Fund manager by asset management companies
The role of an asset management company
UCITS and AIF capital management companies in mutual funds
Which are the largest asset management companies in the world?
Closed-ended funds and the role of fund manager
The different costs of a fund and the KIID
Asset-based fee, sales charge and redemption charge in mutual funds
Management costs and performance fees in asset management companies
The contours of asset management companies (AMC or asset management / investment management company/firm1) are defined by the Financial Services and Markets Act 2000 (section 237(2) of the Act). It is a company that is authorised to manage UCITS under certain prudential rules. The activities of an asset management company typically focus on the management of financial instruments such as investment funds, pension funds and investment portfolios. This also includes the management and administration of UCITS units, but also the provision of financial advisory services2. UK UCITS are of course also regulated by the act above (sections 236A and 237 of the Act)3.
If they deal with investment funds, asset management companies may also be named “mutual fund companies” or “investment companies”. Their activity of collecting money from investors, thus concentrating large investment volumes, allows these companies to be able to manage investment funds according to criteria of diversification and economy of scale. In many cases, the remuneration of these companies comes from a percentage of the volume invested in the fund4.
An asset management company is responsible for all measures resulting from portfolio management and risk monitoring of special assets. It makes all investment decisions and examines investment proposals. It is also responsible for ensuring effective risk control (e.g. stress tests) in accordance with specific regulations. A key aspect of AMCs is that risk management, as well as asset and portfolio management, must work strictly separately from one another. It’s also very important that the AMC must guarantee constant liquidity for its payment and repayment obligations towards the fund’s investors.
As mentioned, a capital management company, or CMC, manages special funds, and the form of management involves investment funds for joint accounts of investors.
However, there are also other forms of management, such as the UCITS capital management company and the AIF (Alternative Investment Fund Manager) capital management company, which differ in the type of investment fund managed. UCITS are investment funds that invest in securities and liquid financial instruments (stocks, bonds, money market papers, or mixed funds, as well as units in other UCITS, which are called “funds of funds”). UCITS units will be redeemed or paid out immediately at the request of the unit holders.
AIFs differ from UCITS in that they invest in all other areas (e.g. in real estate, private equity or venture capital funds), or use other financial instruments (hedge funds). Another feature is that the fund does not consist of securities. It is worth mentioning that even AIFs have to be approved by the FCA and subject to the full requirements of UK AIFMD5.
ADV Rating ranked the world’s largest asset management companies in 20226. Here is the list of the top twenty by capital management: BlackRock, Vanguard Group, UBS Group, Fidelity Investments, State Street Global Advisors, Morgan Stanley, JPMorgan Chase, Allianz Group, Capital Group, Goldman Sachs, BNY Mellon, Amundi, PIMCO, Legal & General, Prudential Financial, Deutsche Bank, Bank of America, Invesco, T. Rowe Price, Credit Suisse.
A mutual fund is a financial asset that is managed by an AMC, asset management company. These companies collect the capital of a variety of savers and invest it in financial assets by consolidating it into a single asset, the fund. The investments can relate to real estate (real estate funds), raw materials, stocks (equity funds), bonds or government bonds (bond funds or, more often, pension funds). Investment rules and strategies are usually aimed at increasing returns and reducing risks. In general, it can be said that investment funds are less risky than investments in individual stocks, as they offer diversification across a wider range of assets7.
Fund investors receive shares in the fund’s assets for their contribution. The income generated by the investment funds, from dividends and interest, is either distributed to the unitholders or, in the case of accumulation, reinvested, which increases the value of the units. This is to be distinguished from a reinvestment in which the income from distributing funds is reinvested in them. In summary, it’s sometimes so: while an investment in mutual funds is one of the best guarantees for diversifying one’s investments, there is no guarantee of a return or the preservation of the capital invested. The reason is clear: the value of the assets that make up the funds can change based on market trends.
An equity fund is an investment fund that invests exclusively or predominantly in stocks. The fund can invest globally as an international equity fund or diversify investments by investing in stocks that are focused on different geographic or economic sectors. A bond fund is a mutual fund that invests exclusively or primarily in bonds. These funds get their added value by paying interest and trading the securities they hold. Specific types of funds are mixed funds, which not only invest the clients’ assets in a certain asset class, but also optimise risk diversification. The balanced funds invest in stocks as well as in fixed income securities, however, maximum limits are usually set for the proportion of shares and bonds. In contrast to the other funds, balanced funds definitely contain at least two different asset classes. The mixed funds are also known as balanced funds.
There are different types of funds. A basic distinction is made between open-ended and closed-ended funds. In the case of open funds, units can be purchased at any time or they can be requested to be redeemed. The range of open-ended investment funds is considerably larger than that of closed-end funds. Mutual funds “that are structured as collective investment schemes (CIS) must be authorised or recognized” by the Financial Conduct Authority “to be promoted to retail investors in the UK”8. In an open-ended fund, share prices are typically published daily and correspond to their current net asset value (NAV).
Among the most common open-ended funds are Authorised Unit Trusts (AUTs) and Open-Ended Investment trusts (OEICs). “The value of a unit in an OEIC or AUT is linked to the net asset value (NAV) of the underlying assets held in the fund”9. Among the collective savings schemes regulated by the FCA in the UK are Investment Companies with variable Capital (ICVC).
Instead, closed-end funds only allow subscriptions to be made during the offering period (takes the name of IPO – “Initial Public Offering”), i.e. before the fund is operational. They’re referred to as “closed” because units can’t be returned before the agreed investment period has expired and units can’t be purchased after the planned volume has been contributed. In contrast to an open-ended fund, this means that the fund manager doesn’t issue any new shares in order to continue to satisfy investor demand. The share price of a closed-end fund fluctuates on the dynamics of market demand and “the changing values of the fund’s holdings”10. Most closed-end funds are primarily investments in real estate, unlisted companies, or loans. The usual name for closed-end funds in the UK is Investment Trusts11.
Cost is a key consideration when choosing mutual funds. The costs can be broken down into different types of commissions: an asset-based fee and redemption, administration and performance fees. A mutual fund’s annual recurring charges are listed as an ongoing charge and can include several types of charges. All of this information is stored in the Key Investor Information Document (KIID), the sales prospect, a document that must be given to the investor when they sign. The investor can therefore find all the information necessary to make their choice: the objective and investment policy, the main types of activities, the risk-return profile and any costs envisaged. The way to get as close as possible to the fund’s overheads is to consider a measure called the ongoing charge figure (OCF)12.
The so-called asset-based fee (or subscription fee) is the fee payable when subscribing to the mutual fund. However, the policy of the fund can also stipulate that this payment must also be made in the event of later acquisitions. There is no fixed fee for the sales charge: it varies from fund to fund, although it’s usually higher for equity funds. The redemption charge (or redemption commission) is a commission that, for some funds, may be charged to subscribers when they request the reimbursement of their units in a mutual fund.
Management costs are undoubtedly the most important cost involved when calculating the return: they are based on an annual percentage of the investment, which remunerates the work of the management company and the advisory service and must always be deducted from the result generated. Finally, there are the performance fees, which are calculated based on the results achieved; in this case the calculation can relate to the absolute return, but in some cases to a reference parameter set at the beginning, as well.
See the rankings of funds on MoneyController and compare their performance.
How much do the funds with the best risk/reward ratio cost? – Check out the ranking.
To learn more, you can also read:
Regular savings accounts
1 https://en.wikipedia.org/wiki/List_of_asset_management_firms
2 https://www.handbook.fca.org.uk/handbook/glossary/G2455.html
3 https://www.handbook.fca.org.uk/handbook/glossary/G3403u.html?date=2022-06-22
4 https://www.investopedia.com/terms/a/asset_management_company.asp
5 https://www.fca.org.uk/firms/aifmd/uk-aifm
6 https://www.advratings.com/top-asset-management-firms
7 https://www.lloydsbank.com/wealth-management/what-are-mutual-funds.html
8 https://www.fca.org.uk/firms/authorised-recognised-funds
9 https://www.afhwm.co.uk/news/closed-and-open-ended-funds-what-is-the-difference
10 https://www.investopedia.com/terms/c/closed-endinvestment.asp
11https://www.morningstar.co.uk/uk/news/65085/what-is-a-closed-end-fund.aspx
12 https://www.which.co.uk/money/investing/types-of-investment/investment-funds/are-fund-charges-eating-into-your-returns-as43q0j6wsrq
