What is asset management?

The Gateway guides you through the basics

What is asset management?

Asset management means deciding where to invest money. Asset management firms take care of large sums of money for corporate and individual clients. Firms could do so in a freestanding way, or by putting the money into a fund run by them. They do so on a fiduciary basis, that is, on the basis of a relationship of trust.

Many funds run by asset management firms will seek to take advantage of opportunities in a particular product or region, or in a particular type of company - for example, ones thought likely to grow fast. A golden rule of asset management, however, is to have a portfolio that's diversified to some extent in order to minimise risk.

Who are asset management firm's main clients?

The main corporate clients of asset management firms are pension funds, insurance companies and retail banks, who entrust large pools of individual savings to them. Asset management firms also offer products that individual investors can buy into.

How do asset management firms make money from offering their services to clients?

Asset management firms charge their corporate and individual clients a fee for managing their money, usually a proportion of the money invested. Unlike investment banks, they do not conduct any trading activity for profit on their own behalf.

Why does the British and global economy need asset management firms?

Much of the money that asset management firms invest is the savings and insurance funds of ordinary individuals. Asset management firms therefore help all of us to protect ourselves for the future.

In addition, asset management firms tend to invest much of this money in corporate debt and equity products, thereby providing a vital source of capital to the economy. Because pensions, insurance and savings products are long-term investments, asset management firms are able to commit this money to corporates for many years, providing stable long-term funding to the real economy that's not available from many other sources in the market.

How did asset management firms fare during the financial crisis and the subsequent economic downturn?

Asset management firms have naturally been affected by market and economic turbulence. However, asset management firms tend to take a long-term investment approach which makes allowances for periods of flux, and they also tend not to invest in the complex structured products which the financial crisis exposed as less valuable than the markets initially thought. For these and other reasons, they've weathered the storm better in general than other parts of the financial world. The resilience of the asset management business saw many investment banks raise money by spinning off their asset management arms into independent entities.

In addition, the events of the past few years in the finance world have given rise to new opportunities for asset management firms. For example, because investment banks are less inclined than before to make investments, asset management firms have been able to take more of a leading role in initiating and structuring corporate investments.

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