Asset managers are often tainted in the media, alternative asset managers especially so during the financial crisis, and a few rotten apples tarnished the image of the whole business for a long time. But is it fair to say that the whole industry has gone bad?
The sums of money involved in the asset management industry are sometimes mind-boggling; this is why the industry can be such an easy target for sensationalist head line seekers. PIMCO reportedly saw USD 11 billion leave its flagship fund in January 2015 alone following the departure of Bill Gross. For some perspective, that only represented 8% of the total assets of that one fund, a staggering USD 293 billion at its peak. PIMCO still manages well in excess USD 1 trillion in third party assets. When looking at such sums, a rounding error could be enough for us mere mortals to envisage living off, so for some, the temptation could be too much. As soon as people find themselves in control of large amounts of money there is always the expectation that some might act unethically. This is why we have regulators and governance standards throughout the industry. We get it, we are talking about people’s money, maybe even your money.
Have you ever wondered what would a world without asset managers look like? Have you considered the role funds play in our economies?
Banking and asset management sit side by side and are inextricably linked, but they are not the same, even though Asset management is stepping more and more into the financing role that banks used to play. Asset management is a building business, a catalyst creating value for economic growth and wealth creation. Put short, it is the industry your pension will be sourced from.
But many people don’t understand the asset management industry, and they don’t see, how they are related to it. Hedge funds often receive the worst of the public scorn, yet few realise how diverse the investment strategies are that are labelled as hedge funds. Maybe you feel this doesn’t relate to you, but how would you feel if I told you that today most popular borrowers of private debt are actually small and medium-sized companies? That’s right, the very backbone of our economies. SMEs drive local growth by providing, and keeping, local jobs. They often support specialist crafts and drive local and regional innovation. Without them, we wouldn’t have a way to create new growth. Since the financial crisis these companies, the key to our future growth, have struggled to finance their operations though the traditional means. Where are they turning? To asset managers. Asset managers are fuelling our future economy; in a way that the Banks no longer can, and government are struggling to.
The asset management industry is stepping in to play a leading role in our economies, effectively impacting all of us. Without funds investing in such companies, have we considered which of our family and friends could lose their jobs? If our neighbours’ jobs went, have we considered the impact on our local housing market? How many people would be out of work in your city?
Asset managers are financing projects from roads to buildings, from transportation to entertainment, from technology to philanthropy. Asset managers not only invest in companies, they invest in people, in geographical locations, in history and culture. Asset management is inextricably linked to almost everything, to almost everyone.
Have you thoroughly considered how the asset management industry affects your personal future through your pension? In a world of ageing populations, living longer and more actively into retirement, the asset management industry will be key to keeping us in the comforts we have grown accustomed to.
Most of us will have a pension, either through the state, through our companies, our professional bodies or in the form of a private pension scheme. Without the asset management industry we would be left to manage our savings on our own. Too many of us would leave that cash with the bank and let it loose its value as inflation eats away at it. Then, when we had saved enough over the years, most of us would invest it in one or two assets, very likely our own property initially. Few of us would be able to spread and diversify our investments. What does that mean? Firstly, this would leave our pension tied into relatively illiquid investments and should one drastically loose value, so would a significant chunk, if not all, of our life savings. Secondly, as alluded to previously, our money would most likely lay dormant in a savings account until we had enough to buy an investment asset, unless we are fortunate enough that the bank might loan us the cash. That however comes with a risk few of us thoroughly understand. Borrowing money to buy an asset is using a technique called leverage – an investment strategy used in more sophisticated investment funds and effectively banned in European retail funds. Do we really wish to leave our financial future tied into a handful of undiversified assets, bought using a professional investment technique at costs we cannot assuredly control?
The asset management industry allows you to invest what you can, when you can, and allows you to adapt your risk appetite as circumstances change. Most private pension fund schemes allow you to invest manageable amounts of cash on a monthly basis and move out of the riskier assets as you approach your retirement age. There is a reason most governments give tax incentives to private pension schemes – they know the current pension system cannot go on forever as it is structured today. Even if you are not investing into funds today, I assure you at a minimum your state pension plan is. The next time you hear someone claim that hedge funds are the devil incarnate, ask yourself whether that person is not unknowingly invested in them. The sad fact is that too many of us have not educated ourselves on how our financial system works. Additionally, a number of these views are based on some form of assumed truth pulled from the media. All asset managers, from pension fund managers to hedge funds managers are trying to create wealth through the application of a predefine investment strategy. As investors we should be asking ourselves whether we believe in the strategy, are ethically comfortable with the investments and whether we agree with the structure around that strategy, such as the fees we will be paying.
All too often, as humans we are happy to find an external excuse to our problems. That search for an independent and external reason fuels the sales of sensationalist journalism – news agencies are ultimately profit driven businesses and may in certain cases twist truths to sell their papers. Ultimately we should take responsibility of our actions and take the time to educate ourselves. We owe it to ourselves and the next generations to challenge assumed truths and to make our own judgements. If we choose not to take that time then we must accept that we relinquish a certain amount of information and hence can only act with partial facts.
As an investor, and almost all of us are investors directly or indirectly, we must educate ourselves and challenge the poor managers, the poor structures and the poor decisions. I hope that over time the articles and videos here help your broaden your understanding of funds and the asset management industry, be you a novice looking to start investing or a specialist hoping to stay up to scratch in the ever evolving world of asset management.
For now I hope you appreciate that the asset management industry, while not perfect, is a highly regulated industry that is one of the life lines to economic growth and wealth generation, from the man in the street all the way up to the largest corporations. Would you prefer a world without fund managers?
Disclaimer: The material on this website is intended for information purposes only. We are providing general educational information on the investment industry. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular course of action. Please seek a duly licensed professional for investment advice.
Please note that the views expressed in this article are the author’s own and do not necessarily constitute the views of their organisation. Thank you.