What is Asset Management Company?
Asset Management Company is a company that takes the financial assets of a person, company or another asset management company (generally this will be high net worth individuals) and use the assets to invest in companies that use those as a operational investment, financial investment or any other investment in order to grow the investment; post which, the returns will be returned to the actual investor and a small amount of the returns are held back as a profit with the asset management company.
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 Responsibilities
If you want to learn M&A (Mergers and Acquisitions) professionally, then you may want to look at 25+ video hours of Mergers and Acquisitions Course
In this video, we discuss the following –
- What is the Asset Management Company or AMC?
- How Asset Management Company (AMC) Work?
In the following video, we discuss
- What is Sell Side?
- What is Buy Side?
Transcript of What is Asset Management Company or AMC
What is Asset Management Company (AMC)?
Let’s look at the asset management company (AMC) 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 (AMC) 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 did Asset Management (AMC) Company work?
So the Asset Management Company (AMC) essentially collects money from the public and makes it a pool of funds. So maybe 100 million dollar fund or maybe 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 (AMC) could be like a Mutual FundMutual FundA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks.. 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 managerA Portfolio ManagerA Portfolio Manager is an executive responsible for making investment decisions & handle investment portfolios for fulfilling the client’s investment-related objectives. Also, he/she works towards maximizing the benefits & minimizing the potential risks for clients. 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 maybe 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 a lot of diversification because they have larger pool of resources as compared to the individual investors. So I may invest in only Microsoft or maybe Google. You know the Mutual Funds who invest in technology stocks may provide more diversification because they have larger funds to invest across domains and they are professionals, they can do a 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 (AMC) actually works.
And with this let’s come to the difference between what is a buy-side and what is sell-side.
What is Sell Side?
Many 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 bankingAbout Investment BankingInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc. we said that investment banking has a research division as well as the sales and the trading division so think about equity research divisionEquity Research DivisionEquity Research refers to the study of a business, i.e., analyzing a company's financials, performing Ratio Analysis, Financial forecasting in Excel (Financial Modeling), & exploring scenarios to make insightful BUY/HOLD/SELL stock investment recommendations. Moreover, the Equity Research Analysts discuss their findings & details in the Equity Research Reports. 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 we’re 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 is on the institutional side. So one side is a sell-side selling idea, 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 side are the one who is 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 FundsHedge FundsA hedge fund is an aggressively invested portfolio made through pooling of various investors and institutional investor’s fund. It supports various assets providing high returns in exchange for higher risk through multiple risk management and hedging techniques., 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 the 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 a Buy-side because they invest in stocks and bonds ok. I hope with this your ability to understand the pretty much basic functions of research how do they make money what are the client who is the EMCs and what is the deterrent between by side and a sell-side.