Asset management is the general financial 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 (converted to cash) is considered an asset. Tangible assets are physical items that include 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 buys an existing company and country for more than it is worth, the excess is consider the amount of goodwill). Both tangible and intangible assets work to build the owner’s financial portfolio. While this concept has been around for over a hundred years, recent developments have led to several changing variables worth considering. The following are recent management trends and some of the implications for asset investing.
The globalization of the market
Even as recently as 20 years ago, most investments were made in US-based companies. As technology expanded our range of communication and information, so did our interest in investing in foreign companies. Until recently, most investment in international assets was pooled in mutual funds. Those mutual funds were usually run by a manager who specialized in the country and made all the decisions. However, the rapid development of previously underdeveloped markets, such as those in East Asia, and the formation of the European Union, have made international investment less daunting. Recently there has been a big shift towards investing in individual companies rather than the previously dominant international mutual funds. This allows 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 big shift from the fund manager driven investments of yore to index funds. Index funds are a group of investments that align with the index of a specific market, like the Dow Jones, for example. Because they are primarily computer controlled, index funds eliminate the need for an asset manager, allowing for advantages such as lower costs, turnover, and style change. They are also easier to understand as they cover only target companies and only need to be rebalanced once or twice a year.
Fall in interest rates
Traditionally, stocks and bonds were the ideal assets. However, with interest rates falling sharply in the last 7-8 years, many investors are looking for alternative assets. Bonds don’t provide as consistent returns as they used to, and the ever-changing risk and volatility of the stock market are turning those seeking higher returns to alternative investments. These alternatives include hedge funds, private equity (shares held in private companies), and real estate. These have become popular as they offer relatively higher returns in a shorter period of time. However, these alternatives also carry greater long-term risk.
While these are all trends to watch out for when reviewing your investments, the key to good asset management remains diversification. Any investment, regardless of the type, carries some degree of risk. The best solution to limit risk is to spread your investments across different types and reassess as needed. A balanced portfolio and good asset management lead to a happy investor.