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Home > Asset Management Best Practice > Money Managers

Asset Management Best Practice

Money Managers

by David Pitt-Watson

Executive Summary

  • Money managers invest trillions of dollars on behalf of millions of individuals.

  • Investments primarily involve the holding and trading of shares.

  • Money managers that own equities have a powerful role in the governance of companies, should they choose to exercise it.

  • Active stockholders can be of great influence on how, and by whom, companies are managed.

A Vast and Diverse Industry

Money managers (also known as fund managers or investment managers) manage money on behalf of other people. In most Western countries more than half the population will, directly or indirectly, have a money manager working for them. The managers find suitable investments, and are usually given the discretion by clients to make investments on their behalf.

It is usually the client who owns the investment and takes the risk that it will do well or badly. Therefore placing money with a money manager is different from putting it in a bank account. The bank offers a given return on your money, and it takes the risk on any loan or investment it may make.

The biggest money managers are household names; often they are part of banks or insurance companies. Examples are Fidelity, Vanguard, Barclays Global Investors, Nippon Life, Generali, Allianz, AXA, and Legal and General. Each of these companies manages hundreds of billions, and sometimes over a trillion dollars of people’s savings. They have both individual clients and large institutional clients, such as pension funds, who will in turn represent many thousands of savers.

There are literally hundreds of money managers. Sometimes one money manager will use the funds they have under management to invest in another money manager’s fund if they feel that gives them access to particular investment skills. And each may offer scores of different funds, each one designed to attract the savings of a particular type of investor.

Money managers invest in all sorts of things, from property to commodities, from government bonds to exchange rate futures. But their largest investments are in the shares and bonds issued by large companies, typically publicly traded companies, whose securities can be easily bought and sold should the need arise.

Money managers are hugely significant in large and developed capital markets. More than 80% of public company shares in the United Kingdom are owned through money managers. In the United States, Japan, and much of Continental Europe, the figure is around 70% and growing.1

Some History and Context

The growth of these financial giants is a comparatively modern phenomenon. In the early days of the Industrial Revolution most companies were both owned and managed by the founders and their families. Over the generations these families had less interest in management and wished to realize the value of their stockholding. One way to do so was to sell some of their shares on the stock market. And being quoted on the stock market had other advantages, in particular, access to a large pool of capital for companies needing finance.

Thus was born the significant stock markets that have now developed in most modern economies.

However, to manage investment in these companies requires a degree of expertise. First, to choose appropriate companies in which to invest. Second, to manage the administration of the various financial transactions that companies undertake, from paying dividends, to rights issues, share splits and repurchases, voting, and other rights given to stockholders.

By the 1950s, money managers had emerged as separate entities, often out of brokerage or other advisory businesses. However, the greatest fillip to their growth came with the development of the private pensions industry and its decision to invest in company securities, including company shares. In most developed capital markets in the 1950s, money managers might have held 15–30% of a company’s shares—today it is nearer to three-quarters.2

Further, money managers have expanded globally as their investors have sought global investment opportunities. In most European countries, upwards of 40% of shares are owned by foreign investors, usually through a multinational money manager.

The development of an honest and ethical money management industry requires considerable regulation, oversight, and professionalism. After all, these people control trillions of dollars of other people’s savings. In most jurisdictions, strict rules are applied on the custody of securities held on behalf of others. Investment mandates make specific rules on what sort of investments and risks can be taken, and regulators insist on systems for the management of conflicts of interest. Nevertheless such conflicts do occur, and they continue to raise issues for the money management industry.

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Further reading

Book:

  • Davis, Stephen, Jon Lukomnik, and David Pitt-Watson. The New Capitalists: How Citizen Investors Are Reshaping the Corporate Agenda. Boston, MA: Harvard Business School Publishing, 2006.

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