What is Asset Management Company AMC – This is the 3rd Part of the 9 part series on Investment Banking Overview.
- Part 1 – Investment Banking vs Commercial Banking
- Part 2 – Equity Research in an Investment Bank
- Part 3 – What is Asset Management Company
- Part 4 – Sales and Trading
- Part 5 – Private Placements, IPOs and FPOs
- Part 6 – Underwriters and Market Makers
- Part 7 – Mergers and Acquisitions
- Part 8 – Restructuring and Reorganization
- Part 9 – Investment Banking Roles and Responsibilities
1) Investment Banking Program 99 Course Bundle, 500+ hours
2) Business and Financial Modeling (University of Pennysylvania)
3) Wharton Business and Financial Modeling Capstone (University of Pennysylvania)
4) Introduction to Finance: Valuation and Investing (University of Michigan)
5) Valuing Projects and Companies (University of Michigan)
In this video and article, we discuss the following –
- What is Asset Management Company or AMC?
- How Asset Management Company Work?
- What is Sell Side?
- What is Buy Side?
Transcript of What is Asset Management Company or AMC
What is Asset Management Company?
Let’s look at the asset management company in a bit more detail. Now let us understand the meaning of an Asset Management Company (AMC) in this regard. So while we have discussed research on one side, we said that the research may have different kinds of clients. One could be the individual investors, the other one could be institutional investors and Asset Management Companies can be classified as one of the institutional investors. So what do they exactly do? So institutional investors like Asset Management Company what they do is they basically invest pooled of funds of clients into various securities. Securities can be bond securities or company based securities i.e. stock equity-based securities.
How Asset Management Company works?
So Asset Management Company essentially collects money from the public and makes it as a pool of funds. So may be 100 million dollar fund or may be 200 million or multi-billion fund. So depending on the size of the Mandate they invest the pooled funds of clients into various securities and an example could be an Asset Management Company could be like a Mutual Fund. So a Mutual Fund that invests into technology stocks. So obviously you and I as an investor invest in a Mutual Fund of one of the companies that Mutual Fund will be managed by a portfolio manager here. So there is a portfolio manager who directs these pooled funds into various securities. So let’s see what this job is all about you know how do they make money?
They make money by actually you know taking a commission or fees depending on the size of the fund that they are managing. So if it is 100 million for example, management fee may be around 2% – 3% of the overall asset under management or AUM. So that’s how the asset management companies make money and the manager who manages the investments or takes investment decisions is called a portfolio manager or a fund manager ok and the important part of this Asset Management or the Asset Management Companies is that they provide lot of diversification because they have larger pool of resources as compared to the individual investors. So I may invest in only Microsoft or may be Google. You know the Mutual Funds who invest into technology stocks may provide more diversification because they have larger funds to invest across domains and they are professionals, they can do lot of risk-return analysis and kind of diversify their large portfolio which will in return ultimately mitigate my investment in the Mutual Fund. So that’s how basically the Asset Management Company actually works.
And with this let’s come to the deferent between what is a buy-side and what is sell side.
What is Sell Side?
Many a times I have seen students confusing between what is a buy side and what is a sell side and why they are kind of used in this context of investment banking. When we had earlier talked about investment banking we said that the investment banking has a research division as well as the sales and the trading division so think about equity research division who is preparing equity research reports and advice. So research and advice for whom? So research and advice for clients like institutional clients, investors who can individually investors. So were saying that the investment bank research department will produce research that will be consumed by clients. So the clients would be institutional and individual investors. So whenever you see this report you about a buy-sell recommendation from a brokerage firm think of this as a sell side, because what they are doing is essentially selling ideas ok so they are not selling reports so please not there could be some neutral brokerage firms, independent brokerage firms who sell reports as well as price tag but when we talk about sell side in the context of investment banking they sell ideas ok. So they are selling ideas to the clients and in most cases these ideas are communicated for free. So that’s how a sell side comes, the selling ideas ok.
What is Buy Side?
Think about a buy side, buy side is nothing but the client who are on the institutional side. So one side is a sell side selling ideas, selling ideas to whom? To the clients and the clients are called as buy side because what they essentially do is that they have a pool of funds, they invest in stocks and bonds. So a buy sides they are the one who are buying stocks and bonds and they do that in large quantities of securities for money marketing purposes. So they have a Mandate and they invest as per their Mandate. So who are the examples of a buy side? So let’s look at a couple of them. Hedge Funds, Mutual Funds, Insurance Companies, Pension Funds to name a few actually buy side because if you look at individually Hedge Funds, Mutual Funds in every place you will find a fund manager who will interact with the brokerage firms for ideas. So brokerage firm is giving ideas to Mutual Funds. Mutual Fund is hearing those ideas they may be appreciating those ideas and looking forward to making investments. So whose portfolios are these companies actually managing on the buy side managing they are basically the clients. So investor Mutual Funds is a pool of funds from their own investors. So that’s why they are called as a Buy side because they invest in stocks and bonds ok. I hope with this your able to understand pretty much basic functionality of research how do they make money what are the client who are the EMCs and what is the deterrent between by side and a sell side.