Asset Management - Explained
What is Asset Management?
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Table of ContentsWhat is Asset Management?How Does Asset Management Work?Academic Research on Asset Management
What is Asset Management?
Asset management refers to a process in which a professional asset manager or financial institution develops, maintains and manages all tangible and intangible assets owned by a client. It is a systematic approach in which a manager or investment bank is in charge of a part or all of the asset portfolio that a client has. The entire life cycle of a clients portfolio, down to the performance, costs and risks of the portfolio are managed or overseen through asset management.
How Does Asset Management Work?
Oftentimes, individuals and large institutions who have tangible and intangible assets need the service of experts and professionals who help them manage the assets. Simply put, asset management entails a systematic process whereby the investments or assets owned by individuals are managed by experts. Asset managers must possess expertise in mitigating investment risks and at the same time increasing investment returns for clients. Asset managers deliver professional services in exchange for a fee. Usually. Individuals with high net-worth, large corporations and government agencies hire asset managers to manage their investment portfolio. Asset management requires a vast knowledge in the analysis of market trends that help determine the risks and appreciation of the assets. Financial institutions also render asset management services to their clients. These financial institutions manage the accounts of their customers and give advice to account holders on selecting the best account for them, whether a regular saving account or a checking account. Customers with large deposits are also advised on the type of account to keep their money for higher returns. Federal Deposit Insurance Company-backed (FDIC) funds and non-FCID funds are the two types of funds that account holders can also choose from. Clients who choose financial institutions as their asset managers save the cost of hiring an external brokerage -dealer to manage their accounts. Here are some important things you should know about asset management;
- Asset management is a systematic procedure of developing, maintaining and managing investments on behalf of other people.
- Individual who are experts in asset management, financial institutions and investment banks can offer asset management services.
- The purpose of asset management is to increase investment returns and reduce investment risks.
- High net-worth persons, large institutions and corporations, and government entities are major targets for asset managers.
Academic Research on Asset Management
- The theoretical underpinnings of custome rasset management: a framework and propositions for future research, Bolton, R. N., Lemon, K. N., & Verhoef, P. C. (2004). The theoretical underpinnings of customer asset management: a framework and propositions for future research.Journal of the Academy of Marketing Science,32(3), 271-292. Most research in customer asset management has focused on specific aspects of the value of the customer to the company. The purpose of this article is to propose an integrated framework, called CUSAMS (customer asset management of services), that enables service organizations (1) to make a comprehensive assessment of the value of their customer assets and (2) to understand the influence of marketing instruments on them. The foundation of the CUSAMS framework is a careful specification of key customer behaviors that reflect the length, depth, and breadth of the customerservice organization relationship: duration, usage, and cross-buying. This framework is the starting point for a set of propositions regarding how marketing instruments influence customer behavior within the relationship, thereby influencing the value of the customer asset. The framework and propositions provide the impetus for a research agenda that identifies critical issues in customer asset management.
- Risk-sensitive dynamic asset management, Bielecki, T. R., & Pliska, S. R. (1999). Risk-sensitive dynamic asset management.Applied Mathematics and Optimization,39(3), 337-360. This paper develops a continuous time portfolio optimization model where the mean returns of individual securities or asset categories are explicitly affected by underlying economic factors such as dividend yields, a firm's return on equity, interest rates, and unemployment rates. In particular, the factors are Gaussian processes, and the drift coefficients for the securities are affine functions of these factors. We employ methods of risk-sensitive control theory, thereby using an infinite horizon objective that is natural and features the long run expected growth rate, the asymptotic variance, and a single risk-aversion parameter. Even with constraints on the admissible trading strategies, it is shown that the optimal trading strategy has a simple characterization in terms of the factor levels. For particular factor levels, the optimal trading positions can be obtained as the solution of a quadratic program. The optimal objective value, as a function of the risk-aversion parameter, is shown to be the solution of a partial differential equation. A simple asset allocation example, featuring a Vasicek-type interest rate which affects a stock index and also serves as a second investment opportunity, provides some additional insight about the risk-sensitive criterion in the context of dynamic asset management.
- Asset management techniques, Schneider, J., Gaul, A. J., Neumann, C., Hogrfer, J., Wellow, W., Schwan, M., & Schnettler, A. (2006). Asset management techniques.International Journal of Electrical Power & Energy Systems,28(9), 643-654. Deregulation and an increasing competition in electricity markets urge energy suppliers to optimize the utilization of their equipment, focusing on technical and cost-effective aspects. As a respond to these requirements utilities introduce methods formerly used by investment managers or insurance companies. The article describes the usage of these methods, particularly with regard to asset management and risk management within electrical grids. The essential information needed to set up an appropriate asset management system and differences between asset management systems in transmission and distribution systems are discussed. The bulk of costs in electrical grids can be found in costs for maintenance and capital depreciation. A comprehensive approach for an asset management in transmission systems thus focuses on the life-cycle costs of the individual equipment. The objective of the life management process is the optimal utilisation of the remaining life time regarding a given reliability of service and a constant distribution of costs for reinvestment and maintenance ensuring a suitable return. In distribution systems the high number of components would require an enormous effort for the consideration of single individuals. Therefore statistical approaches have been used successfully in practical applications. Newest insights gained by a German research project on asset management systems in distribution grids give an outlook to future developments.
- Marketing actions and the value of customer assets: a framework for customer asset management, Berger, P. D., Bolton, R. N., Bowman, D., Briggs, E., Kumar, V., Parasuraman, A., & Terry, C. (2002). Marketing actions and the value of customer assets: a framework for customer asset management.Journal of Service Research,5(1), 39-54. This article develops a framework for assessing how marketing actions affect customerslifetime value to the firm. The framework is organized around four critical actions that firms must take to effectively manage the asset value of the customer base: database creation, market segmentation, forecasting customer purchase behavior, and resource allocation. In this framework, customer lifetime value is treated as a dynamic construct, that is, it influences the eventual allocation of marketing resources but is also influenced by that allocation. By viewing customers as assets and systematically managing these assets, a firm can identify the most appropriate marketing actions to acquire, maintain, and enhance customer assets and thereby maximize financial returns. The article discusses in detail how to assess customer lifetime value and manage customers as assets. Then, it identifies key research challenges in studying customer asset management and the managerial challenges associated with implementing effective customer asset management practices.
- China's asset management corporations, Ma, G., & Fung, B. S. (2002).China's asset management corporations (No. 115). Bank for International Settlements. To address the banking system's non-performing loan (NPL) problem, the Chinese government set up four asset management corporations (AMCs). They were to buy up bad debts of the big four state-owned commercial banks and dispose of them over 10 years, taking a large step towards NPL resolution. But in their first two years, these AMCs have made only a limited contribution to resolution of the NPL problem. They have taken over less than half of the NPLs at the big four banks. In addition, while AMC financing have been less than transparent, it appears to have burdened The People's Bank of China (PBoC) with greater risks to date than the Ministry of Finance (MoF), although there have not been to date any evident monetary consequences. Under plausible recovery scenarios, the AMC losses would surpass the current financial contributions to the AMCs from both the MoF and the PBoC. Since their cash recoveries have lagged their interest obligations, the AMCs face rising cash flow pressure. In response, the government is pushing for speedier asset recovery, as evident in the milestone of the first international NPL auction.