The Economics of Fund Management

Ed Moisson

Description

Although the asset management industry has come under increasing scrutiny since the financial crisis it still remains poorly understood and investment scandals continue to headline in the financial press. Whereas most literature on the industry focuses on the technical end – how managers invest and what tips others can glean – this book explores the way these businesses operate as businesses and how they make their money.



The book explains how the industry is organized, how firms generate revenues through various types of fund, fees and charges and what cost pressures they face. It investigates the nature of their client relationships, the role played by star investors and the requirement for firms to integrate non-financial considerations into their investment process. The inherent tensions and potential conflicts of interest within asset managers that seek to keep both clients and shareholders happy is also examined. The book concludes by considering how the industry is evolving, the role of regulation and where it is struggling to change.



Suitable for students of business and finance, those working in allied areas of the finance sector, and for anyone with a general interest in how financial institutions and markets operate, the book offers readers a balanced and incisive guide to the economics of an industry that globally controls more than $100 trillion of financial assets and a critical appraisal of the sector’s future.

1. Introduction

2. Organization

3. Business model

4. Managing money

5. Stars and scandals

6. Purpose and sustainability

7. Regulations and responsibilities

8. Sales and products

9. Fees and charging

10. Conclusions and the future

Sujets

• Financial Services
• Industries
• Banking
• Economie gestion
• risk management
• Bank
• Neil Woodford
• General officer
• Tertiary sector of the economy
• Economics
• Business
• General
• Finance
• Service
• Industrie

Informations

• Publié par: Agenda Publishing
• Date de parution: 13 octobre 2022
• Nombre de lectures: 1
• EAN13: 9781788215367
• Langue: English

Extrait

The Economics of Big Business
This series of books provides short, accessible introductions to the economics of major business sectors. Each book focuses on one particular global industry and examines its business model, economic strategy, the determinants of profitability as well as the unique issues facing its economic future. More general cross-sector challenges, which may be ethical, technological, or environmental, as well as wider questions raised by the concentration of economic power, are also explored. The series offers rigorous presentations of the fundamental economics underpinning key business sectors suitable for course use and a professional readership.
Published
The Economics of Airlines, Second Edition
Volodymyr Bilotkach
The Economics of Arms
Keith Hartley
The Economics of Construction
Stephen Gruneberg and Noble Francis
The Economics of Fishing
Rögnvaldur Hannesson
The Economics of Fund Management
Ed Moisson
The Economics of Music, Second Edition
Peter Tschmuck
The Economics of Oil and Gas
Xiaoyi Mu

© Ed Moisson 2022
This book is in copyright under the Berne Convention.
No reproduction without permission.
All rights reserved.
First published in 2022 by Agenda Publishing
Agenda Publishing Limited
The Core
Bath Lane
Newcastle Helix
Newcastle upon Tyne
NE4 5TF
www.agendapub.com
ISBN 978-1-78821-533-6 (hardcover)
ISBN 978-1-78821-534-3 (paperback)
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Typeset by JS Typesetting Ltd, Porthcawl, Mid Glamorgan
Printed and bound in the UK by CPI Group (UK) Ltd, Croydon, CR0 4YY
CONTENTS
Preface and acknowledgements
Acronyms and abbreviations
1. Introduction
2. Organization
3. Business model
4. Managing money
5. Stars and scandals
6. Purpose and sustainability
7. Regulations and responsibilities
8. Sales and products
9. Fees and charging
10. Conclusions and the future: have we reached peak mutual fund?
Glossary
References
List of tables and figures
Index
PREFACE AND ACKNOWLEDGEMENTS
My ideas for this book had been milling around for several years, but there is nothing like having surgery during a pandemic to focus your mind. I was fortunate that Steven Gerrard at Agenda read the resulting outline and suggested that it could form the basis for an addition to Agenda’s series on the Economics of Big Business – short, accessible introductions to the economics of major business sectors. I cannot thank him enough for giving me the chance to take this on. I am not an economist, so readers certainly do not need to be to gain an understanding of how the fund management industry functions and operates. The vast majority of literature relating to asset managers concerns how they invest, so there seems ample room to explore the array of other functions as well. There is even more room to explore asset management in Europe and the UK when so many books are focused on the United States, either intentionally or as a result of it being the world’s largest market for mutual funds.
Writing this book has prompted me to reflect on what has changed, and what hasn’t, over the years since I entered the asset management industry in the late 1990s. This has made the process of writing particularly enjoyable as time for reflection of this kind is less easy when writing about what is new in the industry day-to-day as a journalist. Unusually, my earliest experience in asset management was analysing funds’ charges, which perhaps explains why I have found this part of the industry (how it makes money) just as interesting as its investment role (how it makes money for clients). I have been fortunate that over the intervening years I have been involved in researching and writing about funds’ performance, flows, regulations, distribution, as well as the impact of technology and the development of new products on fund businesses.
Working variously at a research firm, inside an asset manager and as a journalist has given me the chance to hear diverse perspectives on the industry, both from colleagues and from those at other firms across Europe, as well as in the United States and Asia. This has been made more interesting, and sometimes more lively, by often trying to explore issues that asset managers tend to prefer to be left unexplored. This book must therefore partially reflect those myriad views, although it also reflects my interpretation of events and actions and so responsibility for the views expressed in this book rests with me alone. I hope to have conveyed information and insights on all of the most relevant issues, although the book’s wide scope inevitably means some areas are not tackled in depth. However, I think the book serves its main purpose, and should be more accessible, as a result. The aim is also to offer enough food for thought to make it of interest to those already working in asset management, and potentially those with a more general interest in better understanding an industry that has a growing influence in the wider economy.
My experiences over the past 20 years or so have left me with the lasting impression that there is little room for self-doubt when working in asset management – certainly the wind of self-confidence fills the sails of the industry’s successful executives. It is not really an industry for those that lack this confidence, let alone one for introverts. But as a journalist I find myself regularly questioning my own views and interpretations even as I pose questions to those working in and around the business of fund management. Over the years, hearing recycled thoughts being regurgitated as though profound wisdom is being imparted has sometimes left me longing for more original or contrarian opinions. This seems surprising in an industry that prides itself on being a “people business”, where a range of different people with different views would seem to be a prerequisite. This situation partly reflects asset managers’ struggles to be more diverse, as well as likely reflecting that it is not only a competitive industry, but also one where firms (particularly those operating in multiple markets) are simultaneously cautious about being seen to be too different from the norm lest they make any clients nervous. Being a safe pair of hands when managing clients’ money clearly has its merits. But looking at the way firms advertise themselves or position their brands shows the result: most asset managers simply explain what the industry does (i.e. investing) rather than showing how their particular business is different from others. I think this is partly because while every firm can agree it is striving to deliver good financial returns for clients, distinguishing a fund management company from its peers in any other way presents a tension between the interests of investors in funds and the investors in the fund management business. This is the inherent tension, and potential conflict of interest, that asset managers must grapple with, but which they prefer to downplay: higher fees for the business mean lower returns for clients, all other things being equal.
The recurring and highly resilient revenue stream that a fund management business provides is one of the main reasons why the industry has moved from a backwater in European financial services to a prized possession over the past 40 years (albeit ebbing and flowing in the intervening years). This was shown in the speed with which the European funds industry recovered from an initial loss of almost €1.3 trillion in assets in March 2020 triggered by the Covid-19 pandemic, as clients withdrew from funds and stock markets fell. But rather than suffering a longer-term hit to revenues, asset levels had recovered by August of the same year. Asset managers in the UK and Europe have not always been in this position. The modern UK fund management industry arguably entered the mainstream in the late 1980s, boosted by the demand from retail investors on the back of tax-incentivized Personal Equity Plans (PEPs) introduced in the government’s 1986 Budget, which had the aim of expanding individual share ownership. In time PEPs were replaced by Individual Savings Accounts (ISAs), but the idea was the same. The power of star fund managers (including Morgan Grenfell’s Peter Young, discussed in this book) to attract these UK clients really came to the fore in the 1990s and they have been a key element of the industry ever since (which isn’t to say there weren’t good fund managers before this period, but they worked in an unglamorous business, not helped by long memories of the chaos caused by Bernie Cornfeld). As a result, the highs and lows of star managers and their relevance to the wider industry are explored in this book, at the very least to provide some form of institutional memory which I think is important not to lose when considering the fund management businesses of today and tomorrow.
In a similar way, the post-Brexit world might make it easier to forget the importance of EU regulations in helping the growth of the European funds industry (including the UK). British and US firms recognized the commercial possibilities offered by the EU’s UCITS directive in the late 1990s and never looked back. More recently, the vast majority of UK and European asset managers have embraced the need for environmental, social and governance (ESG) considerations – or at least recognized the need to pay lip service to this. There are also some firms that are shouting about how they have been ESG investors for many years. Only a very few are turning their backs on ESG altogether. As firms grapple with integrating non-financial considerations into their investment process, it does seem as though asset managers are moving into the next phase of their evolution, even if it is unlikely that aspects such as the appeal of star managers will fade altogether. What hasn’t changed is the