Asset Management Industry Overview | CFA Level I Portfolio Management

Today, we’re exploring the exciting world of the asset management industry. Asset management firms manage investments for clients and can be independent or part of larger financial institutions. Let’s break down the key players and recent trends in this industry.

Buy-Side vs. Sell-Side Firms

Asset management firms, also known as buy-side firms, manage money on behalf of clients. In contrast, sell-side firms like securities brokers and investment banks facilitate the buying and selling of securities, acting as intermediaries between buyers and sellers.

Types of Asset Management Firms

Buy-side firms can be classified in several ways:

• Full-service asset managers offer a variety of investment styles and asset classes.
• Specialist asset managers focus on a particular investment style or asset class.
• Multi-boutique asset managers consist of smaller investment boutiques, each with its distinct investment style and portfolio management team. This structure aims to offer investors access to diverse investment strategies and expertise.

Asset management firms can also be classified as traditional or alternative, depending on the asset classes they manage. Traditional asset managers focus on publicly-traded equities and fixed-income securities, while alternative asset managers handle other asset classes like private equity, hedge funds, real estate, or commodities.

Another common distinction is between active and passive management. Passive managers seek to replicate a benchmark index’s return, while active managers attempt to outperform a benchmark through manager skill, using techniques like technical or fundamental analysis. Smart beta strategies fall between active and passive investing, aiming for better returns by systematically deviating from benchmark index weights to increase exposure to specific market risk factors.

Industry Trends

Here are some notable trends in the asset management industry:

• Passive management, which represents around 20% of global assets under management, has been growing due to its lower fees and increasing skepticism about active management’s value.
• Asset managers have been adopting services and technologies to process the exponential increase in available data, hoping to capitalize on information for quick investment decisions.
• Robo-advisors, a recent technology that replaces human advisors, offer investment advice and recommendations to retail investors. They appeal to younger investors due to their lower minimum investment requirements, ease of access, and tech-savvy nature.

And that wraps up our introduction to the asset management industry! In our next lesson, we’ll learn about pooled investment products.