- Large asset management firms manage money for pension investors around the world.
- The role most people aspire to is that of “portfolio manager”, where you manage a pool of funds yourself on behalf of clients.
- You don’t necessarily need to be highly mathematical for these roles – unless you work for a “quant fund.”
Large asset management firms are the backbone of the financial services industry. Part of the “buy-side,” they manage huge sums of money on behalf of their clients, which include large pension funds, sovereign wealth funds and retail investors. Asset management firms aim to increase the value of clients’ investments over time, and they receive a fee for their services. Unlike hedge funds, which “hedge” investments and try to make money even when markets fall, asset management firms typically “go long” – they invest in products in the hope that their prices will rise. For this reason, they are also known as “long only investors.” They can also be called “institutional asset managers” – they manage money for institutions.
The scale of the asset management industry is huge. Figures from the OECD show that retirement savings in pension funds, pension insurance contracts and in other vehicles exceeded the $50 trillion the first time at the end of 2019 (the most recent year for which figures are available). The biggest pools of retirement funds are located in Canada and the United States, the Netherlands, Switzerland and the United Kingdom, and in Australia and Japan.
If you work in asset management (AKA fund management), you’ll be helping to manage these enormous pools of money and helping today’s working population save for the future. However, the experience you have will depend on the kind of fund you work for.
Broadly speaking, there are two basic kinds of fund within the asset management industry:
Passive: Also called ‘index-trackers’, passive funds mirror the performance of large financial indices like the S&P 500 or the FTSE 100. The money going into an index tracker is put into stocks or bonds in the same proportion as the in the relevant index. The advantage for investors is that the fees are low, the risks of human error are minimal and turnover in the portfolio is also lower.
As well as passive mutual funds run by huge institutional investors like Vanguard, exchange-traded funds (ETFs) are a good example of passive investment. They track an index, or a ‘basket’ of assets, but are also a tradable security, so their value goes up and down like a stock on a stock exchange.
Active: This is where human skill and experience comes into the fund management industry. A team of portfolio managers, analysts and researchers use their expertise and a plethora of research, quantitative analysis, forecasts and judgement to make a decision on what assets to invest in with the aim of beating the market.
A fund is judged on how far above or below it is on a particular index – in equity markets this could be, say, the Dow Jones Industrial average, but they’re also competing in bond markets and host of other asset classes. The problem is, it can be hard to beat the index, and even if a fund manager does this consistently, they still charge investors higher fees for the privilege.
Bottom-up investors are more interested in the financials of a particular company than broad macro themes
Active vs passive management is only one great divide in the fund management industry. Another is top down versus bottom up investment. The former is concerned with a big picture view of a particular sector, asset class or geography first, before delving into the finer financial details.
Bottom up investors are more interested in the financials of a particular company than broad macro themes. This assumes that gems can be found even in industries that are generally not doing well.
Many funds today use quantitative methods to analyze markets and determine where to invest their money, and therefore rely less on humans to make decisions. These are the so-called “quant funds.”
The jobs you’ll do in asset management
When people think of asset management, they think of portfolio managers. Portfolio managers, or “fund managers” are the kings and queens of the asset management world. They run funds on behalf of their clients based on a range of investment experience and expertise. However, you won’t be a portfolio manager from the outset. This is the pinnacle of an investment career, and you’ll need to work your way up.
The roles on offer in the asset management industry include the following:
Investment jobs: This is where you find the portfolio managers who run the investment strategies. They tend to specialise in one asset class, whether that’s equities, fixed income or property and manage the day-to-day investment decisions across the funds they look after.
In big fund management firm there are tens of money managers with various areas of expertise including multi-asset funds, which decide on which ‘blend’ of financial investments to include in a portfolio. However, portfolio managers don’t work in isolation.
Supporting them are teams of buy-side research analysts. Their role is all about generating investment ideas for portfolio management teams to act upon.
Research analysts spend their days poring through company reports and industry insights in order to gain in-depth knowledge about particular sectors or asset classes, which will give the portfolio management team an edge over the competition.
Distribution: While investment teams deal with the money management side of the business, distribution teams are all about bringing client money into the fund.
Sales, or business development, professionals deal with large institutional investors, find out what their investment needs are and try to recommend the products of their employer. Sales professionals also need to spend a lot of time developing and maintaining relationships with clients in an attempt to increase loyalty. One of the biggest challenge any fund manager faces is maintaining assets under management, particularly if performance dips.
Product development/management roles ensure that a fund manager is present in all the markets and asset classes it should be, has the right funds available to investors in the right markets and that there are no obvious gaps. They also liaise with the risk and compliance teams to ensure any new products will keep regulators happy, that a fund’s pricing structure is correct and that a firm isn’t falling behind their competitors in any areas.
Marketing professionals make sure that the right messages about the products reach potential and existing clients. Marketing professionals today spend less time wining and dining clients and more ensuring that the fund manager is well-represented online and on social media.
Business operations: Without delving too deeply into each position, fund managers employ risk and compliance professionals, investment operations professionals performing back office functions as well as IT, HR and accounting positions.
Career paths in asset management
If you’re a graduate starting out in fund management, you’ll come in as an analyst. Unlike investment banks, where the term implies you’re a junior banker required to work your way up to associate over three years, an analyst in fund management is simply the first rung on a much shorter career ladder.
Analysts in fund management learn the trade. They study the financial results of companies, consume huge amounts of information and news on the companies and sectors they cover, and – when they’re good enough - make investment recommendations.
Some people choose to remain as analysts throughout their careers. Others move across to becoming a junior portfolio manager and eventually work your way up to a portfolio management position.
During your formative years, it’s likely that you’ll be studying for your chartered financial analyst (CFA® Institite) designation. This is an industry standard on the buy-side.
The skills you’ll need to be a portfolio manager
Working as a portfolio manager at an asset management firm is a specialist role, but you can get into the industry with a generalist degree.
Graduates don’t necessarily need a degree in mathematics, economics or computer science to get a job as an asset manager. They do need to show critical thinking, and a genuine deep curiosity about how companies work and what drives human behavior.
“It’s important for graduates to understand it’s not all about numbers! Many investors and employees today want a three-dimensional view of their investments, one of risk, return, and impact.,” said Margaret Franklin, CFA, President and CEO of CFA Institute.
Asset managers have historically recruited from the same elite band of schools as investment banks. In the U.S., the University of Pennsylvania, Harvard, Columbia, University of Chicago and New York University are usually the top five schools for fund management employees, while in the U.K. Oxford, Cambridge and the London School of Economics typically dominate. However, like much of the finance industry, asset management firms are trying to diversity their intakes – and this means recruiting from a broader range of schools than in the past.
Alex Torrens, Investment Manager and Co-head of Research, at Walter Scott says: “With a team-based approach, it is critical that the team functions effectively, and that demands diversity. For that reason, we don’t rule anyone in, or out, based on the subject studied or the university. Instead, we look for people who are inquisitive and curious in nature, and who have a strong interest in how businesses work. Cognitive diversity within the team is vital. Our job is to seek to invest in some of the best companies around the world, companies that will lead their markets over the next 10 or 20 years. In analyzing companies and making those decisions, it doesn’t matter what subject you studied at university, but you do need to have a passion for finding and understanding those companies.”
Some regard asset management more as an art than a science, and humanities subjects can often be just as good a way of acquiring critical thinking skills.
Good people skills are important. For example, if you work in a distribution role, you need to be able to build relationships quickly and cultivate them to become deeper. Communication skills are needed too: portfolio managers need to be able to understand a client’s needs, and to explain their investment decisions.
“Employers today are looking for a broader range of skills from their staff in order to deliver for their clients,” says Franklin. “While technical skills will always a play a role in an employee’s ability to perform a financial role, the growth of soft skills and T-shaped skills – such as the ability to make connections and foster lateral thinking – will be increasingly important.”
Asset managers must also be aware of a whole range of factors that drive growth and performance, particularly big trends such as environmental, social and governance (ESG) factors as climate change becomes a big area of focus for the pension fund clients of investment management firms. “Employees also must be educated and prepared to respond to client’s investing objectives, this includes considerations like ESG analysis to underline the impact of their investments,” Franklin adds.
Photo by Anne Nygård on Unsplash
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