Blackrock, The Vanguard Group, State Street, Carlyle… If you want to work in finance, you may know these big names in capital asset management. These sprawling groups are, directly or indirectly, shareholders in a colossal number of companies, which has earned them a lot of criticism and other conspiracy theories.
These groups make many financiers dream because asset management is one of the most prestigious activities. If the films “Wall Street” and “Wall Street: Money Never Sleeps” made you dream, if you also saw yourself in Gordon Gekko’s shoes, and if you worship Warren Buffett, then this article is for you.
What is Capital Asset Management: Definition and Explanation
Capital asset management, also known by its English name “asset management,” is a profession that consists of managing and investing capital within the framework of a previously defined investment policy and maximizing its return.
An asset manager’s objective is to invest the funds entrusted to him in perfect compliance with his investment mandate. This notion of mandate, or investment policy, is fundamental. Indeed, it scrupulously frames what a manager can do or not.
Most people think that a manager’s only duty is to maximize the return of his portfolio for his client or employer. This is wrong! This is only half of his activity. The other half always respects the mandate entrusted to him.
Thus, if his investment policy consists of long-term and low-risk investments, a manager cannot have fun investing in small technology stocks (such as start-ups), even if he is convinced that the return on investment would be enormous. He does not have the right to keep his portfolio under a certain level of risk.
Similarly, some clients, banks, or funds have policies that prohibit investing in certain asset classes or sectors. For example, the Vatican Bank does not invest in arms or gambling companies. Therefore, it is impossible for a man, his portfolio manager, who directly or indirectly manages his capital, to invest in companies such as EADS or Dassault.
Therefore, a manager’s daily work consists of constantly rebalancing his portfolio to maximize its return while remaining aligned with his mandate. To do this, he must keep himself fully informed of financial and economic news and know his exposures, not only in which assets the funds are invested but also in which factors are likely to cause their value to fluctuate.
The Different Types of Capital Asset Management or Asset Management
You may have noticed that the article deals with asset management, not stock management. Most people often confuse the two activities. Stock management is a subcategory of capital asset management.
Several types of asset management can depend on the type of assets in which the funds are invested and the investment strategy or method. Here are the main types of capital asset management:
Equity Management
Equity management, often shortened to “equity management,” is a type of capital asset management involving investing in company shares listed on the stock exchange. It aims to strike a fair balance between financial mathematics and economic and technical knowledge.
Indeed, knowledge of financial mathematics is required, mainly to constantly check your portfolio’s risk/return balance and estimate the impacts of new investments on this balance. Economic knowledge is also necessary to understand the consequences of each economic news item on the companies in your portfolio.
Moreover, managers also have a very detailed knowledge of their work sectors. They must perfectly understand the activities of the companies they are likely to invest in to judge best their growth potential and the challenges and risks they face. Warren Buffett has always said that he does not invest in companies whose activity, product, and business model he does not fully understand.
Equity managers work with dedicated IT tools, the best known being Bloomberg and Reuters. Equity management can be divided into different, more precise subcategories, including the following:
Finally, know that stock management is not trading. The time when you bought a bunch of shares at 10 a.m. to resell them at 10:15 a.m. is over. It only existed in 80s movies about finance. Today, computers do it infinitely faster, and trading is, therefore, a matter for doctors in mathematics more than for financiers.
Consequently, stock management focuses on longer investment horizons, several months or even years. Managers invest in stocks because they think the economic results of the companies behind these stocks will be good in the coming months and rarely speculate on the short term.
Rate Management
Rate management is the category of capital asset management that concerns bonds and other “rate products,” such as monetary products (exchange rates). Thus, rather than investing in stocks, the manager buys and sells corporate bonds, public entities (States, municipalities, etc.), or mutualized rate products (mutualized real estate loans, such as the famous real estate subprimes).
Rate management is much more mathematical than equity management, and managers often have more scientific profiles, although exceptions exist. The manager’s objective is to maintain a duration (maturity of his investments) in line with his mandate and to monitor the evolution of the rate curves of his investments concerning the rates at which he finances himself to maintain his profit margin.
There is a subcategory of rate management called ALM, which stands for Asset Liabilities Management. Insurers are particularly familiar with this activity, which aims to manage a portfolio of interest-rate products that must systematically cover a company’s liability.
For example, an insurer’s liability is the amount that its policyholders can claim from it every month to reimburse for their accidents, health costs, etc. The insurer invests the contributions of its policyholders, in particular, on interest-rate products. It must ensure that the duration (or maturity) of its investments always corresponds to the duration of its liabilities so that it does not find itself without liquidity the day it has to reimburse policyholders.
Property Management
Yes! You read that right: property management is also an asset management category. Be careful; however, this is not about buying a studio to rent to students. We are talking about “large-scale” real estate: corporate real estate, shopping centers, retirement homes, residential towers, etc.
Some funds invest only in commercial real estate; their job is to find properties with the lowest possible risk, the main risk being vacant premises. A huge shopping center in a sparsely populated area will not be exciting.
As you will have understood, managing a real estate portfolio of this magnitude requires tremendous interest in economic and financial news, a critical mind, and knowledge of potential tenants’ activity. For example, the COVID crisis in 2020 favored the emergence of teleworking and, therefore, the decline in the need for offices for many companies. This is the trend that a real estate asset manager must be perfectly aware of and anticipate. CBRE, JLL, or Nexity are among the largest real estate capital asset management groups.
Renewable Capital Asset Management
This subcategory of asset management is partially similar to real estate management in that it concerns real estate. However, it concerns infrastructure in the broad sense: industrial, energy, transport, etc. You have probably already seen news about investment funds that buy airports, solar or wind farms, etc. This is infrastructure investment.
It is common for funds that invest in these assets to be supported by industrial players familiar with the business to delegate the entire operational part to them. For example, infrastructure funds that buy stakes in renewable energy assets (solar or wind farms) either do not buy 100% of the shares to leave part of them to an industrial player (EDF Renouvelables or Engie in particular) or sign maintenance contracts with these same players to delegate the operational management of the infrastructure to them. This is logical: have you ever seen a banker go and repair a wind turbine with his adjustable wrench?
If you want examples of financial companies that invest in industrial assets, here are a few: Macquarie, an Australian capital asset management company and, in this case, the largest in the world for infrastructure assets, with motorway concessions in France, Copenhagen airport, and Brussels airport. You will also find players such as Ardian Infrastructure, Allianz Infrastructure Equity, or AXA Avenir Infrastructure.
Alternative Management
Finally, all types of capital asset management that do not fall into the previous categories are generally classified as alternative management. We can still identify at least two subcategories of alternative management:
Private Equity: this involves investing in companies that are not listed on the stock exchange. It is one of the most prestigious disciplines in finance. We have also written an article dedicated to private equity, which will tell you everything about this asset management category.
Hedge Funds: the hedge fund category includes many different activities. For example, all high-frequency trading funds are considered hedge funds. As we explained previously, these are very mathematical and computer-based professions. Hedge, activist, and vulture funds are also considered hedge funds. Finally, some hedge funds do equity management with a short-only or long-short strategy, which allows them to be positioned somewhere between hedge funds and equity management.
Jobs in Capital Asset Management
Jobs related to capital asset management are varied, but they all have one thing in common: your knowledge of finance must be perfect. Whether it is an IRR, a VaR, a NPV, cash flows, a multiple, etc., you must be perfectly comfortable with all these concepts.
These jobs will require mastering IT tools, particularly the office suite. It would be best if you were on an Excel spreadsheet like a fish in water. Regarding the tools specific to these jobs, such as the famous Bloomberg, it is advisable to know them and have some knowledge of them. However, no one will ask you to know them by heart for a first internship. If you can, try to find out more on the internet to be better prepared than the other candidates (YouTube is your friend), but you will learn the most technical parts of the job.
Finally, be aware that there are bridges between specific corporate finance jobs and capital asset management. Thus, a candidate who has done M&A will often be appreciated in capital asset management jobs such as infrastructure, real estate, or private equity.
These past practical experiences will have less impact on equity or interest rate market management. Despite everything, we will see that you are hard-working and learn quickly, which is a powerful asset. The hours of capital asset management jobs are generally more reasonable than in corporate finance, especially in M&A. This is a point that can attract many candidates.
The salaries are also, on average, slightly lower than in M&A, but they remain much higher than the average. Finally, a good portion of the remuneration is based on your results for jobs involving the front office, i.e., those closest to investments (for example, managers or analysts). If you perform well, you can double your fixed salary. Even M&A bankers won’t look down on you.
Bottom Line
Capital asset management is a service firms offer to their individual and corporate clients. Indeed, the types of capital asset management vary in terms of investment instruments. Asset management is a vast field offering multiple career opportunities for young aspirants, such as IT professionals and finance experts. Entry-level jobs are not so lucrative, but with experience and direct involvement with financial aspects, they pay handsomely.
