKET ( LONG-TERM)2
• Trade short-term debt • Trade long-term stocks and bons
• Maturity < 1 year • Maturity > 1 year
• Need for cash to support operations • Generate money for long-term purpose
• Highly liquid • Less liquid
• Low return and Low risks • High return and High risk
• Over the Counter (OTC) • Exchange/Listed Market (ETC)
Credit Equity shares
Notes Fixed incomes
Commercial paper
Certificate of deposit
Treasury Bill (T-Bill)
2
Capital market is divided between the primary and the secondary market.
3. Understand how financial markets operate and confront supply and demand; more specifically
understand the price of liquidity
Financial Liquidity refers to how easily an asset can be converted into cash. Assets such as stocks and
bonds are considered to be very liquid since they can be converted into cash easily. However, large
assets such as property, plant, and equipment are not as easily converted to cash and therefore less
liquid. Cash itself is considered to be the most liquid asset as it can be quickly and easily converted into
another asset.
Market liquidity refers to how easily it is to buy and sell securities on financial markets.
Measuring liquidity is very important. Financial analyst and AM often use several ratio such as the
current ratio (current asset/current liabilities) or quick ratio ((Cash and Cash Equivalent+ ST investment
+ AR)/Current liabilities) to measure liquidity.
According to a BlackRock framework, the price of liquidity depends on the following factors :
PRINCING LIQUIDITY
CAPACITY COST CONSIDERATION CUSTOMIZATION CONDITIONS
The market liquidity of assets affects their prices and expected returns. Theory and empirical
evidence suggests that investors require higher return on assets with lower market liquidity to
compensate them for the higher cost of trading these assets. For a given security generating cash flows,
the higher the market liquidity, the higher the price and so the lower is the expected return.
4. Understand how open-ended mutual funds (UCITS/OPCVM) work; how the NAV/VL is computed
and how subscriptions/redemptions take place.
What is a mutual fund ?
A mutual fund is a financial vehicle made up of a pool of money collected from many investors to invest
in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are
operated by professional money managers, who allocate the fund's assets and attempt to produce
capital gains or income for the fund's investors. Mutual funds are strictly regulated.
What is an open-ended mutual fund ?
An open-ended mutual fund is a diversified portfolio of pooled investor money that can issue an
unlimited number of shares. Open-end shares do not trade on exchanges and are priced at their Net
Asset Value (NAV) on a daily basis.
An open-end fund issues shares as long as buyers want them. It is always open to investment.
Purchasing shares cause the fund to create new—replacement—shares, whereas selling shares takes
them out of circulation. Shares are bought and sold on demand at their NAV. An open-end fund
provides investors an easy, low-cost way to pool money and purchase a diversified portfolio reflecting
a specific investment objective.
An open-ended mutual fund is the opposite of a closed-end fund. Closed-end fund is a type of mutual
fund that issues a fixed number of shares through a single initial public offering (IPO) to raise capital
for its initial investments. Its shares can then be bought and sold on a stock exchange but no new
shares will be created and no new money will flow into the fund.
Computation of NAV/VL
The net asset value (NAV) represents the per share price of the fund on a specific date or time. Net
asset value is commonly used to identify potential investment opportunities within mutual funds, ETFs
or indexes. Net asset value, or NAV, is equal to a fund's or company's total assets less its liabilities.
Subscriptions redemptions
A subscription is when the investor applies to join a particular fund. Subscription minimums vary from
a fund to another.
A redemption is when the investor withdraws a part or all of their investment from a fund. The
redemption of fund shares from a mutual fund company must occur within seven days of receiving a
request for redemption from the investor. Because mutual funds are priced only once per day,
investors who wish to redeem their money must place the order before the market's close or the time
set by the mutual fund. Money is redeemed at the fund's net asset value (NAV) for the day.
UCITS | OPCVM3
The Undertakings for the Collective Investment in Transferable Securities (UCITS) is a regulatory
framework of the European Commission that creates a harmonized regime throughout Europe for the
management and sale of mutual funds.
UCITS funds are perceived as safe and well-regulated investments and are popular among many
investors looking to invest across Europe. According to the European Commission, they account for
around 75% of all collective investments by small investors in Europe.
The french name for UCITS is OPCVM: Organisme de Placement Collectif en Valeurs Mobilières. It
allows small private investors and corporates to invest on financial market, get access to complex
security and diversify their investment portfolio.
3
Les OPCVM sont des intermédiaires financiers qui donnent, à leurs souscripteurs, la possibilité d'investir sur des
marchés financiers auxquels ils n'auraient que difficilement accès autrement (marchés financiers et monétaires
étrangers, actions non cotées,...). L'activité principale des OPCVM consiste à collecter des fonds en émettant des
titres financiers auprès de divers agents (particuliers, sociétés, etc.) en vue d'acquérir des actifs financiers. On
distingue traditionnellement deux grandes catégories d'OPCVM selon leur mode d'organisation :
les Sociétés d'investissement à capital variable (Sicav) et les Fonds communs de placement (FCP)
5. Understand the basic business proposition of Asset Management services; what is promised the
value added and what is the price paid
Asset management refers to the professional management of an investment portfolio, on behalf of a
third party, in order to maximize its value while maintaining an acceptable level of risk and minimizing
the cost of investing. AM can either be individual or collective.
Asset management is a solution for organization and private individual to access complex investment
techniques, vehicles and products while limiting their risk.
A value-based asset management is about ensuring the highest level of value creation from the asset
portfolio. The value creation take place over the entire lifecycle of the asset. In order to maximize the
value created for the investors, AM companies must manage accurately costs, risks and performance
to achieve investment goals.
ADVANTAGES OF ASSET MANAGEMENT
Increase the Promote
Track
Mitigate risk asset’s rate of economic
performance
return growth
ASSET MANAGEMENT FEES
In most cases, Asset Management Fees are calculated in % of the client’s Asset Under Management
(AUM). This asset management fee is a defined annual percentage that is calculated and paid
monthly. For example, if an AMC charges a 1% annual fee, it would charge $100,000 in annual
fees to manage a portfolio worth $10 million.
Continuing with the example mentioned above, if the $10 million portfolio increases to $12
million in the next year, the AMC will make an additional $20,000 in management fees.
Likewise, if the $10 million portfolio declines to $8 million due to a market correction, the
AMC's fee would be reduced by $20,000. Charging fees as a percentage of AUM serves to align
the AMC's interests with the client’s interests.
Usually the Asset management company set a minimum annual fees (fixed part) that has to
be paid regardless of the AUM and the performance.
6. Understand how to compute Holding Period Return, gross and net of fees and/or taxes.
Holding period return is the total return received from holding an asset or portfolio of assets over a
period of time. Its is often expressed as a percentage. Holding period return is calculated on the basis
of total returns from the asset or portfolio (income plus changes in value).
EXAMPLE
What is the HPR for an investor, who bought a stock a year ago at $50 and received $5 in dividends
over the year, if the stock is now trading at $60?
Which investment performed better: Mutual Fund X, which was held for three years and appreciated
from $100 to $150, providing $5 in distributions, or Mutual Fund B, which went from $200 to $320 and
generated $10 in distributions over four years?
For a similar holding period, the fund X has a better return, at 15,73% (annualized return).
Your stock portfolio had the following returns in the four quarters of a given year: +8%, -5%, +6%, +4%.
How did it compare against the benchmark index, which had total returns of 12% over the year?
If you make a positive return (profit) over the holding period, you owe the regulators taxes. In order
to compute the HPR net of fees/taxes you have to multiply the income received by (1- Trate).
7. Understand how to read and appreciate a performance report for a Mutual Fund or Institutional
account
Read TD
1/ Analyze the performance of the fund in comparison with an appropriate benchmark.
2/ Research the management company & team
3/ Understand the market life-cycle and features of the portfolio’s companies/industries
4/ Established some personal criteria’s depending on your investor profile and look for the elements
that match the most your criteria’s
5/ Asses performance by calculating ratio
6/ Compare the fund’s performance with similar funds or other investment company offer
8. Understand the basics of equity investing and the two major investment styles: value and
growth
Equity investing refers to the investment in Equity also known as stocks. Investors are seeking to
acquire a portion of share/stake in a company’s capital. Stocks are traded on listed market (ETC). A
stock give ownership of a portion of the company’s capital as well as some voting rights. When it comes
to equity investing, people have usually two major investment styles : value and growth.
Value investing refers to an investment strategy in which investors are seeking for companies/stocks
that are currently trading under their real value and that will therefore provide better return over a
period of time, when the market will value the company at its real worth (undervalued stocks). Value
stocks are generally larger, more well-established companies that are trading below the price that
analyst feel the stock is worth.
Growth investing refers to an investment strategy in which investors are seeking for companies/stocks
that have a potential to outperform the overall market over time. Growth companies are considered
to have a good chance of considerable expansion over the next few years. It can be found in small/mid
and large cap sectors.
Both investment styles have advantages and drawbacks. Choosing a style or another depends on the
investor’s preferences, including elements such as its risk tolerance, investment goals and time
horizon.
• A small P/E ratio reflets a value
strategy.
• A high EPS reflects a growth strategy.
• A P/E ratio below the
benchmark/index reflects a value strategy.
Here the Manager B has a passive style of
investment (buy-and-hold strategy, with
low risk and low return). ETF.
The manager C has a growth investment style
with strong EPS projected and a strong P/E
ratio. Finally the manager A has a value
investment style.
9. Understand the basics of asset liability management as it relates to retirement in general, and
defined benefit pension funds in particular.
DEFINED BENEFIT PENSION FUNDS
A defined benefit pension plan provides a fixed, pre-established pension benefit for employees upon
retirement . It based of the percentage of their average salary over the last few years of employment
as well as how many years they worked for the company. It is the most common type of traditional
pension. After employees retire, they receive monthly benefits from the plan. Employers, and
sometimes employees, contribute to fund those benefits. In a defined benefit pension fund the payout
do not depends on the investment return.
As an example, a pension plan might pay 1% for each year of the person's service times their average
salary for the final five years of employment. So, an employee with 35 years of service at that company
and an average final-years salary of $50,000 would receive $17,500 a year.
The traditional investing strategy for a pension fund is to split its assets among bonds, stocks, and
commercial real estate. Many pension funds have given up active stock portfolio management and
now only invest in index funds.
There are two basic types of private pension plans: single-employer plans and multiemployer plans.
Both types of private plans are subject to the Employee Retirement Income Security Act (ERISA) of
1974. It aimed to put pensions on a more solid financial footing.
ASSET/LIABILITY MANAGEMENT (ALM)
Managing assets and liabilities is a key element to reduce the risk of default of an organization ( risk
that an organization will not meet its obligations in the future).Asset/liability management is often
applied to pension plans.
Th concept of ALM focuses on the timing of the cash flows because company managers must plan for
the payment of liabilities. An effective ALM must ensure that assets are available at any moments to
pay debts, and are quickly convertible to cash. It mitigate liquidity, interest rate, currency or capital
market risk for example.
Example of ALM in a Defined Benefit Pension Plan
A defined benefit pension plan provides a fixed, pre-established pension benefit for employees upon
retirement, and the employer carries the risk that assets invested in the pension plan may not be
sufficient to pay all benefits. Companies must forecast the dollar amount of assets available to pay
benefits required by a defined benefit plan.
Assume, for example, that a group of employees must receive a total of $1.5 million in pension
payments starting in 10 years. The company must estimate a rate of return on the dollars invested in
the pension plan and determine how much the firm must contribute each year before the first
payments begin in 10 years.
A widely used ratio in ALM management is the Asset Coverage ratio, that compute the value of assets
available to pay a firm’s debt.
10. ETF and Index investing
ETF
An exchange traded fund (ETF) is a type of security that tracks an index, sector, commodity, or other
asset and that is traded on an exchange. An ETF is a type of fund that holds multiple underlying assets,
rather than only one like a stock does. Because there are multiple assets within an ETF, they can be a
popular choice for diversification. A well-known example is the SPDR S&P 500 ETF (SPY), which tracks
the S&P 500 Index
The price of an ETF’s shares will change throughout the trading day as the shares are bought and sold
on the market. This is unlike mutual funds, which are not traded on an exchange, and trade only once
per day after the markets close.
ETF are mainly used for passive asset management purpose as it mostly aims at replicating public
indexes.
INDEX
An index can be defined as a synthetic representation of multiple variables. In finance, an index often
refers to a portfolio of securities that are considered to represent an industry, asset, class, investment
style…
How to build an index ?
The sample of securities must balance
representativity (large sample offer better
representation). Pricing sources should be
objective and precise. The weight of each
asset/securities should translate/represent the
investor profiler and investment style.
How to compute an index ?
Financial analyst and investors usually use three methods to compute and analyze indexes :
• Price weighted method
• Capitalization method
• Equal Weighted method
EXAMPLE
How to select an Index ?
In order to elect an appropriate index, the chosen index has to comply with several features :
• Completeness : Does it reflects the investment opportunities ?
• Investable : Does the index include liquid securities ?
• Rules : Does the index complies with laws & regulations ? Does it make decision based in this rules
?
• Return : Is there way to assess and monitor the past, present and future performance ?
• Investors acceptance : Is the index widely used ?
• Turnover management
• Replication : Can the index be easily replicated ?
• Appropriate : Is it consistent with the investor’s profile and strategy ?
The different type of replication for ETF ?
We usually consider two main type of ETF replication : physical and synthetic.
• Physical replication : Physical replication refers to the situation in which an exchange traded fund
(ETF) tracks its benchmark by holding all or a portion of all the underlying securities that make up
that benchmark.
• Synthetic ETS replication : A synthetic ETF is designed to replicate the return of a selected index
(e.g., S&P 500 or FTSE 100) just like any other ETF. But instead of holding the underlying securities
or assets, they use financial engineering to achieve the desired results. Synthetic ETFs use
derivatives such as swaps to track the underlying index. The ETF provider enters into a deal with a
counterparty (usually a bank), and the counterparty promises that the swap will return the value
of the respective benchmark the ETF is tracking.2
