Recent Trends in Asset Management
Asset management is the financial umbrella term for any system that monitors or maintains things of value, whether for an individual or a group. An asset is anything that has actual or potential value as an economic resource. Anything tangible or intangible that can be owned and produce a profit (turned into cash) is considered an asset. Tangible assets are physical items including inventory, buildings, trucks, or equipment. Intangible assets are not physical items, and include copyrights, trademarks, patents, stocks, bonds, accounts receivable, and financial goodwill (when a buyer purchases an existing company and pays more than it is worth, the excess is considered the goodwill amount). Both tangible and intangible assets work to build the owner’s financial portfolio. While this concept has been in play for more than a hundred years, recent developments have lead to several shifting variables worth considering. The following are recent management trends and some of the implications for asset investment.
The Globalization of the Market
Even as recently as 20 years ago, the majority of investments were made in U.S. based companies. As technology expanded our range of communication and information, our interest in investing in overseas companies expanded as well. Until recently, most investing in international assets was pooled into mutual funds. Those mutual funds were typically run by a manager who specialized in the country and made all of the decisions. However, the rapid development of previously underdeveloped markets, such as those in Eastern Asia, and the formation of the European Union, has made international investment less daunting. Recently there has been a large shift to investing in individual companies instead of the previously dominant international mutual funds. This allows the assets to be managed as the investor sees fit.
Use of Index Funds
The rise of technology has not only affected the global market, it has also affected the way we invest in our own stock market. There has been a large shift away from the fund manager driven investments of before and into index funds. Index funds are a group of investments that align with the index of a specific market, like the Dow Jones for instance. As they are primarily computer driven, index funds remove the need for an asset manager, which allows for advantages such as lower costs, turnovers, and style drift. They are also simpler to understand as they cover only the targeted companies and need only to be rebalanced once or twice a year.
Drop of Interest Rates
Traditionally, stocks and bonds were the ideal assets. However, with the severe drop in interest rates that has occurred over the past 7 or 8 years, many investors are looking to alternative assets. Bonds are not providing as steady returns as they used to, and the constantly changing risk and volatility of the stock market is turning those looking for higher returns towards alternative investments. These alternatives include hedge funds, private equity (stocks held in private companies), and real estate. These have become popular as they offer relatively greater returns in a shorter time frame. However, these alternatives also carry a higher long-term risks.
While these are all trends to take into consideration when examining your investments, the key to good asset management still lies in diversification. Any investment, no matter the type, comes with some degree of risk. The best solution to limit the risk is to spread out your investments over different types and reassess as needed. A balanced portfolio and good asset management leads to a happy investor.