Before getting into what does an asset management company do, let us first understand what is asset management all about and how does it factor into helping individuals getting started right with their investments.
Asset Management is a service offered by a financial services company, usually an investment bank for managing client’s cash by investing in financial products and securities. These include products such as, equity, fixed income, real estate, commodities and international investments. Availing such services requires minimum investment amounts and are restricted to high-net-worth-individuals (HNWIs), government entities, corporations and financial intermediaries.
Now that you have an idea of what is asset management, let us now understand what is asset management company.
Asset Management Company
An asset management company (or AMC) is a company that invests its clients’ pooled funds into financial products and securities according to their investment mandate. This investment mandate covers the individual clients’ investment objectives, risk appetite, expected returns and time horizons.
At this point, you might ponder as to what does an asset management company do and this article tries to answer that very question.
What AMCs Do?
Asset Management Companies provide investors with diversification and investing options. AMCs manage mutual funds, hedge funds and pension plans, and they earn income through service fees and commissions.
In order to understand, what does an asset management company do, one needs to first understand the types of AMCs, as different types of AMCs provide different scope in services. These are mentioned below:
Types of Asset Management Companies
There are two basic types of Asset Management Companies. These are individually explained below:
Fiduciary AMCs –they are held to a higher legal standard and hence are required to act in their clients’ best interests. They tend to have higher minimum investment thresholds, and they charge services fees rather than commissions.
Brokerage Houses – do not have any minimum investment thresholds and they have a legal standard to provide suitable services. This means that as long as funds are appropriately and wisely managed, they are not responsible for clients’ losses.
How do They Work?
Asset Management Companies are typically considered buy-side firms. The structure of an AMC is of a fund house, wherein it collects money from the public and makes it as a pool of funds. Depending on the size of the mandate, they invest the clients’ pooled funds into various securities, much like that of a mutual fund. The investment decision is arrived at after a careful evaluation of various metrics such as, market risks, industry risks, etc. The AMC receives their insights through in-house research, data analytics and also public recommendations from sell-side firms.
Now that you have an idea of what is asset management company and a basic understanding of what does an asset management company do, let us understand their role in more detail. This is explained below.
How does an AMC manage funds?
When you invest with an AMC, you are purchasing a portfolio they offer. The company is principally responsible for driving the mutual fund and make decisions that benefit the investors.
Asset Allocation – Every mutual fund has a definite financial objective or theme, such as debt-oriented, equity-oriented or balanced fund
Research and Analysis – In-depth studies comprising the micro and macro-economic aspects are conducted by analysts. On the basis of this, the fund manager takes a call regarding stock selection
Constructing the Portfolio – Based on market trends and findings, the fund manager chooses which securities to buy, sell and hold and this is how the portfolio is built.
Performance Review – Despite mentioning disclaimers, AMCs face a lot of scepticism from investors and trustees and therefore, AMCs must provide unit-holders with information which directly impacts their holdings. AMCs must also send regular updates on sales and repurchases, NAV, portfolio details, etc.
How does an AMC make money?
An AMC makes its money by charging commissions or fees depending on the size of the fund that it manages, which is termed as “Assets Under Management” or AUM. The management fee charged is a percentage of the AUM. For instance, if the AUM is worth $4 million, and the AMC charges a 2% commission fee, it owns $80000 of that investment.
Now that you have learnt about what does an asset management company do and how it makes its money, let us now understand its structure. This is explained in the section below.
Although, the article discusses in brief about the role and functions of AMCs, understanding where an AMC stands in the mutual fund structure will help you better understand what does an asset management company do.