CFA INSTITUTE INDUSTRY

GUIDES

THE ASSET MANAGEMENT

INDUSTRY

by Owen Concannon, CFA

©2015 CFA Institute

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ISBN 978-1-942713-04-3

April 2015
TABLE OF CONTENTS
Title Page
Copyright Page
Table of Contents
About the Author
Introduction
Portfolio Management Overview
Active Portfolio Management
Fundamental Research Techniques
Quantitative Techniques
Equity Portfolio Management
Fixed-Income Portfolio Management
Duration management
Yield curve structure management
Sector exposure
Credit spread and risk management
Multi-Asset Portfolios
Money Market Funds
Index Portfolio Management
Full replication
Sampling
Index weighting methodologies
Traditional vs. Alternative Asset Managers
Hedge Funds
Private Equity and Venture Capital
Real Estate and Infrastructure
Real Estate
Infrastructure
Major Asset Management Client Segments
Retail Investors
United States
Europe and Asia
Retail Product Packaging
Retail Investor Segmentation
Institutional Investors
Pension Plans
Defined Benefit
Defined Contribution
Endowments and Foundations
Insurance Companies
Sovereign Wealth Funds
Major Product Segments
Separately Managed Accounts
Mutual Funds
Exchange-Traded Funds
ETF Transparency and Arbitrage
Industry Trends
Defined Contribution/Target-Date Fund Growth
Rise of Passive Investing
Growth of Alternative Investing
Analyzing Asset Management Companies
Ownership Structure
Private corporations
Publicly traded
Shareholder owned
Barriers to Entry
Investment track records
Product differentiation
Economies of scale
Distribution and brand reach
Regulation and compliance
Financial Statement Analysis
Asset Manager Financials
Management Fee Revenue
Performance Fees
Investment Income
Administrative Revenue
Business Metrics
Assets under Management
Market Appreciation/Depreciation
Sales and Redemptions
 Redemption Rate
Investment Performance
Investment Capacity
Valuation Metrics
Major Risks
Capital Markets
Investment Performance
Operational Risk
Human Capital/Key Man Risk
Counterparty Risk
Appendix A. Data
Industry Resources
Regulatory Agencies
Asset Management Industry
Asset Management Industry News
Closed-End Funds
Exchange-Traded Funds
Investment Product–Specific News
Alternative Investments
Investment Data and Strategy Attribution
Specialist Investment Banks
ABOUT THE AUTHOR

Owen Concannon, CFA, is a director at Guggenheim Partners, a global

investment and advisory firm. He began his career at Financial Research
Corporation in Boston, where he was ultimately responsible for overseeing
the firm’s consulting and investment product research efforts in the
exchange-traded fund and alternative investment areas. Subsequently, Mr.
Concannon led investment product management and development efforts for
Touchstone Investments in Cincinnati. He holds a BA from the College of
William and Mary.
 INTRODUCTION

Asset managers serve as a critical link between providers and seekers of

investment capital. The asset management industry is an integral component
of the global financial services sector, responsible for professionally
managing more than $68 trillion in assets owned by a broad range of
institutional and individual investors.1

Today, thousands of investment managers compete for clients in a highly

competitive and mature industry. The universe of firms offering asset
management services is varied and ranges from “pure play” independent
asset managers to diversified commercial banks, insurance companies, and
brokerages—all offering asset management services in addition to
complementary and unrelated business lines.

The diversity of asset managers is partially attributable to the multitude of

clients the industry serves. Whether these clients are large multinational
corporations responsible for multibillion-dollar pension liabilities or
individual investors planning for retirement, asset managers play a critical
role in achieving the investment objectives that investors require.
Increasingly, many asset managers have been aggressively adding investment
research and distribution offices overseas to compete on the global stage for
the management of client assets.

The asset management industry has naturally evolved alongside an

increasingly complex and global capital market landscape as the estimated
total global investable capital market size has grown from $64 trillion in 2004
to more than $101.1 trillion as of June 2013 (see Table 1).
TABLE 1. GLOBAL INVESTED
CAPITAL MARKET BY ASSET CLASS
(AS OF JUNE 2013, $ TRILLIONS)

Market Market
Asset Class Size Share
Equity
US equity $18.20 18%
Non-US equity (developed) 13.85 14
Emerging market equities 3.99 4
Frontier market equity 0.15 0
Alternatives
Private equity $2.52 2%
Private infrastructure 0.24 0
Timberland 0.05 0
Private real estate debt 5.80 6
Private real estate equity 4.20 4
Public real estate equity 1.26 1
Commodities 0.33 0
Debt
High-yield bonds $1.85 2%
Bank loans 0.88 1
Emerging market bonds (sovereign, USD) 0.55 1
Emerging market bonds (sovereign, local 1.48 1
 foreign exchange)
Emerging market bonds (corporate, USD) 0.68 1
Insurance-linked securities 0.02 0
US bonds (investment grade) 15.34 15
Non-US bonds (developed) 22.65 22
Inflation-linked bonds 2.57 3
Money market/cash equivalents 4.49 4
Total global invested capital market $101.10 100%

Note: Percentages do not add to 100% because of rounding.

Source: Hewitt EnnisKnupp, An Aon Company, “Global Invested Capital Market,” Aon (June 2014):
https://ctech.rproxy.hewitt.com/hig/filehandler.ashx?fileid=10355.

Asset managers offer a broad range of investment management strategies—

informally referred to as “products”—across geographies and capital
structures. Although “boutique” asset managers may specialize in specific
investment disciplines (e.g., emerging market equities) or methods (e.g.,
quantitative investing), other “full-service” managers seek to offer an ever-
evolving lineup of investment products that cover a breadth of investment
styles and asset classes. Increasingly, a “multi-boutique” asset manager
structure has emerged whereby a holding company houses a number of
affiliated though autonomous boutique asset management firms under one
corporate umbrella. This model allows the managers to retain their own
unique investment cultures—and often equity ownership stakes—while also
drawing on the centralized, shared services of the holding company (e.g.,
technology, operations, and legal services).

This industry guide will outline the organizational structure of the global
asset management industry while providing perspective on some of the most
important issues affecting asset managers (see Figure 1). Specifically, this
guide will explore the following industry topics:

Portfolio management techniques

Major investor client segments and investment vehicles

Trends affecting the asset management industry

Key business metrics and financial statement considerations

 FIGURE 1. ASSET MANAGEMENT
INDUSTRY STRUCTURE

Note: UCITS are undertakings for the collective investment in transferable securities, ETFs are
exchange-traded funds, and LPs are limited partners.
NOTES
1Gary Shub, Simon Bartletta, Brent Beardsley, Hélène Donnadieu, Renaud Fages, Craig Hapelt, Benoît
Macé, Andy Maguire, and Tjun Tang, “Global Asset Management 2014: Steering the Course to
Growth,” Boston Consulting Group (16 July 2014):
www.bcgperspectives.com/content/articles/financial_institutions_global_asset_management_
2014_steering_course_growth.
 PORTFOLIO MANAGEMENT
OVERVIEW

Professional investment portfolio management is the central service provided

by asset managers. Asset managers typically act on behalf of investors, using
investors’ capital to implement investment strategies, and generally assume
the role of a fiduciary—a guiding legal standard ensuring that asset managers
act solely in the interests of investors and avoid conflicts of interest.

Although styles and techniques of portfolio management have continually

shifted over time, in conjunction with capital market innovations and investor
demand, investment strategies have generally been identified as either active
or passive. Managers employing active techniques attempt to outperform (on
an after-fee basis) predetermined performance benchmarks represented by
relevant market indexes, such as the S&P 500 (large-capitalization US
equities) or Barclays Global Aggregate Bond Index (global investment-grade
fixed-rate debt). Active portfolio management represents the most prevalent
form of portfolio management in the industry: In the United States, the
world’s largest asset management marketplace, approximately 73% of mutual
fund assets were actively managed as of November 2013.2

Asset managers offering passive investment strategies attempt to replicate the

returns of a market index largely by mirroring the index’s holdings. Passive
asset managers are measured by how closely they are able to track a market
index—a process that is largely a function of index replication methodologies
and asset management fees, which act as a permanent drag on returns for
passive and active strategies alike.
ACTIVE PORTFOLIO MANAGEMENT
Asset managers employing active portfolio management techniques typically
use a combination of fundamental and quantitative security selection methods
to purchase a portfolio of securities that will, ideally, outperform a
predetermined benchmark, often represented by a market index or absolute
return goal (e.g., LIBOR plus 3%). Active portfolio management techniques
encompass a broad range of methods used by research analysts and portfolio
managers to ultimately form a view of a security’s “intrinsic” value, as
distinguished from the security’s market value. Active managers believe
capital markets offer opportunities to outperform market indexes and thus
attempt to purchase securities or sectors perceived as “undervalued” in the
market and, in some cases, short sell3 securities deemed “overvalued.” An
active manager will vary weights on securities or sectors relative to their
benchmark index weightings—overweighting undervalued securities and
underweighting or negatively weighting (i.e., short selling) overvalued
securities. In addition, managers often purchase securities not included in a
benchmark index or focus their research efforts on less well-known
companies—often unfollowed by sell-side research analysts—in an attempt
to outperform a benchmark. Finally, managers of multi-asset and balanced
strategies benchmarked to a static blend of equity and fixed-income indexes
(e.g., 60% MSCI World Index, 40% Barclays Global Aggregate Bond Index)
often vary exposures to asset classes (equities, bonds, currency) over either
tactical (short-term) or strategic (long-term) time frames.
FUNDAMENTAL RESEARCH TECHNIQUES
Fundamental research requires both quantitative and analytical skills, as well
as a dose of good judgment. Analysts and portfolio managers performing
fundamental research typically collect financials and business metrics from
required regulatory filings (e.g., in the United States, annual reports [10-Ks]
and quarterly reports [10-Qs]), management presentations, sell-side
investment research, data vendors, trade publications, and various other
sources. With these research and financial inputs, the analyst or manager
builds a security valuation model using a variety of discounting techniques
based on projected earnings, dividends, and/or free cash flow. An analyst’s
valuation model is influenced by a qualitative view of a security’s business
and competitive prospects, which are often distilled from conversations with
company management, vendors, customers, suppliers, and industry experts.
Fundamental analysts and portfolio managers are often dedicated to research
coverage of a single sector but may act as “generalists” covering multiple
sectors. Given the growing importance to many companies of international
revenues, more asset managers have begun to organize their sector research
efforts on a global basis while deemphasizing the geographical domicile of
the companies under their research coverage. For example, for Advanced
Micro Devices, a semiconductor company based in Sunnyvale, California,
generated international sales as a percentage of net revenue were 85% in
2013.4
GLOBAL INDUSTRY
CLASSIFICATION STANDARD
Established jointly by MSCI and Standard & Poor’s, the Global Industry
Classification Standard (GICS) is a widely used framework through
which publicly traded companies are organized into comparable groups
and subgroups. As of November 2014, the GICS structure consisted of
10 sectors, 24 industry groups, 67 industries, and 156 subindustries (see
Exhibit 1).
EXHIBIT 1. GLOBAL INDUSTRY
CLASSIFICATION STANDARD

Sector Industry Group

Energy Energy

Materials Materials

Industrials Capital goods

Commercial and professional

services

Transportation

Consumer Automobiles and components

discretionary
Consumer durables and apparel

Hotels, restaurants, and leisure

Media

Retailing

Consumer staples Food and staples retailing

 Food, beverage, and tobacco

Household and personal products

Health care Health care equipment and services

Pharmaceuticals and biotechnology

Financials Banks

Diversified financials

Insurance

Real estate

Information Software and services

technology
Technology hardware and equipment

Semiconductors and semiconductor

equipment

Telecommunication Telecommunication services

services
Utilities Utilities

Source: MSCI, “GICS” (www.msci.com/products/indexes/sector/gics; retrieved 27

December 2014).
QUANTITATIVE TECHNIQUES
Quantitative portfolio management techniques are dispassionate and rely
heavily on data, financial ratios, and statistical analysis to identify attractive
securities. Analysts and portfolio managers—who often possess advanced
quantitative and/or statistical training—seek to construct composites of
“factors” ranging from financial data inputs to ratios (e.g., price/earnings,
enterprise value/free cash flow, security price momentum), which are found
to have historically significant relationships to security prices. Furthermore,
factors incorporating fundamental-oriented judgments can be integrated into a
quantitative process (e.g., sell-side analysts’ earnings revisions and sell-side
analyst performance ratings, such as those tracked by StarMine). Often,
quantitative investment strategies rely on fundamental-based factors that
possess a rational economic relationship to security prices and are designed to
avoid spurious correlations.

In practice, most asset managers and portfolio management teams employ a

combination of quantitative and fundamental analysis as a part of the
investment process. However, from a business perspective, quantitative
research methods are often considered more scalable and profitable than
fundamental research methods because computing power is relatively
inexpensive compared with the physical human capital required to expand
fundamental security research coverage.
EQUITY PORTFOLIO MANAGEMENT
Equity investment strategies are managed in a variety of styles. Although
some strategies focus on narrow niches of the equity universe, such as a
specific sector (e.g., technology companies) or geographic exposure (e.g.,
emerging market equities), many are managed within specific guidelines
defined by market capitalization and style (e.g., large-capitalization growth
companies). “Unconstrained” equity strategies, which invest across a
spectrum of global equities, have become increasingly common.

The global equity universe is valued at more than $62 trillion in market
capitalization.5 Within the equity universe, the United States represents the
dominant exposure, as measured by the MSCI All Country World Index
(ACWI), which covers 85% of the global investable equity universe,
including 46 developed and emerging countries. Table 2 and Table 3
provide the country and sector weightings of the MSCI ACWI.6
TABLE 2. MSCI ACWI: COUNTRY
WEIGHTINGS
(AS OF 30 JUNE 2014)

Country Weight
United States 48.9%
United Kingdom 7.8
Japan 7.4
Canada 3.9
France 3.7
Other 28.4
 TABLE 3. MSCI ACWI: SECTOR
WEIGHTINGS
(AS OF 30 JUNE 2014)

Sector Weight
Financials 21.3%
Information technology 12.8
Consumer discretionary 11.6
Industrials 10.7
Health care 10.6
Energy 10.2
Consumer staples 9.6
Materials 6.1
Telecommunication services 3.9
Utilities 3.4

In the US mutual fund market alone, more than 7,500 distinct mutual funds
are tracked by industry research and data supplier Morningstar.7 To help
simplify the many permutations of investment strategies that exist, many
investors rely on a simple style box convention that arrays funds into a grid
based on average market capitalization (large, mid, small) and investment
style (value, core, growth). Figure 2 illustrates the typical style box
convention.
 FIGURE 2. EQUITY STYLE BOX
CONVENTION

Investment Style
Value Core Growth
Low P/E Mid P/E High P/E

High Mid Low

Dividend Dividend Dividend
Yield Yield Yield

Market Large
Capitalization > $10
billion
Mid
$2
billion–
$10
billion
Small
$250
million–
$2
billion

Equities are generally categorized along a continuum ranging from value to

growth. Value companies tend to exhibit certain common characteristics: low
price-to-earnings, price-to-book, and enterprise-value-to-EBITDA ratios and
high dividend yields. Growth companies tend to exhibit opposite metrics
relative to their value counterparts and generally avoid dividends because
retained earnings are reinvested in capital or research and development
projects. Core, or blend, equities share characteristics of both value and
growth groups. In practice, significant qualitative judgment is applied to each
of these categorizations and different portfolio managers can form very
divergent views as to the same security.

Equity categories are not exclusively limited to delineations along market

capitalization and style lines. Industry data providers have formed dozens of
investment categories that span regions, asset classes, sectors, and investment
strategy styles.

The use of investment categories allows investors to create appropriate peer

groups to evaluate the relative performance and product characteristics (e.g.,
fees, investment guidelines) of similar investment strategies offered by
different asset managers. In addition, investors benefit from being able to
construct diversified portfolios that avoid potentially duplicative allocations
to similar securities.

Exhibit 2 outlines a version of the investment guidelines a typical

institutional investor would require of an asset manager managing a US
large-capitalization blend strategy benchmarked to the S&P 500.
EXHIBIT 2. DOMESTIC US LARGE-
CAP EQUITY PORTFOLIO: SAMPLE
INVESTMENT GUIDELINES

Investment objective
Outperform the S&P 500 after fees by 100 bps over a market cycle

Generate excess returns with an information ratio of at least 0.25

Risk management (maximum limitations)

125% of sector’s index weighting

35% in any one sector

7% in any one holding or 1.5× security’s index weighting

7% cash position

2% ownership of any one corporation’s common shares

10% preferred securities

Sovereign risk
20% non-US securities (American Depositary Receipts and US-listed
securities only)

7% in any other country

 Liquidity risk
80% of portfolio must be in securities traded on a major exchange

Private placements, physical real estate, and commodities prohibited

Source: Public School Employees’ Retirement System, “Pennsylvania Public School Employees’
Retirement System Investment Objectives and Guidelines: U.S. Style-Oriented Large Cap Equities,
Addendum A” (9 December 2011):
www.psers.state.pa.us/content/investments/guidelines/A%20(approved%202011-12-09).pdf.
FIXED-INCOME PORTFOLIO MANAGEMENT
Fixed-income portfolio management requires many of the same fundamental
analytical skills used in equity portfolio management; however, a distinct
analytical skill set and viewpoint are also required. Fixed-income securities
typically feature an asymmetric risk profile because an investor’s upside
return potential is generally limited to predefined coupons and the return of
principal, whereas downside potential may extend to a default scenario in
which only a fraction of principal is recovered.

Fixed-income portfolios typically include diverse exposures to either taxable

or tax-exempt fixed-income securities categorized in five broad
classifications: government-issued securities, inflation-indexed securities,
corporate securities, mortgage-backed securities, and asset-backed securities
(e.g., credit cards, auto loans, licensing fees). The Barclays Global Aggregate
Index provides a view of the global investment-grade fixed-income universe
of 24 countries. Figure 3 and Figure 4 provide a historical view of the
Barclays Global Aggregate Index’s sector and quality composition.
 FIGURE 3. BARCLAYS GLOBAL
AGGREGATE INDEX: SECTOR
COMPOSITION
(AS OF MARCH 2014)

Source: Barclays, “Global Aggregate Index”

(https://index.barcap.com/Home/Guides_and_Factsheets; retrieved 27 December 2014).
 FIGURE 4. BARCLAYS GLOBAL
AGGREGATE INDEX: QUALITY
COMPOSITION
(AS OF MARCH 2014)

Source: Barclays, “Global Aggregate Index”

(https://index.barcap.com/Home/Guides_and_Factsheets; retrieved 27 December 2014).
Actively managed bond strategies employ a number of techniques to add
value relative to an index. The most common techniques that fixed-income
portfolio managers employ include duration management, maturity structure
management, sector management, credit and risk spread management, and
yield curve positioning.
DURATION MANAGEMENT
Increasing or decreasing a bond portfolio’s duration is a key lever for
portfolio managers seeking to act on the projected path of interest rates.8 In
anticipation of increasing interest rates, managers will shorten duration to
limit price declines; conversely, managers will lengthen duration when rates
are anticipated to decline. The strong influence of central banks on the path of
interest rates during and following the 2008 financial crisis highlighted the
importance of understanding the investment implications of central bank
policy.
YIELD CURVE STRUCTURE MANAGEMENT
Managers anticipating future shifts in the shape of the yield curve can alter a
portfolio’s maturity structure to take advantage of such shifts. In the case of a
flattening of the yield curve—when interest rates rise at the short end while
falling on the long end—a manager would benefit from a “barbell” approach
that weights a portfolio’s assets both toward the short end of the curve to
benefit from higher reinvestment rates and toward the long end of the curve
to capture bond price appreciation driven by lower rates.
SECTOR EXPOSURE
Portfolio managers often shift sector weightings relative to a benchmark
index based on their expectations regarding relative sector performance. For
example, a portfolio manager anticipating deteriorating credit fundamentals
among financial services companies will underweight the portfolio’s
exposure to financials relative to the benchmark index to achieve excess
relative returns. A manager expecting a general recession will increase
allocations to “risk-free” Treasuries.
CREDIT SPREAD AND RISK MANAGEMENT
Assessing credit risk (i.e., the probability of a company being able to meet its
contractually obligated interest and principal payments) is the primary
objective of credit analysis (see Exhibit 3). Managers can add value by
investing in undervalued credits and avoiding the debt securities of
companies expected to face significant business or default risk. Managers
also attempt to anticipate the tightening and expansion of credit spreads
between Treasuries and non-Treasuries by shifting exposures between
investment and high-yield credits.
 EXHIBIT 3. CREDIT RATINGS
SUMMARY BY RATINGS AGENCY

Moody’s Investors Fitch

Service S&P Ratings Description
Investment grade
Aaa AAA AAA Prime
Aa AA AA High grade
A A A Upper medium grade
Baa BBB BBB Lower medium
grade/crossover
Below investment grade
Ba BB BB Speculative
B B B Highly speculative
Caa CCC CCC Extremely speculative
Ca CC CCC Default imminent
C D D In default

Trading liquidity in the bond market is a critical factor to consider. Unlike

most equity securities, which trade on organized exchanges (both physical
and electronic), bonds trade “over the counter” via dispersed dealer networks.
Without a centralized quotation system, bond pricing tends to be inconsistent
and bonds are often priced differently by different agencies. Liquidity
considerations are especially salient in the municipal bond market, where in
2011, for example, approximately 99% of outstanding municipal securities
did not trade on any given day.9

Many investors use a simple style box convention that arrays bond funds in a
grid based on average maturity (short, intermediate, long) and credit quality
(investment grade, high yield). Figure 5 summarizes the typical fixed-income
style box convention.
 FIGURE 5. FIXED-INCOME STYLE
BOX CONVENTION

Average Credit Quality

Investment-Grade High-Yield
S&P Ratings S&P Ratings
AAA–BBB BB–D
Duration Short
1–3 years
Intermediate
5–7 years
Long
+10 years

The portfolio guideline structure for a domestic investment-grade core fixed-

income investment strategy for a typical institutional investor (based in the
United States) is detailed in Exhibit 4.
EXHIBIT 4. CORE FIXED-INCOME
PORTFOLIO: SAMPLE

Investment objective
Outperform the Barclays Capital US Aggregate Bond Index (BC
Aggregate) over a complete market cycle (three to five years)

Maintain +/– two-year duration versus the BC Aggregate

Risk management
Portfolio average credit rating of at least A; lowest rating for an
individual security BBB– (S&P)

Minimum of 25 issuers, 10% max weight in a single issuer

10% max cash allocation

No leverage

No short selling

Sovereign risk
10% in non-dollar-denominated bonds

15% in US-dollar-denominated issues from foreign governments and

corporations
MULTI-ASSET PORTFOLIOS
Managing portfolios across equities and fixed-income securities in a single
investment strategy is commonplace with many investment managers. Multi-
asset strategies come in many types, ranging from simple balanced strategies
that maintain a fixed allocation to equities and bonds (e.g., a 60% equity,
40% fixed-income strategy with quarterly rebalancing) to global asset
allocation strategies that rely heavily on macro-level forecasts to allocate
assets across geographies and asset classes, including equities, fixed income,
and “real assets,” such as commodities and real estate.

One of the fastest-growing segments of the “multi-asset” space is target-date

mutual funds, which represent diversified portfolio investment solutions
designed for retirement investors. Typically, these funds gradually shift asset
allocation exposures over time from an equity-centric asset allocation at the
outset of an investor’s time horizon to a more conservative, fixed-income
posture to coincide with an investor’s expected retirement date. The turnkey
nature of these funds has caused them to be widely adopted in the employer-
sponsored defined contribution (DC) marketplace in the United States (see
the Industry Trends section) and other jurisdictions as well.
MONEY MARKET FUNDS
First introduced in the 1970s, money market mutual funds are a mainstay
investment for US individuals and institutions: They held more than $2.6
trillion in assets under management (AUM), representing 17% of US mutual
fund assets, as of year-end 2013. Money market mutual funds are a key
investment offering for many asset managers, and though uninsured in the
United States, they often represent a substitute for several retail bank
offerings (e.g., savings accounts). Most money market funds are designed to
maintain a $1/share net asset value (NAV) by investing in high-quality, short-
term debt securities, including US Treasuries, agencies, certificates of
deposits, commercial paper, and repos (repurchase agreements).10 In order to
report a stable $1/share NAV, asset managers in the United States must
comply with Rule 2a-7, an SEC regulation that imposes a number of portfolio
limitations on money market funds, including the following:

Securities must have maturities of less than 397 days.

Average portfolio maturity must be less than 60 days.

At least 10% of a portfolio must be invested in cash or convertible into

cash within a day; 30% must be similarly liquid within a week.

Securities must have short-term ratings within the two highest tiers from
nationally recognized statistical rating organizations.

During the 2008 financial crisis, money market funds took center stage as the
$68 billion Reserve Primary Fund became the second money market fund in
the industry to “break the buck” after suffering $785 million in losses on
Lehman Brothers debt. The loss caused the fund’s NAV to dip to $0.97 per
share and prompted a wave of investor redemptions as fear of future losses
mounted. Ultimately, the Federal Reserve helped to assuage investor fears by
establishing a $600 billion liquidity backstop called the “Money Market
Investor Funding Facility.”11 The Fed introduced its liquidity facility—which
ultimately was never tapped—after asset managers had already put up more
than $10 billion to support redemptions.12

The Reserve Primary Fund experience helped spawn new rules in the United
States, adopted in 2010, which tightened the liquidity and holdings
requirements of money market funds. On 23 July 2014, the SEC introduced
additional regulation pertaining to money market funds. The new rules
require institutional prime money market funds—those generally used by
corporations—to float NAVs rather than maintain stable $1/share NAVs. In
addition, if certain asset threshold tests are met, the SEC will grant mutual
fund boards broader power to impose gates or redemption fees (up to 2%) on
money market redemptions. Money market funds used by retail investors will
continue to maintain a stable $1/share NAV.
INDEX PORTFOLIO MANAGEMENT
Index providers, such as Russell, Barclays, Standard & Poor’s, and MSCI,
calculate and maintain thousands of benchmark indexes that track asset
classes across the capital spectrum. An index can be created for virtually any
market, provided the underlying securities included in the index possess
adequate liquidity and quoted prices. Index managers typically employ full
replication or sampling methods to replicate the performance of benchmark
indexes.
FULL REPLICATION
The most straightforward index replication strategy exactly matches an
index’s constituents. For example, the manager of the XYZ S&P 500 Index
Fund will own all 500 stocks listed in the S&P 500 Index. This technique is
common for indexes tracking large, liquid segments of the market, such as
large-cap stocks.
SAMPLING
Sampling, or optimization, techniques attempt to replicate the performance of
an index without using the full complement of securities contained in the
index. Through the use of statistical modeling, a manager attempts to
replicate the performance of an index by approximating its risk factors, such
as sector allocations, portfolio duration, and maturity profile. Asset managers
typically use sampling techniques when replicating bond indexes, given the
large number of securities and liquidity constraints associated with most
fixed-income indexes. The Barclays US Aggregate Index includes more than
8,000 securities; however, the iShares Core US Aggregate Bond ETF
(exchange-traded fund) uses 2,795 holdings to replicate the performance of
the Barclays index.13

Index strategies are intended to replicate the underlying returns of a market

benchmark. Theoretically, an index strategy that perfectly tracks its
benchmark will underperform by an amount equal to the total expenses
associated with managing the strategy, including management, operational,
and trading fees. Asset managers offering the lowest-cost index strategies
have attracted significant investor interest.

The results of index-tracking strategies are typically measured in terms of

tracking error. Tracking error represents the volatility of the difference
between a manager’s returns and the returns of the benchmark. The smaller
the tracking error value, the more closely a manager is replicating the
benchmark. Many large index asset managers operate securities lending
programs whereby managers lend index securities to other investors
(typically short sellers) in return for a fee. The revenue earned from this
activity, if implemented successfully, is typically shared with investors and
helps to offset operating expenses and reduce tracking error.
INDEX WEIGHTING METHODOLOGIES
Most of the investing world’s widely followed equity and fixed-income
market indexes are market-capitalization weighted, including the S&P 500
and the Barclays US Aggregate Bond Index. A market-cap-weighted index
simply weights each component security in proportion to its capitalization in
the general market. Therefore, the largest component securities by market
capitalization form the largest components of the index, and thus, the index
reflects the “market.” The performance of individual securities and sectors
can have a material impact on the performance of an index. A recent market
example demonstrates this point: At the height of the US technology boom
during the 1990s, the technology sector had a weighting in the S&P
500/BARRA Growth Index of more than 50%, compared with its historical
average of less than 20% (see Figure 6).
FIGURE 6. S&P 500/BARRA
GROWTH INDEX
Source: William Hester, “Large Value Index Bets Big on Economic Growth and Financials,” Hussman
Funds (July 2005): www.hussmanfunds.com/rsi/lgvaluebets.htm.
Asset managers have recently begun to address the perceived weaknesses of
market-cap-weighted indexes by introducing products that rely on alternative
weighting schemes (e.g., index weightings determined by a combination of
“attractive” fundamental characteristics, dividend yield, etc.) and/or inclusion
rules. The asset managers marketing these alternatively weighted indexes
often describe them as “smart beta” or “enhanced beta” strategies.
NOTES
2Adam Zoll, “A Bull Market in Passive Investing,” Morningstar (6 January 2014):
http://ibd.morningstar.com/article/article.asp?
id=624328&CN=brf295,http://ibd.morningstar.com/archive/archive.asp?
inputs=days=14;frmtId=12,%20brf295.

3Short selling is the borrowing and subsequent selling of a security not owned by the seller that must
later be returned, or “covered.” The technique is used by investors aiming to profit from a security’s
price decline. Short-selling losses are theoretically unlimited but in practice are capped by margin
maintenance rules imposed by brokerages.

4Advanced Micro Devices, “2013 Annual Report,” AMD (March 2014):

http://ir.amd.com/phoenix.zhtml?c=74093&p=irol-reportsannual.

5Weiyi Lim and Anna Kitanaka, “Global Stocks Erase 2014 Losses as $3 Trillion of Value Restored,”
BloombergBusiness (18 February 2014): www.bloomberg.com/news/2014-02-18/global-stocks-
erase-2014-losses-as-3-trillion-of-value-restored.html.

6MSCI, “MSCI ACWI” (www.msci.com/resources/factsheets/index_fact_sheet/msci-acwi.pdf;

retrieved 27 December 2014).

7Morningstar, “Morningstar Direct: Content and Data Quality”

(http://corporate.morningstar.com/us/documents/MarketingFactSheets/ContentAndDataQualit
yFactsheet.pdf; retrieved 27 December 2014).

8In its simplest form, duration is an approximate measure—expressed in years—of a bond’s price
sensitivity to a change in interest rates. Duration measures the approximate percentage change in a
bond’s price resulting from a 1% change in its yield. An inverse relationship exists between bond prices
and interest rates.

9SEC, “Report on the Municipal Securities Market,” US Securities and Exchange Commission (31 July
2012): www.sec.gov/news/studies/2012/munireport073112.pdf.

10The SEC permits only money market funds subject to Rule 2a-7 to use amortized cost accounting for
reporting the NAV, which affords these funds the ability to offer and redeem shares at $1/share. The
SEC also requires money market funds to maintain a “shadow” NAV, which is based on market values.
Money market funds that fall in value by more than one-half cent per share are said to have “broken the
buck” and begin to report NAVs based on market value.

11Board of Governors of the Federal Reserve System, “Money Market Investor Funding Facility
(MMIFF),” Federal Reserve (www.federalreserve.gov/newsevents/reform_mmiff.htm).

12Eric Dash, “Rethinking Money Market Funds,” New York Times (11 July 2008).
13BlackRock, “iShares Core U.S. Aggregate Bond ETF” (www.ishares.com/us/literature/fact-
sheet/agg-ishares-core-u-s-aggregate-bond-etf-fund-fact-sheet-en-us.pdf; retrieved 29
December 2014).
 TRADITIONAL VS. ALTERNATIVE
ASSET MANAGERS

Asset managers are typically categorized as either “traditional” or

“alternative.” Traditional managers derive the majority of their revenues from
asset-based fees and generally focus their efforts on long-only equity, fixed-
income, and multi-asset investment strategies. Alternative asset managers—
including hedge fund, private equity (PE), and venture capital managers—
rely heavily on management and performance fees (or “carried interest”) to
generate revenue. Although PE and venture capital firms typically pursue
private market transactions, hedge funds typically trade in mainstream and
more exotic corners of the public markets and often employ derivatives and
short-selling techniques. Many alternative managers also use financial
leverage (e.g., bank borrowing) to enhance the returns of investment
strategies.

Increasingly, the line between “alternative” and “traditional” managers is

blurring as traditional managers seek to deliver higher-margin alternative
products to retail segments of the market (see the Franklin Templeton
Investments case study later). Concurrently, alternative managers seeking to
reduce the revenue volatility associated with performance fees and carried
interest (performance fees are inherently less predictable than recurring
management fee revenue) are increasingly offering retail versions of their
alternative strategies (featuring less leverage, no performance fees, and more
liquid holdings), in addition to offering long-only investment strategies that
generate more stable asset-based fees. The Blackstone Group, the world’s
largest PE manager, recently launched a multistrategy mutual fund (ticker
symbol BXMMX) for retail investors via Fidelity Investments’ distribution
network. In addition, Blackstone partnered with State Street Global Advisors
to manage an ETF focused on non-investment-grade senior bank loans (ticker
symbol SRLN).
HEDGE FUNDS
The hedge fund is a mid-20th-century US financial invention, and today’s
hedge funds represent one of the most important segments of the asset
management industry; having eclipsed their 2007 peak, assets stood at $2.2
trillion as of 31 March 2014. Hedge funds generally play a supporting role in
an investor’s asset allocation as a portfolio diversifier, alongside core
allocations to long-only equity and fixed-income strategies. Hedge funds
represent a broad set of investment styles and strategies but generally share a
few distinguishing characteristics:

Short selling. Profiting from a decline in a security’s price is a hallmark

of most hedge fund strategies. Portfolio managers can implement short
sales to profit from price declines of individual securities, sectors, and/or
broad market indexes. Shorts are implemented directly or synthetically
through the use of derivatives, such as options, futures, and credit
default swaps.

Absolute return seeking. Although traditional long-only investment

strategies aim to provide investment returns relative to a benchmark—
seeking to outperform a benchmark index in positive return
environments and lose less than the benchmark in negative market
environments—the goal of absolute return investing is to pursue positive
returns in all market environments over a market cycle.

Leverage. A number of hedge fund styles call for the use of financial
leverage (bank borrowing) or implicit leverage (through the use of
derivatives, such as options, swaps, and futures) to magnify the impact
of relatively small profit-making opportunities. The use of leverage and
the amount of leverage employed are highly dependent on the
investment strategy being implemented (see Table 4).

Low correlation. Many investors look to hedge funds to provide a form

of portfolio ballast in volatile market environments because hedge funds
have historically exhibited low return correlations with traditional asset
classes (see Table 5).

Fee structures. Hedge funds typically charge two layers of fees: a

traditional asset-based management fee—calculated as a percentage of
AUM—and a performance fee, which allocates a percentage of the
fund’s realized capital gains to the asset manager.14 Hedge funds have
traditionally charged management fees of 2% and performance fees of
up to 20%, although managers have witnessed downward pressure on
those fees because of growing investor resistance.
 TABLE 4. LEVERAGE BY HEDGE
FUND STRATEGY

Leverage Guidelines
Strategy Typical Max
Convertible arbitrage 4× 6×
Distressed debt 1 1.5
Event-driven equity and merger arbitrage 1.3 2
Fixed-income arbitrage 8 15
Global macro 5 10
Long–short equity, fundamental 1.3 2
Long–short equity, quantitative 2.5 5
Multistrategy 3.5 6

Source: Frank Barbarino, “Leverage, Hedge Funds and Risk,” NEPC (Summer 2009):
www.nepc.com/writable/research_articles/file/09_07_nepc_leverage_hf_and_risk.pdf.
TABLE 5. HEDGE FUND STRATEGY
CORRELATIONS WITH EQUITIES
AND BONDS

Equity
Jan. 1990 Developed Developed Event- Equity Market
to Jan. Market Government Driven Hedge Neutral Quantitative
2014 Equities Bonds Index Index Index Directional
Developed 1.00
market
equities
Developed –0.01 1.00
government
bonds
Event- 0.61 –0.09 1.00
driven
index
Equity 0.63 –0.05 0.84 1.00
hedge index
Equity 0.16 0.04 0.42 0.51 1.00
market
neutral
index
Quantitative 0.71 –0.02 0.82 0.89 0.34
directional
Macro 0.34 0.35 0.51 0.55 0.34
index
 Relative 0.41 –0.05 0.77 0.68 0.41
value index

Source: Adam J. Eisenberg and David Doberman, “Alternative Trading Strategies: Opportunities in
Long/Short Equity,” Barclays (25 March 2014):
https://wealth.barclays.com/en_gb/home/research/research-centre/compass/compass-mar-
214/opportunities-in-long-short-equity.html.

Hedge fund investment strategies are diverse and can range from highly
specific niche strategies (e.g., long–short financial services) to global
multistrategy approaches that employ multiple techniques across global
capital markets. Exhibit 5 provides an overview of several major categories
of hedge fund investment strategies.
EXHIBIT 5. OVERVIEW OF MAJOR
HEDGE FUND STRATEGIES

Strategy Description
Global Focuses on implementing macroeconomic bets on such
macro factors as interest rates, currencies, and relative
country/market performance. Managers often employ
derivatives to quickly enter and exit positions (both long
and short).
Equity long– Profits from long (undervalued) and short (overvalued)
short positions in equities. Net market exposure can be adjusted
based on overall market direction or prevalence of
attractive long–short candidates, or exposure can be kept
beta neutral to isolate stock-specific risk. Some managers
hedge beta risk purely by shorting market indexes rather
than individual companies.
Distressed Involves the purchase of securities (debt, equity,
convertibles, etc.) of companies in or approaching
bankruptcy. Returns tend to be uncorrelated with market
conditions because the returns are based on events specific
to the distressed company—negotiations among creditors,
divestiture proceedings, etc. Managers often commit
significant legal resources when analyzing investment
opportunities.
Event driven A broad set of strategies designed to profit from corporate
events, including mergers and acquisitions, bankruptcies,
and spinoffs. Merger arbitrage trades attempt to profit from
spreads between takeover offers and the market price of a
 target’s securities. In the context of a cash-financed
merger, a portfolio manager will acquire shares of the
target company, which often trade below the offer price, in
return for assuming the risk that a deal will not reach
completion. Leverage is often employed to magnify
merger arbitrage returns.
Managed Relies primarily on the use of futures contracts to take long
futures and short positions across a multitude of commodity,
interest rate, and other financial futures markets. Many
managed futures strategies rely on quantitative
management techniques designed to identify short-term
price and momentum trends in futures contracts across
markets.
Multistrategy A single fund or fund-of-funds strategy designed to
combine multiple hedge fund investment strategies in a
single fund. Often, multiple specialist asset managers are
engaged to individually manage each substrategy within a
fund-of-funds strategy. Fund-of-funds managers charge an
overlay fee (often a 1% management fee plus 10% of
profits) in addition to the expenses charged by the
underlying hedge fund managers.

Hedge fund industry AUM have grown steadily as the use of hedge funds has
expanded among institutional investors. Table 6 lists the 10 largest hedge
fund managers.
 TABLE 6. LARGEST HEDGE FUND
MANAGERS
(AS OF 31 MARCH 2014, $ BILLIONS)

Manager AUM
Bridgewater Associates $87.1
J.P. Morgan Asset Management 59.0
Brevan Howard 40.0
Och-Ziff Capital Management 36.1
BlueCrest Capital Management 32.6
BlackRock 31.3
AQR Capital Management 29.9
Lone Pine Capital 29.0
Man Group 28.3
Viking Global Investors 27.1

Source: Sital S. Patel, “Bridgewater, J.P. Morgan Top List of 100 Largest Hedge Funds,” MarketWatch
(12 May 2014): http://blogs.marketwatch.com/thetell/2014/05/12/bridgewater-j-p-morgan-top-
list-of-100-largest-hedge-funds.
PRIVATE EQUITY AND VENTURE CAPITAL
As of June 2013, the PE industry’s AUM topped $3.5 trillion, inclusive of
uncalled capital commitments and unrealized value of portfolio assets.15
Private equity and venture capital managers (general partners, or GPs)
generally operate in a similar manner, raising investor capital (capital
commitments) from investors (limited partners, or LPs) to buy, optimize, and
ultimately sell portfolio companies to generate profits. Although LPs commit
the majority of a fund’s capital, GPs also commit approximately 1%–5% of
the fund’s capital to help align their interests with those of the LP investors.
Most PE funds have a defined lifespan of approximately 7–10 years (usually
subject to contractual extensions) and spend the first few years acquiring 10
or more attractive target companies, applying many of the same fundamental
research techniques described previously. Unlike most traditional asset
managers trading in public securities, PE and venture firms often take a
hands-on approach to their portfolio companies through a combination of
financial engineering (e.g., realizing expense synergies, changes to the capital
stack), the installation of their own executives and board members, and
significant contributions to the development of a target firm’s business
strategy. The final stage, often referred to as the “harvesting” or “exit” phase,
occurs when a fund begins to profitably divest its portfolio companies
through an IPO, a private sale to a competitor (“strategic buyer”), or a sale to
another PE firm. Figure 7 illustrates the typical return pattern for PE.
 FIGURE 7. PRIVATE EQUITY: J
CURVE RETURN PATTERN

PE firms generate revenue through several means:

Management fees: AUM-based fees (1%–2%) calculated on committed

capital that sometimes step down several years into the investment
period of a fund or are calculated based on net invested capital.

Transaction and monitoring fees: Fees paid by portfolio companies to

the GP for various corporate and structuring services. Typically, a
percentage of this fee revenue reverts back to the LPs in the form of
 management fee offsets.

Investment income: Gains generated on capital contributed to the fund

by the GP.

Carried interest: Represents the GP’s share of gains (typically 20%) on

sales of portfolio companies. The distribution of proceeds from portfolio
company sales is subject to specific “distribution waterfall” terms. In a
European-style waterfall, GPs collect fees only after LPs receive
distributions equal to their committed capital plus a preferred or hurdle
return (typically about 5%–8%). A GP “catch-up” may exist in some
instances in which the GP is allocated 100% of the distributions until it
has received 20% of the distributions in excess of return of capital. After
clearing the preferred return to LPs and the GP catch-up, all remaining
distributions follow the normal 80/20 split carried interest allocation. It
is important to note that if a fund’s performance turns negative,
“clawback” terms—contractual provisions that define the terms under
which carried interest is refunded to LPs—can become relevant to
certain distribution waterfall structures in which carried interest is
calculated on a deal-by-deal basis.

Institutional investors have long been attracted to the returns generated by

private strategies relative to the public markets. Consider, for example, the
largest PE managers (see Table 7). Over the last 20 years, PE funds have
outperformed the S&P 500 by more than 400 bps on an annualized, net-of-
fees basis (see Table 8). That said, the dispersion of returns between top-
quartile and bottom-quartile performing managers has historically been quite
high, implying that proper manager selection is a critical consideration for PE
investors. In addition, gaining access to top-performing managers and
achieving desired commitment sizes have become increasingly difficult for
institutional investors.
 TABLE 7. LARGEST PE
MANAGERS, FIVE-YEAR
FUNDRAISING TOTALS
(AS OF MARCH 2014, $ BILLIONS)

Manager AUM
The Carlyle Group $30.7
Kohlberg Kravis Roberts 27.2
The Blackstone Group 24.6
Apollo Global Management 22.3
TPG 18.8
CVC Capital Partners 16.6
General Atlantic 16.6
Ares Management 14.1
Clayton Dubilier & Rice 13.5
Advent International 13.2

Source: “The Ten Biggest Private Equity Firms in the World,” GrowthBusiness (2 May 2014):
www.growthbusiness.co.uk/news-and-market-deals/business-news/2462432/the-ten-biggest-
private-equity-firms-in-the-world.thtml.
 TABLE 8. US PRIVATE EQUITY AND
VENTURE CAPITAL INDEX RETURNS
(AS OF Q1 2014)

1- 3- 5- 10- 15- 20- 25-

Index Year Year Year Year Year Year Year
Cambridge 19.1% 14.2% 17.4% 14% 12% 13.7% 13.7%
Associates US
Private Equity
Cambridge 30.5 15.3 14.1 10 18.7 31.7 21.1
Associates US
Venture
Capital
Dow Jones 15.7 13 19.9 7.5 6 10.3 10.9
Industrial
Average
NASDAQ 28.5 14.7 22.4 7.7 3.6 9 9.8
Composite
Russell 2000 24.9 13.2 24.3 8.5 8.9 9.5 9.9
S&P 500 21.9 14.7 21.2 7.4 4.5 9.5 10

Source: Cambridge Associates, “U.S. Private Equity Index and Selected Benchmark Statistics” (31
March 2014): http://40926u2govf9kuqen1ndit018su.wpengine.netdna-cdn.com/wp-
content/uploads/2014/07/Public-USPE-Benchmark-2014-Q1.pdf.
ALTERNATIVE ASSET MANAGER
PROFILE:
KOHLBERG KRAVIS ROBERTS &
CO.
OVERVIEW
Founded in 1976 by Henry Kravis and George Roberts, Kohlberg Kravis
Roberts & Co. (KKR) is one of the oldest and most recognized
alternative investment firms operating in the United States. Throughout
the firm’s history, its PE business has completed more than 230 PE
investments, many via leveraged buyouts, with a total transaction value
of more than $485 billion. The firm is widely known for completing one
of the largest leverage buyouts in history with its purchase of RJR
Nabisco in 1988. KKR became a public company and listed on the
NYSE on 15 July 2010.
BUSINESS SEGMENTS
KKR operates three main business lines: Private Markets, Public
Markets, and Capital Markets.

Private Markets. PE represents KKR’s primary business line with more

than $62 billion in AUM as of 31 March 2014. Also as of that date,
KKR held 93 portfolio companies across 16 industries. Collectively,
these portfolio companies generate more than $200 billion in annual
revenue and employ more than 940,000 people (see, for example, Table
1).

KKR’s historical PE business has generated substantial profits for its

limited partners. The firm has collectively posted a 26% gross internal
rate of return on its funds, outperforming the S&P 500 by more than 700
bps.

Public Markets. KKR’s Public Markets business manages more than

$42 billion in assets via credit and hedge funds. Through its registered
investment adviser affiliates, the firm manages a variety of traditional
debt strategies focused on high-yield bonds and leveraged loans. In
addition, KKR manages a number of alternative credit strategies,
including mezzanine financing, long–short credit, distressed credit, and
direct lending to middle-market companies seeking financing.

Capital Markets. Via affiliated broker/dealers, KKR’s Capital Markets

division provides a variety of capital market and traditional investment
banking services to both its portfolio and third-party companies.
Services include equity and debt arranging and underwriting and
IPOs/follow-ons. The firm’s principal activities involve using the firm’s
own balance sheet to make investments in its funds and to co-invest in
certain portfolio companies. KKR uses its investments as seed capital
and to increase its participation in funds, aligning its interests with those
of limited partners.

Sources: KKR, “Annual Report” (2013):

http://ir.kkr.com/kkr_ir/kkr_annuals.cfm; KKR, “Investor
Presentation” (November 2014):
http://ir.kkr.com/kkr_ir/kkr_events.cfm.
NOTES
14Performance fees are often subject to high-water mark provisions, which preclude a manager from
earning a performance fee unless the value of a fund at the end of a predefined measurement period is
higher than the value of the fund at the beginning of the measurement period. The unpredictability of
future performance leads to uncertainty in performance fee revenue, which is regarded as less reliable
than revenue derived from management fees.

15Preqin, “2014 Preqin Global Private Equity Report, Sample Pages”

(www.preqin.com/docs/samples/The_2014_Preqin_Global_Private_Equity_Report_Sample_P
ages.pdf; retrieved 27 December 2014).
REAL ESTATE AND
INFRASTRUCTURE
REAL ESTATE
Private real estate debt and equity assets are considered the most ubiquitous
alternative assets, accounting for approximately half of global alternative
assets (see Table 1). Direct and indirect investments in such assets as land,
single-family housing, multifamily housing, and urban office properties have
long been a mainstay for investors. Real estate assets have generally featured
low correlations with equities and fixed income and are considered long-term
assets that yield relatively stable cash flows, often positively correlated with
inflation. Table 9 lists the 10 largest real estate managers.
 TABLE 9. LARGEST REAL ESTATE
MANAGERS
(AS OF YEAR-END 2012, $ BILLIONS)

Manager AUM
Brookfield Asset Management $115.4
CBRE Global Investors 90.7
The Blackstone Group 88.6
UBS Global Asset Management 64.7
AXA Real Estate 59.6
J.P. Morgan Asset Management 55.9
TIAA-CREF Asset Management 55.2
Prudential Real Estate Investors 52.2
Invesco Real Estate 50.6
Deutsche Asset & Wealth Management 48.7

Source: Property Funds Research and Institutional Real Estate, “Global Investment Managers 2013,”
Institutional Real Estate (2013):
www.irei.com/userfiles/cms/investmentManagerReport/1/2013pfr-ireireportus.pdf.
INFRASTRUCTURE
Investing in infrastructure-related assets (e.g., bridges, tunnels, power
generation, and waste management facilities) continues to grow among
institutional investors seeking to secure relatively reliable long-term yields
with a degree of inflation protection. As the gap between required
infrastructure spending and public funding continues to widen, opportunities
have expanded for private investment to provide financing.
MAJOR ASSET MANAGEMENT CLIENT
SEGMENTS
Asset managers serve two broad client segments: retail investors and
institutional investors. The segmentation of these channels is the result of the
varying distribution, product, and client-servicing needs. Asset managers
targeting retail investors typically package investment strategies through
highly regulated collective investment vehicles (CIVs), legally referred to as
“investment companies”16 in the United States, and possess a large
distribution staff geared toward either “wholesaling” products through
financial advisers or reaching investors directly. Institutionally focused
managers often market directly to large institutional clients or to investment
consultants, and they typically package their investment strategies in less
regulated and more customizable product structures, including separately
managed accounts and limited partnerships. Many institutionally focused
asset managers that do not possess a retail distribution presence opt to pursue
the retail channel through subadvisory relationships. Through a subadvisory
relationship, a retail-focused asset manager essentially subcontracts the
investment management responsibilities of a collective investment vehicle—
typically a mutual fund or undertakings for the collective investment in
transferable securities (UCITS)—to a third-party institutional asset manager
while retaining distribution and marketing responsibility for the fund. The
relationship allows a retail asset manager to offer its clients access to an
institutionally focused asset manager while providing an expanded
distribution and revenue opportunity for the institutional manager.
NOTES
16The SEC defines an investment company as “a company (corporation, business trust, partnership, or
limited liability company) that issues securities and is primarily engaged in the business of investing in
securities” (Investment Company Act of 1940). US federal securities law recognizes three types of
investment companies: mutual funds, closed-end funds, and unit investment trusts.
RETAIL INVESTORS
UNITED STATES
Asset managers participating in the retail channel typically sell funds directly
to investors on a wholesale basis—through financial advisers acting on an
investor’s behalf and through defined contribution (DC) plans—for example,
401(k)s. Asset managers targeting financial advisers, or “intermediaries,”
face a diverse community encompassing more than 300,000 advisers in the
United States.17 The major US distribution channels within the intermediary
space include national full-service broker/dealers, often referred to as “wire
houses” (e.g., Morgan Stanley Wealth Management, Bank of America Merrill
Lynch, UBS, and Wells Fargo); regional broker/dealers with a concentrated
geographical presence (e.g., RBC Wealth Management, Janney Montgomery
Scott); independent broker/dealers with a national presence whose advisers
are generally independent contractors rather than employees (e.g., LPL
Financial, Ameriprise, Raymond James); and insurance-affiliated
broker/dealers (e.g., MetLife, AIG Advisor Group).

Registered investment advisers (RIAs) represent a distinct retail distribution

channel. RIAs are regulated by the SEC or relevant state(s) (rather than the
Financial Industry Regulatory Authority, which regulates most
broker/dealers), and they charge clients asset-based fees for “advice” rather
than commissions. RIAs have a legal fiduciary obligation to their clients,
requiring that they always act in the best interests of their clients, whereas
most other advisers are held to the less rigorous standard of “suitability.”
Many RIAs clear and custody their assets through national clearing firms,
such as Charles Schwab, National Financial Services (owned by Fidelity),
and Pershing.

Many asset managers access self-directed investors by establishing

distribution agreements with major online brokerage firms, such as Fidelity,
Charles Schwab, TD Ameritrade, Vanguard, and E*TRADE.

Table 10 provides an overview of the US retail investment market by

distribution channel, showing projected growth over the next five years.
 TABLE 10. US RETAIL
DISTRIBUTION CHANNELS

Approximate Share Forecasted 5-Year

Distribution of Mutual Fund Compound Annual Growth
Channel AUM Rate (CAGR)
National wire
houses 21% 4.8%
Independent
advisers 10 5.9
RIAs 13 10.4
Regional
broker/dealers 9 2.6
Insurance 2 2.4
Other (e.g.,
discount/bank
brokerage) 44 1.0

Source: Neil Bathon, “2013 Investment Industry Trends Presentation,” FUSE Research Network (23
June 2014).
EUROPE AND ASIA
In Europe, retail investment product distribution is fragmented and highly
region dependent. In continental Europe, distribution is primarily driven
through retail banks (e.g., UniCredit, BNP Paribas) and private banks (e.g.,
UBS, Credit Suisse), which generally take an “open architecture” approach to
offering affiliated and third-party asset management products to investors.
The distribution model in the United Kingdom is relatively unique because
most products are sold via independent financial advisers (IFAs),18 who work
directly for clients rather than for banks or insurance groups. Retail
distribution in Switzerland and in the Nordic countries is driven largely
through private banks (e.g., Pictet, SEB).

Although individual Asian mutual fund markets remain relatively small (11%
of global mutual fund AUM; see Appendix A) compared with their Western
counterparts, growth trends remain attractive to asset managers seeking to tap
the wealth of the region’s demographic profile and growing middle class.
Furthermore, distribution in many Asian markets is dominated by large
regional retail banks and global banks with private banking divisions. Asian
markets tend to have fractured regulatory regimes with no centralized
regulatory system extending across political and geographic borders.
Nevertheless, a number of Asian countries continue to work toward a
common cross-border regulatory scheme similar to what has developed under
the UCITS regime in Europe.
RETAIL PRODUCT PACKAGING
Asset managers primarily package retail investment strategies through CIVs,
including mutual funds, UCITS, ETFs, closed-end funds (CEFs),19 and unit
investment trusts (UITs).20 Collective funds allow asset managers to scale
efficiently and to offer such advantages to retail investors as low investment
minimums, daily or intraday liquidity, and standardized performance and tax
reporting. Additionally, CIVs are generally overseen by trustees with a
fiduciary responsibility to shareholders and the authority to hire and/or
terminate a fund’s investment adviser and service providers.

It is necessary for analysts to be aware of the subscription and redemption

mechanics of various investment vehicles in order to properly forecast
revenues. For example, open-end mutual funds in the United States allow for
daily subscriptions and redemptions and are thus subject to both market-
based and investor-driven AUM risk. Alternatively, CEFs are launched via an
IPO process and subsequent trading of the fund’s shares takes place between
investors on market exchanges rather than directly with the fund. As a result,
CEFs possess a more predictable revenue stream, setting aside investor-level
redemption risk. Some CEFs trading at a persistent discount to NAV have
been the target of activist investors seeking to convert the funds to open-end
vehicles.

A number of asset managers offer separately managed accounts (SMAs) to

wealthy investors. SMAs, which require much higher investment minimums,
allow an investor to include/exclude specific holdings and offer more tax
flexibility through customized tax gain/loss options. As of March 2013, the
retail SMA industry held more than $700 billion in AUM.21
RETAIL INVESTOR SEGMENTATION
Retail investors’ investment product usage and financial planning services are
typically tailored to an individual’s needs and are a function of investable
financial assets. Exhibit 6 outlines a general segmentation of investor wealth
and product usage.
 EXHIBIT 6. INVESTOR WEALTH
SEGMENTS AND PRODUCT USAGE

Financial
Investor Segment Investment Products
Assets
Ultra high net > $30,000,000 Separate accounts
worth
Hedge funds/PE

Mutual funds/UCITS/CEFs

ETFs

High net worth > $1,000,000 Separate accounts

Hedge funds

Mutual funds/UCITS/CEFs

ETFs

Mass affluent > $100,000 Mutual funds/UCITS/CEFs

Mass retail < $100,000 ETFs

Targeting high-net-worth investors—those with at least $1 million in

investable assets—is a priority for many wealth management firms and asset
managers marketing their products through intermediaries. According to the
2014 “World Wealth Report” from Capgemini and RBC Wealth
Management, 13.73 million high-net-worth individuals (HNWIs) controlled a
record $56.2 trillion in wealth at the end of 2013. Although North America
and Asia had approximately equal numbers of HNWIs at the end of 2013, the
Asia-Pacific region has witnessed faster growth (see Table 11).
 TABLE 11. HNWI POPULATION BY
REGION, 2008–2013
(MILLIONS)

Year Percentage
Change
Region 2008 2009 2010 2011 2012 2013 2012–2013
North 2.7 3.1 3.4 3.4 3.7 4.3 15.9%
America
Asia 2.4 3.0 3.3 3.4 3.7 4.3 17.3
Pacific
Europe 2.6 3.0 3.1 3.2 3.4 3.8 12.5
Middle 0.4 0.4 0.4 0.5 0.5 0.6 16.0
East
Latin 0.4 0.5 0.5 0.5 0.5 0.5 3.5
America
Africa 0.1 0.1 0.1 0.1 0.1 0.1 3.7
Total 8.6 10.0 10.9 11.0 12.0 13.7 14.7

Notes: Numbers and quoted percentages may not add up because of rounding. CAGR 2008–2013 =
9.9%.

Source: Capgemini and RBC Wealth Management, “2014 World Wealth Report”
(www.capgemini.com/thought-leadership/world-wealth-report-2014-from-capgemini-and-rbc-
wealth-management).
NOTES
17Andrew Osterland, “Advisors Slow to Train Successors,” CNBC (1 May 2014):
www.cnbc.com/id/101621040#.

18IFAs, who must meet a number of strict qualifications, are regulated by the Financial Conduct
Authority, the UK’s primary financial regulator.

19A CEF is an investment company that raises assets through an IPO (and follow-on offerings) and
subsequently trades on an exchange. CEF shares are not redeemable by the fund and must be traded on
an exchange. The price of a CEF share can trade at, below, or above the fund’s NAV based on
secondary market demand.

20A UIT is an investment company that issues redeemable securities in a public offering. UITs
generally invest in a fixed basket of securities for a finite period of time.

21Andrew Klausner, “The Death of SMAs (Separately Managed Accounts)?” Forbes (12 June 2013):
www.forbes.com/sites/advisor/2013/06/12/the-death-of-smas-separately-managed-accounts.
 INSTITUTIONAL INVESTORS

The realm of institutional investors spans public and private pensions,

government/sovereign wealth funds, corporations, insurance companies, and
endowments and foundations. Each segment of the institutional market is
unique in its goals, asset allocation preferences, and investment strategy
needs.

In the United States, it is estimated that more than 80% of institutional

investors rely on investment consultants to guide their investment
decisions.22 Investment consultants (e.g., Mercer, Towers Watson) play a key
role in advising their institutional clients on investment policy structuring,
investment manager selection, asset allocation, asset/liability analysis, and
performance monitoring. Increasingly, consultants are acting in a chief
investment officer capacity for clients by assuming complete discretionary
authority over portfolio decisions. Globally, investment consultants advised
on assets estimated at more than $25 trillion as of June 2011.23 Table 12
lists the five largest investment consulting firms as of 30 June 2014.
 TABLE 12. LARGEST INVESTMENT
CONSULTING FIRMS
($ TRILLIONS)

Assets under Advisement

Mercer $9.2
Cambridge Associates 4.7
Aon Hewitt Investment Consulting 4.6
Russell Investments 2.6
Towers Watson Investment Services 2.2

Source: Pensions & Investments (www.pionline.com; retrieved 27 December 2014).

PENSION PLANS
Global pension assets approached $32 trillion by the end of 2013. In the
United States, public and private defined benefit (DB)24 pension plans
collectively hold approximately $8 trillion in assets and serve as a major
source of assets for both traditional and alternative asset managers.25 The
United States represents the largest pension marketplace in the world,
comprising more than 58% of global pension assets (see Table 13).
 TABLE 13. GLOBAL PENSION
ASSETS: 2003, 2013
($ BILLIONS)

AUM
Market 2003 2013 10-Year CAGR
Australia $424 $1,565 14.0%
Brazil 83 284 13.1
Canada 636 1,451 8.6
France 139 169 2.0
Germany 229 509 8.3
Hong Kong 37 114 12.1
Ireland 64 130 7.4
Japan 2,906 3,236 1.1
Netherlands 614 1,359 8.3
South Africa 100 236 9.0
Switzerland 355 786 8.3
United Kingdom 1,261 3,263 10.0
United States 9,942 18,878 6.6
Total $16,787 $31,980 6.7%

Note: US pension assets include DB and DC assets.

Source: Towers Watson, “Global Pension Assets Study 2014” (5 February 2014):
www.towerswatson.com/en-US/Insights/IC-Types/Survey-Research-Results/2014/02/Global-
Pensions-Asset-Study-2014.
DEFINED BENEFIT
DB plans face a myriad of operational challenges (actuarial, accounting,
liquidity, and regulatory) and vary widely in their asset allocation and
sophistication, prompting many asset managers to employ dedicated
personnel to service this segment of the market.

The long-term outlook for the DB segment is negative: Most pension plan
sponsors eschew the complexity, risk, and expense of managing DB plans.
Increasingly, DB plan sponsors are closing plans to new employees and
freezing retirement benefits for participants.

As shown in Figure 8, the general decline in DB plan market share in the

United States has been dramatic as plan sponsors have increasingly adopted
DC plans. Globally, DC plans represent 47% of pension assets.26
 FIGURE 8. PRIVATE SECTOR
WORKERS PARTICIPATING IN AN
EMPLOYMENT-BASED RETIREMENT
PLAN, BY PLAN TYPE, 1979–2011

Sources: US Department of Labor Form 5500, Summaries, 1979–1998; Pension Benefit Guaranty
Corporation, Current Population Survey, 1999–2011; Employee Benefit Research Institute (EBRI)
estimates, 1999–2010 (www.ebri.org/publications/benfaq/index.cfm?fa=retfaqt14fig1).
DEFINED CONTRIBUTION
DC plans represent the dominant form of retirement investing in Australia
and the United States, and they are gaining significant momentum in the
Netherlands, Canada, and Japan.27 In the United States, the $5.9 trillion DC
market and the $6.5 trillion IRA (individual retirement account) market
represent two important sources of assets for managers (see Table 14). The
“stickiness” of these assets and the continuous contributions made by
employees and employers to these accounts over multidecade periods lead to
profitable, long-duration AUM for asset managers. According to McKinsey
& Company,28 the average holding period for a mutual fund held in a DC
plan is six to seven years, compared with three to four years in a brokerage
account.
 TABLE 14. US RETIREMENT
ASSETS
($ TRILLIONS)

Type Amount
IRAs $6.5
Federal, state, and local pension plans 5.6
401(k) plans 4.2
Private DB plans 3.0
Annuities 2.0
Other DC plans 1.7

Source: Investment Company Institute, “Defined Contribution Plan Participants’ Activities, 2013,” ICI
Research Report (April 2014): www.ici.org/pdf/ppr_13_rec_survey.pdf.
ENDOWMENTS AND FOUNDATIONS
Endowments and foundations together represent more than $1 trillion in
assets.29 Although smaller than other institutional segments, this channel is
attractive because of the long time horizons of endowments and foundations,
which are often deemed perpetual. In addition, alternative asset managers
benefit from the segment’s above-average allocation to alternative and
illiquid investment strategies (see Table 15). At the end of 2013, the
National Association of College and University Business Officers
(NACUBO) reported that endowments and foundations held an average 28%
allocation to alternative asset classes.30
 TABLE 15. ASSET ALLOCATIONS
FOR US COLLEGE AND UNIVERSITY
ENDOWMENTS AND AFFILIATED
FOUNDATIONS
(FY2013, EQUAL WEIGHTED)

Asset Class Percentage Allocation

Domestic equity 31%
Fixed income 18
Foreign equity 18
Alternatives 28
Cash 5

Source: National Association of College and University Budget Officers and Commonfund Institute,
“2013 NACUBO-Commonfund Study of Endowments,” NACUBO and Commonfund Institute (2014):
www.nacubo.org/Documents/EndowmentFiles/2013NCSEPublicTablesAssetAllocations.pdf.

The large allocations to alternative investments are primarily because of the

long time horizons of endowments and foundations and the influence of
endowment-specific asset allocation models popularized by Yale University’s
endowment managers David Swensen and Dean Takahashi.31 Table 16
outlines the Yale endowment’s asset allocation, in which alternative
investments represent well over 50% of the portfolio.
 TABLE 16. YALE ENDOWMENT’S
ASSET ALLOCATION
(AS OF JUNE 2013)

Asset Class Percentage Allocation

Absolute return 17.8%
Domestic equity 5.9
Fixed income 4.9
Foreign equity 9.8
Natural resources 7.9
PE 32.0
Real estate 20.2
Cash 1.6

Source: Yale University Investments Office, “The Yale Endowment 2013”

(http://investments.yale.edu/images/documents/Yale_Endowment_13.pdf; retrieved 27
December 2014).
INSURANCE COMPANIES
As of the end of 2013, insurers held more than $13 trillion in AUM globally,
with the United States representing the largest individual market at more than
$5.5 trillion. Many insurance companies have in-house portfolio management
teams responsible for managing general account assets (i.e., assets available
to pay claims and benefits). Moreover, a number of insurers market their
portfolio management capabilities to third-party investors, often through
separately branded subsidiaries (e.g., MassMutual Financial Group operates
several investment management affiliates, including Babson Capital
Management and OppenheimerFunds Investment Management). General
account portfolio allocations vary among insurer types (life, property and
casualty [P&C], reinsurance, fraternal, health, and title) because of the need
to appropriately match assets to liabilities as well as unique liquidity and
duration considerations (see Table 17).32
 TABLE 17. INSURANCE COMPANY
ASSET ALLOCATIONS
(AS OF 31 DECEMBER 2010)

Asset Class Life P&C Health

Cash/short term 3% 7% 18%
Bonds 78 71 60
Equities 1 12 13
Mortgage loans 9 0 0
Other 9 11 9

Source: Davide Serra, “The Insurance Sector: The View from the Outside,” The Geneva Association,
presentation delivered on 4 November 2014 in London.

Increasingly, insurance companies are choosing to outsource some of their

general account portfolio management duties—primarily the management of
sophisticated alternative asset classes—to unaffiliated asset managers. In the
United States, this trend is especially salient: Outsourced AUM increased
54% over the last four years to more than $2.8 trillion by the end of 2013.33
SOVEREIGN WEALTH FUNDS
Sovereign wealth funds (SWFs), state-owned investment funds commonly
funded by revenues from commodity exports or from foreign exchange
reserves, represent an increasingly attractive segment for asset managers:
SWF assets doubled to more than $6.8 trillion from the end of 2007 to 30
September 2014.34 Unlike DB plans, SWFs typically do not manage specific
liability obligations, and they possess a long-term investment horizon with
above-average allocations to alternative investments. The majority of assets
in SWFs are concentrated in resource-rich countries in Asia and the Middle
East. Table 18 lists the 10 largest SWFs.
 TABLE 18. LARGEST SOVEREIGN
WEALTH FUNDS
(AS OF 30 SEPTEMBER 2014, $
BILLIONS)

Country Sovereign Wealth Fund Assets

Norway Government Pension Fund—Global $893
United Arab Emirates Abu Dhabi Investment Authority 773
(Abu Dhabi)
Saudi Arabia SAMA Foreign Holdings 757
China China Investment Corporation 653
China SAFE Investment Company 568
Kuwait Kuwait Investment Authority 548
China (Hong Kong) Hong Kong Monetary Authority 400
Investment Portfolio
Singapore Government of Singapore Investment 320
Corporation
Qatar Qatar Investment Authority 256
Singapore Temasek Holdings 177
Total $6,800

Source: SWFI, “Sovereign Wealth Fund Rankings” (www.swfinstitute.org/fund-rankings; retrieved

27 December 2014).

Abu Dhabi Investment Authority’s broad asset allocation guidelines are

provided in Table 19. This $773 billion global portfolio spans more than
two dozen asset classes and is managed by a number of external asset
managers responsible for both passive and active strategies. The majority of
the portfolio’s equity allocation is passively managed.
 TABLE 19. ABU DHABI
INVESTMENT AUTHORITY ASSET
ALLOCATION GUIDELINES

Min Max
Asset class
Developed equities 32% 42%
Emerging market equities 10 20
Small-cap equities 1 5
Government bonds 10 20
Credit 5 10
Alternative 5 10
Real estate 5 10
PE 2 8
Infrastructure 1 5
Cash 0 10
Region
North America 35 50
Europe 20 35
Developed Asia 10 20
Emerging markets 15 25

Source: Abu Dhabi Investment Authority, “Portfolio Overview”

(www.adia.ae/En/Investment/Portfolio.aspx; retrieved 27 December 2014).
NOTES
22Amit Goyal and Sunil Wahal, “The Selection and Termination of Investment Management Firms by
Plan Sponsors,” Journal of Finance, vol. 63, no. 4 (August 2008): 1805–1847.

23Tim Jenkinson, Howard Jones, and Jose Vicente Martinez, “Picking Winners? Investment
Consultants’ Recommendations of Fund Managers,” working paper (26 September 2014):
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2327042.

24Pension plans are typically categorized as either DB or DC. DB plans are employer-sponsored plans
that offer employees a fixed, predefined benefit upon retirement. Generally, employers are responsible
for the contributions made to the plan and bear the risk associated with adequately funding the benefits
offered to employees. DC plans are typically tax-deferred retirement plans funded by both the
employee and the employer. Future benefit amounts are unknown and lack any guarantee because the
investment risk is assumed by the employee and not by the employer.

25Investment Company Institute, “Defined Contribution Plan Participants’ Activities, 2013,” ICI
Research Report (April 2014): www.ici.org/pdf/ppr_13_rec_survey.pdf.

26Towers Watson, “Global Pension Assets Study 2014” (5 February 2014):

www.towerswatson.com/en-US/Insights/IC-Types/Survey-Research-Results/2014/02/Global-
Pensions-Asset-Study-2014.

27Towers Watson, “Global Pension Assets Study 2014.”

28McKinsey & Company, “Winning in the Defined Contribution Market of 2015: New Realities
Reshape the Competitive Landscape”
(http://legacy.plansponsor.com/uploadfiles/mckinseydcreport.pdf; retrieved 27 December 2014).

29The Foundation Center reports total foundation AUM of $662 billion as of year-end 2011
(http://data.foundationcenter.org/#/foundations/all/nationwide/total/trends:num_foundations/20
11). NACUBO reports total endowment AUM of $448.6 billion as of 30 June 2013
(www.nacubo.org/Documents/EndowmentFiles/2013NCSEPressReleaseFinal.pdf).

30NACUBO and Commonfund Institute, “2013 NACUBO-Commonfund Study of Endowments,”

press release (28 January 2014):
www.nacubo.org/Documents/EndowmentFiles/2013NCSEPressReleaseFinal.pdf.

31Yale University Investments Office, “The Yale Endowment 2013.”

32For example, life insurers tend to invest in longer-term assets (e.g., 30-year government and
corporate bonds) relative to P&C insurers because of the longer-term nature of their liabilities.
33Randy Diamond, “Insurance Assets Outsourced to Managers Jump 54% in 4 Years,” Pensions &
Investments (1 September 2014): www.pionline.com/article/20140901/PRINT/309019992/insurer-
assets-outsourced-to-managers-jump-54-in-4-years.

34SWFI, “Sovereign Wealth Fund Rankings.”

MAJOR PRODUCT SEGMENTS
SEPARATELY MANAGED ACCOUNTS
Large institutional investors generally prefer to invest in SMAs. SMAs differ
from collective investment funds because the individual securities are
purchased in a separate custodial account for the institution and are managed
pursuant to a customized investment management agreement (IMA) and a set
of specific investment guidelines.

SMAs allow institutional investors to directly own securities and to tailor the
asset manager’s investment strategy to match the institution’s specific
portfolio preferences. For example, a public pension plan investing in an
asset manager’s large value equity strategy might wish to implement a social
or public policy stance by excluding any equity ownership of companies
engaged in the tobacco business. Also, SMAs afford investors the ability to
customize their tax exposures, given that the cost bases of the assets are
unique to each investor. Investors generally pursue a number of tax
optimization strategies, such as tax-loss harvesting and avoiding short-term
capital gains.

SMA vehicles hold a significant share of AUM within the $32 trillion global
pension market.35 In the United States, SMA assets were estimated to be
more than $6 trillion as of the end of 2012. A 2014 Securities Industry and
Financial Markets Association survey of asset managers that offer separately
managed accounts found that half of the institutional investor clients were
pension plans (35%) or insurance companies (15%), with the remainder
owned by a combination of other official institutions and endowments and
foundations.

SMA investor account minimums generally range from $1 million to $100

million, depending on the type of investment strategy (e.g., fixed-income
strategies typically require higher minimums to achieve proper
diversification) and the asset manager’s operational efficiency. Relative to a
collective investment vehicle, an SMA, because of its customized nature,
generally requires an asset manager to employ more operational and back-
office resources.

Institutional investors often negotiate management fee terms when entering

into IMAs with asset managers. Large institutional investors that present an
attractive revenue opportunity for an asset manager often negotiate favorable
fee terms relative to published fee rates. Also, most investors receive scale
discounts in the form of a sliding management fee schedule. For example, an
institutional investor committing $100 million to a small-cap value SMA
would be subject to a 0.75% management fee on the first $50 million
invested, and any amount more than $50 million would be subject to a 0.65%
management fee. In this case, the weighted-average management fee expense
to the investor would amount to 0.70%.
MUTUAL FUNDS
Mutual funds represent the primary collective investment vehicle of
individual investors globally, with more than $30 trillion in AUM as of the
end of 2013.36 The United States ranks as the largest mutual fund
marketplace, with AUM topping $15 trillion by the end of 2013. Mutual fund
AUM in the United States represents a high-water mark for the industry,
which began in 1924 with the launch of the first mutual fund, Massachusetts
Investors Trust, by MFS Investment Management.37

Globally, mutual fund markets operate in a similar manner, offering

individual investors low investment minimums, diversified portfolios, daily
liquidity, and standardized performance and tax reporting. However, the
impact of regulations is a function of political and geographical borders.
Mutual funds in the United States are legally “open-end”38 companies,
regulated by the SEC and governed by the rules and procedures detailed in
the Investment Company Act of 1940 (the 1940 Act). In Europe, the
European Union has helped to usher in a collective regulatory framework
known as UCITS. UCITS regulation, first introduced in 1985, allows asset
managers to distribute funds across all EU member countries, provided that
funds are registered with one local country regulator that is a member of the
broader European Securities and Markets Authority. UCITS funds are also
distributed in jurisdictions outside of the EU, including the Asia-Pacific
region, where there are more than 3,500 Luxembourg-domiciled UCITS
funds distributed throughout Australia, Japan, Singapore, and Hong Kong.39
As of 2013, more than 35,000 UCITS funds were distributed throughout 86
countries.40
OVERVIEW OF US MUTUAL FUND
REGULATION: INVESTMENT
COMPANY ACT OF 1940
Oversight. A mutual fund must establish a board of trustees or
directors who are approved by shareholders. At least 75% of a
mutual fund’s board must consist of independent directors, and the
chairman must be independent.41

Diversification. Funds that elect to be labeled “diversified” must

meet specific portfolio diversification standards. For example, with
respect to 75% of a fund’s assets, no more than 5% may be
invested in any single investment, and typically, the fund may not
own more than 10% of the voting securities of a single company.
Funds that elect to be classified as nondiversified follow more
liberal portfolio diversification guidelines.

Voting rights. Funds can issue only one class of stock, every share
of which must have equal voting rights, although multiple share
classes may exist to accommodate different pricing and service
offerings.

Leverage limitations. To limit risk, the 1940 Act restricts the use of
leverage by limiting borrowing to one-third of a fund’s assets.

Liquidity. A fund’s illiquid assets must be limited to 15% of the

portfolio.

Tax treatment. To qualify as a pass-through tax entity and avoid

double taxation, a fund must distribute at least 90% of its interest,
dividends, and net realized capital gains earned every year.
Most mutual funds act as “virtual companies” by generally not retaining
employees and by outsourcing all aspects of operations (investment
management, administration, distribution, etc.) to other companies. These
relationships are subject to board approval, often renewable on an annual
basis, and are sometimes subject to shareholder approval.

Figure 9 depicts the major relationships between a mutual fund and its
shareholders, board, and service providers.
FIGURE 9. MUTUAL FUND MAJOR
RELATIONSHIPS
Source: Investment Company Institute, 2014 Investment Company Fact Book, 54th ed. (2014):
www.icifactbook.org/fb_appa.html.
EXCHANGE-TRADED FUNDS
State Street Global Advisors introduced the first ETF in 1993 with the debut
of its SPDR S&P 500 (Standard & Poor’s Depositary Receipts) on the NYSE.
This ETF, designed to track the performance of the world’s most popular
equity index, the S&P 500, was seeded with $6.5 million in assets and today
totals more than $172 billion in AUM, representing one of the most widely
traded securities in the world.42

ETFs are structured as open-end investment vehicles similar to mutual funds,

and in the United States, they are subject to the vast majority of the 1940
Investment Company Act rules. However, investors do not purchase shares of
an ETF directly; rather, shares are acquired on secondary market exchanges
(e.g., NYSE, NASDAQ). Although ETF share prices closely track a fund’s
actual NAV,43 prices can vary based on demand trends among investors,
market-making activity from authorized participants, and the underlying
liquidity of the securities represented by the ETF.

ETFs have taken hold across investor classes in the institutional and retail
marketplaces and represent one of the fastest-growing and most disruptive
product categories in the asset management industry. Tactically oriented asset
managers value intraday market pricing (mutual funds typically can be
purchased or sold only once a day) and the ability to short sell ETFs, whereas
long-term investors—both institutional and retail—have increasingly
employed ETFs as portfolio building blocks in a diversified asset allocation.
ETFs have also benefited from the growing popularity of passive investing in
general (see the Industry Trends section).

As of October 2013, the global $2.3 trillion ETF industry included more than
5,000 funds from 215 managers located on 58 exchanges worldwide.44
(Table 20 shows global exchange-traded product market share by region.)
From 2009 to 2013, assets in ETFs listed in the United States almost doubled
from $1.0 trillion to $1.7 trillion, representing a 25.8% CAGR. Although the
vast majority of ETFs follow passively managed indexes, a growing number
of actively managed ETFs have been introduced by asset managers in recent
years. In the United States, actively managed ETFs represented less than 1%
of AUM as of year-end 2013, according to FUSE Research Network.
 TABLE 20. GLOBAL EXCHANGE-
TRADED PRODUCT MARKET SHARE
(AS OF 30 SEPTEMBER 2014)

AUM Market No. of

Listing Region ($ billions) Share Products AUM/Product
United States 1,864.3 71% 1,646 1.13
Europe 450.8 17 2,219 0.20
Canada 65.3 2 324 0.20
Latin America 8.5 0 43 0.20
Asia Pacific 186.0 7 694 0.27
Middle East and 45.4 2 377 0.12
Africa
Global exchange- 2,620.3 5,303 0.49
traded product
industry

Source: BlackRock, “ETP Landscape: Industry Highlights,” BlackRock Advisors (September 2014):
www.blackrockinternational.com/content/groups/internationalsite/documents/literature/etfl_ind
ustryhilight_sep14.pdf.
ETF TRANSPARENCY AND ARBITRAGE
Transparency of ETF holdings is essential to helping ETFs track their fair
value or NAV. ETFs, whether index tracking or active, are currently required
to publish their holdings daily. Only institutional trading firms deemed
“authorized participants” (APs) trade directly with an ETF. Authorized
participants are usually large institutional trading firms that actively exploit
the arbitrage mechanism to profit from any deviation of the ETF’s price from
its NAV. ETFs typically issue bulk share amounts called “creation units”
(typically representing 50,000 shares) to APs in exchange for the underlying
securities included in the index that the ETF tracks. This mechanism allows
APs to arbitrage any price discrepancy between the ETF’s share price as it
trades on an exchange and the underlying NAV of the ETF.

The following excerpt from the Investment Company Institute’s paper “ETF
Basics: The Creation and Redemption Process and Why It Matters” provides
a basic overview of the arbitrage APs employ when an ETF’s market price
deviates from its NAV.
ETF Trades at a Premium to NAV

When an ETF is trading at a premium to its underlying value, authorized

participants may sell short the ETF during the day while simultaneously
buying the underlying securities. At the end of the day, the authorized
participant will deliver the creation basket of securities to the ETF in
exchange for ETF shares that they use to cover their short sales. The
authorized participant will receive a profit from having paid less for the
underlying securities than it received for the ETF shares. The additional
supply of ETF shares also should help bring the ETF share price back in
line with its underlying value.
 ETF Trades at a Discount to NAV

When an ETF is trading at a discount, authorized participants may buy

the ETF shares and sell short the underlying securities. At the end of the
day, the authorized participant will return ETF shares to the fund in
exchange for the ETF’s redemption basket of securities, which they will
use to cover their short positions. The authorized participant will receive
a profit from having paid less for the ETF shares than it received for the
underlying security. The lower supply of ETF shares available also
should help bring the ETF share price back in line with its underlying
value.45

The arbitrage pricing mechanism is unique to the ETF vehicle and has
resolved a major perceived flaw of CEFs, whose shares are exchange traded
and subject to relatively large discounts and premiums to NAV based solely
on secondary market demand from investors.
TRADITIONAL ASSET MANAGER
CASE STUDY:
FRANKLIN RESOURCES
(FRANKLIN TEMPLETON
INVESTMENTS)
OVERVIEW
Franklin Templeton Investments, based in San Mateo, California, is one
of the world’s largest and best-known global asset management firms,
possessing more than $898 billion in AUM as of 30 September 2014.
Founded in 1947, the firm was an early pioneer in investing in overseas
markets and today has more than 9,000 employees, of which 600 are
investment professionals. Franklin Templeton manages assets for
institutional and retail clients located in 150 countries and is regarded as
the largest cross-border fund manager. Franklin Templeton is a publicly
traded asset manager included in the S&P 500 and listed on the NYSE
under the ticker symbol BEN.
ASSETS UNDER MANAGEMENT
Franklin Templeton’s holdings tend toward traditional asset classes,
with 81% of AUM managed in long-only equity and fixed-income assets
(see Table 21).
TABLE 21. FRANKLIN
TEMPLETON ASSETS UNDER
MANAGEMENT

Investment AUM Percentage of

Category ($ billions) Total AUM Notes
Equity $371.0 41% Growth, income,
value
Hybrid 159.5 18 Asset allocation,
flexible, alternatives
Fixed 361.0 40 Long term, short term
income
Cash 7.0 1 Short-term liquidity
management assets
Total $898.0 100%
PRODUCTS MANAGED
Acquisitions have been a major contributor to the growth in Franklin’s
AUM over the past 60 years. Franklin Templeton’s CEO, Greg Johnson,
has remarked, “One of the ways that we have built Franklin Templeton’s
global business is by making strategic investments in smaller, highly
experienced asset management companies.”46

Originally focused on domestic fixed-income and balanced strategies,

the Franklin family of funds has expanded over the decades across the
capital spectrum. The firm began to diversify into alternative
investments with the purchase of hedge fund specialist K2 Advisors.

Exhibit 7 provides a summary of key acquisitions and investments

made by Franklin.
EXHIBIT 7. FRANKLIN
TEMPLETON ACQUISITION
TIMELINE

Year Capability Added Target

Domestic
1992 Global equities Templeton, Galbraith &
Hansberger
Value equities

1996 Value equities Heine Securities/Mutual Series

Fund

2012 Hedge fund of K2 Advisors LLC

funds

International
2000 Korean Ssangyong Templeton
Investment Trust Management

2000 Canadian fixed Bissett & Associates

income

Growth equities
2002 Indian equities Pioneer ITI AMC

2003 Emerging markets Darby

PE

2006 Brazilian equity Bradesco

and fixed income

2011 UK equities Rensburg

2011 Australian equities Balanced Equity Management

OVERSEAS REACH
Many asset managers strive to create a globally diversified business to
spread risk across regions, client types, and asset classes. Specifically,
overseas markets offer asset managers a ripe opportunity to manage the
wealth of the growing middle class, given that an estimated 80% of the
global middle class will be located in developing countries by 2030.
That said, Franklin Templeton represents a leading example of a
domestic asset manager that has successfully built a global investment
and sales platform. The firm’s 9,000 employees are located in 35
countries and serve clients in more than 150 countries. International
investments represent 35% of total AUM, and in fiscal year 2013, more
than half of long-term (i.e., not money market) investment product sales
occurred outside the United States. Franklin is also regarded as
possessing the largest individual retail cross-border fund umbrella in the
world.

Source: Franklin Resources, “Annual Report 2013”

(https://materials.proxyvote.com/Approved/354613/20140114/AR
_190616; retrieved 28 December 2014).
NOTES
35Towers Watson, “Global Pension Assets Study 2014.”

36Investment Company Institute, 2014 Investment Company Fact Book, 54th ed. (2014), Table 60
(www.icifactbook.org/pdf/14_fb_table60.pdf).

37On 16 July 1926, the Boston Globe published an article profiling the fund that stated: “The
Massachusetts Investors Trust, organized in 1924 to afford the investor an opportunity to purchase a
broad list of sound common stocks in convenient units, has grown in the interim from $50,000 paid in
to more than $2,500,000 and now numbers just short of 1,000 shareholders. Its funds are invested in the
common stocks of 136 leading American corporations. The trustees have acquired the holdings of
common stocks for permanent investment, not for speculation. Their selection to date has shown the
following interesting results: Of the 136 stocks held, three have passed their dividends, paid extras, or
stock dividends or issued results. The result of market fluctuations has been equally favorable. At
today’s market, 26 of the 136 stocks are selling at less than they cost, but the other 110 issues are
selling for enough more so that the value of the trust shares is more than 10 points above the offering
price of 52-1/2.” “First Mutual Fund (1924),” CelebrateBoston
(www.celebrateboston.com/first/mutual-fund.htm; retrieved 27 December 2014).

38Open-end funds allow shareholders to purchase and redeem shares of the fund daily at NAV.

39J.P. Morgan Worldwide Securities Services, “The Future of Asset Management: Exploring New
Frontiers,” JPMorgan Chase Bank (2010):
www.jpmorgan.com/cm/BlobServer/The_Future_of_Asset_Management.pdf?
blobkey=id&blobwhere=1320549503851&blobheader=application/pdf&blobheadername1=Ca
che-Control&blobheadervalue1=private&blobcol=urldata&blobtable=MungoBlobs.

40PwC, “Fund Distribution: UCITS and Alternative Investment Funds (AIFs),”

PricewaterhouseCoopers (2014): http://download.pwc.com/ie/pubs/2014-pwc-ireland-distribution-
knowledge-12-05-2014-1.pdf.

41SEC, Final Rule: Investment Company Governance, Securities and Exchange Commission (2004):
www.sec.gov/rules/final/ic-26520.htm.

42State Street Global Advisors, “The First ETF Turns 20: Innovation That Leveled the Playing Field
for All Investors Reaches New Milestone,” State Street Corporation (29 January 2013):
http://newsroom.statestreet.com/press-release/state-street-global-advisors/first-etf-turns-20-
innovation-leveled-playing-field-all-i.

43NAV refers to a fund’s assets minus its liabilities, which typically represent accrued expenses for
portfolio management, custody, and other services that are expensed directly to the fund.

44EY, “Global ETF Survey: A New Era of Growth and Innovation,” EYGM (January 2014):
www.ey.com/Publication/vwLUAssets/EY_-_Global_ETF_Survey_2014/$FILE/EY-Global-
ETF-Survey-January-2014.pdf.

45Mara Shreck and Shelly Antoniewicz, “ETF Basics: The Creation and Redemption Process and Why
It Matters,” Investment Company Institute (19 January 2012):
www.ici.org/viewpoints/view_12_etfbasics_creation.

46Franklin Templeton Investments, “Franklin Templeton Announces Agreement to Acquire Majority

Stake in Fund of Hedge Funds Specialist K2 Advisors,” press release, Franklin Resources (19
September 2012): http://phx.corporate-ir.net/phoenix.zhtml?c=111222&p=irol-
newsArticle_print&ID=1736473.
INDUSTRY TRENDS
DEFINED CONTRIBUTION/TARGET-DATE
FUND GROWTH
In the wake of several high-profile pension failures and a deep shortfall in the
federally guaranteed pension insurance backstop, the Pension Protection Act
(PPA) was enacted in 2006. Some view the PPA as the most important
retirement legislation enacted in the United States since the Employee
Retirement Income Security Act was passed in 1974. While providing a
number of reforms to DB plans, the PPA also included a number of
provisions that have benefited the DC market. Specifically, the PPA provided
statutory authority to allow employers to automatically enroll employees in
DC plans. In addition to auto-enrollment, the PPA established Qualified
Default Investment Alternatives (QDIAs) to protect employers from potential
liabilities arising from losses linked to investments made by automatically
enrolled employees. Auto-enrollment is an important catalyst for growth for
the DC market and for providers of investment strategies that qualify as
QDIA options, such as target-date mutual funds.

Target-date funds are designed to provide an investor with a complete

diversified portfolio of asset class exposures, ranging from global equities to
fixed-income securities, that automatically rebalances and shifts asset
allocation exposures over time to a more conservative posture as the fund
reaches a predefined target date (e.g., 2060) meant to coincide with an
investor’s estimated retirement date. Target-date funds often take the form of
funds of funds and are primarily offered by managers with large affiliated
retirement recordkeeping platforms that service the operational requirements
of DC plan sponsors.

The ease and legal protections provided by the PPA have spurred widespread
inclusion of target-date funds within DC plans. An Employee Benefit
Research Institute/Investment Company Institute study estimated that the
number of investors (plan participants) in target-date funds increased from
19% in 2006 to 41% by the end of 2012. Table 22 demonstrates the
dramatic growth in target-date mutual fund assets over time.
 TABLE 22. TARGET-DATE MUTUAL
FUND ASSETS UNDER
MANAGEMENT
($ BILLIONS)

Year AUM
2005 $71
2006 115
2007 183
2008 160
2009 256
2010 340
2011 376
2012 481
2013 618

Note: Eight-year AUM CAGR: Target-date funds = 31%; overall fund industry = 7%.

Source: Investment Company Institute, 2014 Investment Company Fact Book.

RISE OF PASSIVE INVESTING
Institutions and individual investors continue to allocate an increasing
percentage of their investments to passively managed investment strategies.
The motivation behind this trend is largely attributable to expense savings
and the difficulty investors face when attempting to select an asset manager
that will provide ex ante alpha.

Expense savings. Relative to an actively managed strategy, an index

strategy can be accomplished with limited personnel dedicated to
maintaining the proper index constituents and processing corporate
actions (mergers and acquisitions, spinoffs). Today, retail investors can
obtain exposure to the Dow Jones US Large-Cap Total Stock Market
Index for as little as 4 bps,47 whereas large institutional investors can
obtain exposure for even less through a separately managed account.

The average turnover of an index strategy is generally a fraction of the

average for an actively managed strategy. Lower portfolio turnover
typically leads to lower trading commissions and higher tax efficiency
because fewer gains are triggered.

Underperformance. Persistent underperformance of the average active

manager continues to influence investors to pursue index-based
investment strategies, especially in the most information-efficient
markets, such as large-cap stocks. The S&P Indices Versus Active
(SPIVA) report regularly measures the performance of active managers
against relevant S&P benchmarks. The 2013 SPIVA US Scorecard
found that the majority of active managers across all domestic equity
investment categories underperformed their respective benchmarks over
the trailing three- and five-year periods.48

Table 23 breaks out mutual fund industry assets into actively and passively
managed strategies. Nearly two-thirds of investors index “large blend,” which
is consistent with the trend of investors indexing the most efficient areas of
the market.
 TABLE 23. ACTIVE VS. PASSIVE,
HISTORICAL AUM GROWTH
($ TRILLIONS, INCLUDES US
MUTUAL FUNDS AND ETFS)

Year Passive Active Total

2003 $0.6 $4.3 $4.9
2004 0.8 5.0 5.7
2005 0.9 5.5 6.4
2006 1.2 6.4 7.6
2007 1.6 7.1 8.6
2008 1.2 4.5 5.7
2009 1.7 6.1 7.8
2010 2.1 7.0 9.1
2011 2.2 6.9 9.1
2012 2.7 7.9 10.7
2013 3.6 9.3 12.8

Note: Ten-year CAGR: overall = 10%, active = 8%, passive = 20%.

Source: FUSE Research Network.

GROWTH OF ALTERNATIVE INVESTING
The 2008 financial crisis and ensuing recession called institutional and retail
investors’ attention to the importance of managing risk. The decline in value
of almost all risk assets helped underscore the short-term failings of
traditional asset allocation models. A byproduct of 2008’s market drawdown
was an increased demand for noncorrelated asset classes to serve as ballast in
an investor’s asset allocation. In the second quarter of 2014, the global hedge
fund industry’s AUM hit an all-time peak of $2.3 trillion (see Table 24).
 TABLE 24. HEDGE FUND
INDUSTRY AUM
($ TRILLIONS)

Year Amount
2002 $0.5
2003 0.8
2004 1.2
2005 1.4
2006 1.7
2007 2.1
2008 1.5
2009 1.6
2010 1.7
2011 1.7
2012 1.8
2013 2.2
2Q 2014 2.4

Source: BarclayHedge, “Hedge Fund Industry”

(www.barclayhedge.com/research/indices/ghs/mum/Hedge_Fund.html; retrieved 28 December
2014).

Although hedge fund usage has always been prevalent among institutional
investors, retail investors have increasingly been incorporating hedge fund
strategies (packaged through collective investment vehicles, such as mutual
funds and UCITS) into their portfolios. The “downstreaming” of hedge fund
strategies to retail investors has been especially prevalent in the United
States, where, since 2009, more than $130 billion in net new dollars has been
allocated to mutual funds categorized as alternative. Alternative AUM in the
mutual fund space have grown at a 40% CAGR over the last five years,
compared with 6% for the overall US fund industry. A survey of US financial
advisers demonstrates that much of the growth in alternatives has been
associated with reducing portfolio risk through the use of uncorrelated
alternative strategies (see Figure 10).
 FIGURE 10. WHY DO ADVISERS
UTILIZE ALTERNATIVES?

Source: FUSE Research Network.

Table 25 provides an overview of the growing presence of alternative

strategies in the mutual fund industry in the United States.
 TABLE 25. US ALTERNATIVE
MUTUAL FUND ASSETS AND NET
FLOWS BY STRATEGY
($ MILLIONS)

AUM
5-Year Market
Category 2008 2013 CAGR Share 2009 2010
Absolute $6,166 $70,656 63% 40% $3,626 $12,301
return
Multistrategy 4,072 29,040 48 16 1,736 4,823
Equity long– 4,909 21,508 34 12 1,165 1,947
short
Risk- 9,599 15,808 10 9 1,798 1,761
managed
equity
Arbitrage 1,652 13,443 52 8 1,770 4,171
Managed 1,439 11,892 53 7 1,449 2,209
futures
Market 5,725 10,000 12 6 2,137 198
neutral
Credit long– 14 5,378 230 3 61 227
short
Total $33,576 $177,725 40% $13,742 $27,636

Source: FUSE Research Network.

PricewaterhouseCoopers (PwC) projects that global alternative AUM
(defined broadly as hedge funds, PE, etc.) will reach $13 trillion by 2020,
representing 13% of global AUM (see Figure 11).
 FIGURE 11. GLOBAL
ALTERNATIVE AUM PROJECTION

Source: PwC, “Asset Management 2020: A Brave New World,” PwC (2014):
www.pwc.com/gx/en/asset-management/publications/asset-management-2020-a-brave-new-
world.jhtml; retrieved 28 December 2014.
NOTES
47Charles Schwab, “Schwab ETFs”
(www.csimfunds.com/public/csim/home/products/product_finder?producttype=etf; retrieved 28
December 2014).

48S&P Dow Jones Indices, “S&P Indices versus Active Funds (SPIVA) U.S. Scorecard,” McGraw Hill
Financial (2014): http://us.spindices.com/documents/spiva/spiva-us-year-end-2013.pdf?
force_download=true.
ANALYZING ASSET MANAGEMENT
COMPANIES
OWNERSHIP STRUCTURE
The ownership structure of investment managers varies, although the vast
majority of advisers are privately owned. Ownership structure can play an
important role in retaining and incentivizing key personnel, and it is often a
metric examined by professional investment consultants when assessing the
alignment between asset managers and investors; owners who are portfolio
managers with personal capital invested in their strategies are viewed
favorably. Ownership stakes are routinely offered to key investment and
management professionals as a long-term retention incentive.
PRIVATE CORPORATIONS
The vast majority of investment adviser firms are privately owned by
individuals who were original founders or who play key roles in the firm’s
management. These firms are typically structured as limited liability
companies or limited partnerships. In addition, PE firms (e.g., TA Associates,
Crestview Partners, Lightyear, ORIX) and asset management holding
companies (e.g., AMG, Old Mutual Asset Managers)49 often take a stake in
privately owned asset management firms and assist in management buyouts.
PUBLICLY TRADED
By the end of 2013, there were approximately two dozen pure-play publicly
traded asset managers listed on US exchanges. A number of publicly traded
diversified financial services (e.g., BNY Mellon, State Street) also possess
significant asset management divisions that represent reportable business
segments. Globally, approximately 30 significant pure-play asset managers
trade publicly, with higher concentrations in Australia, Canada, and the
United Kingdom.
SHAREHOLDER OWNED
The Vanguard Group’s ownership is unique because it is the only client-
owned mutual fund company. Normally, a mutual fund manager is owned by
third-party shareholders (public or private) and manages a series of funds
that, in turn, are owned by the shareholders. However, Vanguard’s fund
shareholders own the firm’s mutual funds, which, in turn, own Vanguard
(i.e., Vanguard is a “mutual” mutual company).50 Vanguard’s vast scale and
ability to operate “at cost” has served as a major competitive advantage,
allowing it to offer substantially lower-cost investment products—both
actively and passively managed—relative to most competitors.
BARRIERS TO ENTRY
Thousands of asset managers operate in today’s highly competitive global
asset management industry. Although new entrants into the market don’t
initially face onerous business hurdles, competing with the largest asset
managers has become increasingly difficult.
INVESTMENT TRACK RECORDS
Possessing a consistent track record of peer- and benchmark-beating
performance represents the single most important attribute for a manager
seeking to attract client assets. Managers must often possess at least a three-
year investment track record to even qualify for most investment manager
searches. In the venture capital and buyout spaces, where firms compete
aggressively for deals, the top-performing managers often garner “first looks”
at the most attractive deals because of their reputation among entrepreneurs
and management teams. That said, startup managers backed by established
portfolio managers are often able to attract client assets based on attractive
track records built at previous firms.
PRODUCT DIFFERENTIATION
Continually offering compelling investment products to fulfill investor
demand and meet the needs of varying macroeconomic environments is an
essential task for asset managers and requires extensive firm resources. In
addition, investors are increasingly seeking customized solutions and have
been granting more discretionary latitude to asset managers in order to pursue
multi-asset and global investment strategies. In order to effectively offer
these solution-oriented products, managers must possess a credible global
investment platform coupled with a deep legal, compliance, and marketing
infrastructure.
ECONOMIES OF SCALE
Large asset managers often use their scale to negotiate favorable contract
terms across divisions, including compliance, technology, operations, and
distribution. National distribution firms (e.g., brokerages) tend to grant
preferential access to large asset management firms with sales and marketing
staff that can adequately service their distribution networks. Furthermore,
many retail-oriented distributors often establish revenue-sharing agreements
with asset managers seeking to distribute products through their platforms.
The prevalence of revenue sharing between asset managers and distributors
varies greatly across markets.
DISTRIBUTION AND BRAND REACH
Asset managers with long operating histories often possess diverse
institutional and retail distribution relationships with wealth management
firms and investment consultants. Cementing relationships with distributors
and consultants is often an expensive multiyear effort. Distributors selling
investment products to retail investors tend to prefer established and
recognized brands from asset managers with long operating histories. Many
asset managers that are part of a broader financial services organization have
access to large affiliated distribution outlets (e.g., bank branches, insurance
representatives) through which products can be sold on a preferred basis.
REGULATION AND COMPLIANCE
The costs of complying with government and self-regulatory organization
regulations increased markedly in the wake of the 2008 financial crisis. The
additional fixed costs linked to complying with new regulations have been
especially burdensome to smaller asset managers. Two recent regulatory
developments are highlighted as follows:

AIFMD. The Alternative Investment Fund Managers Directive, issued

by the EU in 2013, is expected to have a material impact on the future
evolution of the alternative investment business in Europe. The new
rules harmonize regulation across the region and are expected to add
significant incremental legal and compliance costs for managers.
Moreover, the directive adds a number of controversial requirements
related to compensation for senior management and portfolio managers.

Risk retention rules. In the United States, several regulators, including

the Federal Deposit Insurance Corporation, the Office of the
Comptroller of the Currency, and the Federal Housing Finance Agency,
implemented rules requiring structured securities managers (e.g.,
collateralized loan obligation managers) to retain a 5% interest in the
securities they issue. This capital commitment, which is designed to
encourage managers to have “skin in the game,” is expected to be
onerous for smaller asset managers with limited balance sheet capital to
deploy. Similar risk retention requirements have already been introduced
in Europe.
NOTES
49AMG (ticker symbol: AMG) and Old Mutual Asset Managers (ticker symbol: OMAM) are both
publicly traded on the NYSE.

50Vanguard Group, “Why Ownership Matters” (https://about.vanguard.com/what-sets-vanguard-

apart/why-ownership-matters; retrieved 28 December 2014).
FINANCIAL STATEMENT ANALYSIS
ASSET MANAGER FINANCIALS
The asset management industry is a “professional services” business that
requires little physical capital and relies heavily on human capital inputs.
These human inputs often constitute the majority of an asset manager’s
expense base, inclusive of salaries, benefits, incentive compensation (cash,
deferred compensation, equity), and commissions, which are typically a
percentage (measured in basis points) paid on gross sales of investment
products by distribution personnel. Operations and technology-related
spending (e.g., fund accounting systems, portfolio management systems,
Bloomberg terminals) often make up the remainder of the expense base.

The balance sheets of most asset managers are straightforward, and most
publicly traded asset managers carrying public debt possess investment-grade
ratings (with the exception of PE-backed managers, which often take on
significant debt within their capital structure).

In aggregate, traditional asset manager revenues are largely derived from

recurring management fees or “base” fees, supplemented by performance fees
and distribution and/or service fees. Of course, alternative-focused managers
(hedge funds and PE firms) rely heavily on performance fee and/or carried
interest revenue, which can often represent a multiple of management fee
revenue. In general, the asset management industry has traditionally been
characterized by its embedded operating leverage, which has resulted in high
margins relative to other financial and nonfinancial industries. As AUM
increase—actively via organic growth (i.e., net new sales) and investment
alpha (i.e., portfolio management’s contribution to AUM growth outside of
beta returns) and passively through market appreciation—the compounding
effect of management and performance fees can be a compelling driver of
higher margins.

Margins in the industry tend to be fairly resilient given the ability of asset
managers to adapt to deteriorating market and business environments. Low
capital expenditure requirements and the cost flexibility embedded in most
managers’ profit and loss accounts allow a manager to translate earnings into
strong cash flow. On average, 50%–60% of most asset managers’ expenses
are discretionary in nature (e.g., discretionary compensation, marketing,
travel and entertainment) or vary directly with revenue (e.g., commissions
paid to distribution personnel on new sales). On average, public asset
managers achieve pretax operating margins in the mid- to low-30% range,
whereas the top quartile of managers (usually focused on higher-fee-earning
equities and alternatives) regularly produce margins in the 40%–50% range.

The 2008 financial crisis and the effects felt in 2009 tested the resiliency of
asset managers’ operating models. Asset manager operating margins, which
are most sensitive to levels of AUM, experienced material declines of
approximately 5%–8% from peak 2007 margins, which were typically in the
35%–40% range (see Table 26). Almost universally, managers displayed
their margin resiliency through discretionary spending cuts and/or head count
reductions. The extent of expense cuts varied widely by asset and ownership
structure. Publicly owned asset managers felt investor pressure, whereas
managers that were subsidiaries of large banking or insurance groups were
relied on to deliver solid margins amid turmoil in their core operating
businesses.
 TABLE 26. OPERATING MARGINS
AS A SHARE OF NET REVENUES
(BPS)

Year Margin
2008 37
2009 32
2010 36
2011 36
2012 37
2013 39

Note: Net revenues are defined as management fee revenues minus distribution costs.

Source: Shub, et al., “Global Asset Management 2014: Steering the Course to Growth.”
MANAGEMENT FEE REVENUE
Management or investment advisory fee revenue often represents the largest
component of an asset manager’s total revenues, especially within the
traditional asset manager universe. Management fees are generally calculated
as a fixed percentage of the fair value of net AUM (see Table 27). AUM is
primarily influenced by capital market appreciation/depreciation and net
flows (the net effect of client purchases and redemptions). Industrywide,
management fees are generally billed either monthly or quarterly and are
accounted for on an accrual basis.
 TABLE 27. US INDUSTRY ASSET-
WEIGHTED AVERAGE
MANAGEMENT FEE RATES
(BPS)

Industry Average
For Fiscal Years Ended 30 September 2013 2012 2011
Equity
Global/international 60 61 63
United States 44 45 47
Hybrid 39 39 40
Fixed income
Tax free 36 37 37
Taxable
Global/international 57 58 56
United States 38 37 38
Cash management 13 13 16

Notes: “U.S. industry asset-weighted average management fee rates were calculated using information
available from Lipper® Inc. as of 30 September 2013, 2012, and 2011 and include all U.S.-registered
open-end funds that reported expense data to Lipper Inc. as of the funds’ most recent annual report
date, and for which expenses were equal to or greater than zero. As defined by Lipper Inc.,
management fees include fees from providing advisory and fund administration services. The averages
combine retail and institutional funds data and include all share classes and distribution channels,
without exception. Variable annuity products are not included.”

Source: Franklin Resources, “Annual Report 2013,” Franklin Templeton Investments

(https://materials.proxyvote.com/Approved/354613/20140114/AR_190616; retrieved 28
December 2014).

For alternative asset managers, management fees generally cover overhead

expenses, but they can generate significant profit depending on a manager’s
scale. Hedge fund management fees for single-manager strategies average
172 bps in North America.51

For PE managers, management fees are typically earned on capital

commitments during the investment period and on invested capital at cost.
The management fees can range from 1% to 2% and may be reduced
following a fund’s investment period.

Management fees are generally collected directly from funds; accounts

receivable issues are, therefore, relatively benign in the asset management
business as compared with other industries.
PERFORMANCE FEES
Alternative asset managers and some traditional managers collect
performance fees, which are contingent fees charged in addition to
management fees. Performance fees are generally calculated in one of two
ways: as a percentage of absolute investment results or as a percentage of
investment results in excess of a stated benchmark over a stipulated period of
time. Performance fees usually range from 10% to 20% of profits, and they
are often used by investment managers to pay the portfolio management
team’s incentive compensation (typically a 40%–50% payout).

Performance fees for hedge funds are often linked to high-water mark
provisions that are perpetual in nature but may be reset after a defined period.
High-water marks generally ensure that if a strategy underperforms relative to
its performance bogey—an absolute return goal or a relative one versus a
benchmark—it must gain back any underperformance before any future
performance-based fees can be collected. A high-water mark is an investor-
friendly provision that prevents an asset manager from collecting
performance fees on the same investment gains more than once. Also, many
funds include “hurdles,” which set a minimum return level that must be
achieved before a performance fee can be collected (e.g., LIBOR plus 3%).
 PERFORMANCE FEE
CALCULATION
Consider an investment of $100 million in a hedge fund charging a 20%
performance fee. If the fund’s NAV increased 20%, the investment
would be worth $120 million. Of the $20 million gain, 20%, or $4
million, would be earned by the hedge fund manager, reducing the
fund’s NAV and the investment to $116 million, representing a 16%
gain before any other expense deductions (management fees,
administrative expenses, etc.). If the fund included a hurdle of 10%, the
performance fee would apply only to the additional 10% gain above and
beyond the hurdle rate.

Analysts often examine the percentage of a manager’s AUM subject to

performance fees to determine the relative impact performance fees have on
overall revenue. This metric can be further expanded by examining the
percentage of assets subject to performance fees that are above their
respective high-water marks to help determine how influential a manager’s
potential performance-based fee revenue will be in the overall revenue story.
It is important to note that asset managers typically accrue performance fee
revenues on an “as if” basis, meaning that a fund that is outperforming its
benchmark (or other relevant measure) will record performance fee revenue
whether or not such amounts have been collected (most hedge funds typically
pay out, or “crystallize,” once a year). Therefore, it is essential to focus on the
cash earnings of alternative managers because performance accruals can
reverse over the course of the year if the fund experiences
underperformance.52 (Carried interest terms and clawbacks are discussed
previously in the Private Equity and Venture Capital section.)
INVESTMENT INCOME
PE managers often invest alongside limited partners and generate principal
gains (or losses) from investments in funds.

It’s important to note that under US GAAP, financial statements for

alternative managers (and many traditional managers) contain the results of
funds and other private investment vehicles (typically PE funds and
structured vehicles) that are required to be consolidated because of related
party and control issues. The inclusion of the consolidated funds distorts the
true underlying operating performance of the asset manager.53 Asset
managers provide a wide variety of non-GAAP reporting and metrics to assist
in the evaluation of the underlying operations, but these non-GAAP measures
can vary widely.
ADMINISTRATIVE REVENUE
A number of operational and shareholder-related services, such as fund
accounting, fund administration, and transfer agency (shareholder call
centers), are often provided by asset managers in-house and can represent a
material source of earnings. Revenue derived from these services is often tied
to a percentage of AUM or to transaction volume.
BUSINESS METRICS
Asset manager success is usually defined by a common set of metrics,
including investment performance, distribution prowess, and brand strength.
Achieving success across these metrics is key to increasing AUM. However,
general capital market risk represents a significant variable outside the
control of asset managers. To help mitigate market risk, many asset managers
pursue a strategy of diversifying their overall asset mix to achieve a balance
of equity and fixed-income assets across geographies. Moreover, many asset
managers aim to diversify their underlying client bases among retail and
institutional investors. Increasingly, pursuing a global client base represents a
core strategic goal of large US asset managers.
ASSETS UNDER MANAGEMENT
Numerous regulatory definitions of AUM exist; however, the term generally
refers to the fair market value of assets subject to the firm’s discretion and
management fees. AUM is the most widely used metric to discern the size
and scale of an asset manager; additional metrics include general market
movements, net client flows (gross sales less gross redemptions), currency
movements, and acquisition activity. Table 28 shows changes in
BlackRock’s AUM over the five years ending with 2013.
 TABLE 28. BLACKROCK AUM,
COMPONENT CHANGES BY
PRODUCT TYPE
($ MILLIONS)

Component Changes in AUM by Product Type, Five Years Ended

December 2013
Acquired
31 Dec Net New AUM Market/Foreign
2008 Business Net Exchange
Equity $203,292 $260,503 $1,061,801 $792,099 $2,317,695
Fixed 481,365 17,779 502,988 240,054 1,242,186
income
Multi-asset 77,516 139,077 45,907 78,714 341,214
Alternatives 61,544 (19,722) 68,351 941 111,114
Long term 823,717 397,637 1,679,047 1,111,808 4,012,209
Cash 338,439 (118,341) 53,616 1,840 275,554
management
Advisory 144,995 (112,263) (10) 3,603
Total $1,307,151 $167,033 $1,732,653 $1,117,251 $4,324,088

Source: BlackRock, “2013 Annual Report” (www.blackrock.com/corporate/en-us/investor-

relations; retrieved 28 December 2014).

However, not all AUM are created equal. Generally, AUM sourced from
institutions are considered “stickier” because the frictional costs to clients of
switching separately managed account mandates are higher than those for
retail investors trading out of collective investment vehicles with daily
subscription/redemption features. Additionally, institutional investors often
pursue a lengthy committee approach to making asset manager hiring and
firing decisions.

Understanding an asset manager’s asset class mix is essential. Diversifying

an asset mix across the capital spectrum generally helps to reduce revenue
volatility caused by market movements. Also, asset managers with deep
product offerings can shift their sales and marketing resources to products
currently in favor in an effort to generate organic growth and offset
redemptions from out-of-favor asset classes. In today’s low-rate environment,
asset managers with significant money market fund assets have suffered
because they have been waiving management fees to support a stable $1 per
share NAV.

Assessing a manager’s weighted fee rate trends (Investment management fee

revenue/Average AUM) alerts an analyst to shifts in a manager’s underlying
asset base and is especially useful on a time-series basis. This metric can be
influenced by capital market trends and/or organic flow (both sales and
redemptions). It is important to examine average AUM at a point in time
because period-ending AUM can present a mismatch between AUM and
earnings.
MARKET APPRECIATION/DEPRECIATION
Capital market movements substantially influence a firm’s AUM, and
understanding a manager’s underlying asset class exposure is essential.
Market movements can have a material impact on an asset manager’s AUM
and thus its revenue. However, given the tendency of capital markets to
achieve positive returns over time, asset managers generally benefit from the
tailwind of positive long-term market movements.
SALES AND REDEMPTIONS
Gross sales and redemptions measure the inflow and outflow, respectively, of
client assets to and from an asset manager’s investment strategies. The net
effect of sales and redemptions is a number referred to as “net inflows” when
positive and “net outflows” when negative. Growth from net inflows is
described as “organic growth,” and it is often divided by the beginning period
AUM to calculate an organic growth rate. A firm with $100 billion in AUM
as of year-end 2013 that saw $5 billion in net sales in the first quarter of 2014
would have achieved a 20% annualized organic growth rate.
REDEMPTION RATE
Retention of client assets is critical to an asset manager’s profitability, given
that many asset managers pay their distribution staff upfront commissions
based on gross sales. The redemption rate seeks to measure the “stickiness”
of AUM by dividing current period sales by prior period-ending AUM. For
example, if a manager’s 2012 year-end AUM was $9 billion and 2013
redemptions through 30 June were $3 billion, the redemption rate would be
calculated as $3 billion/$9 billion, or 33%, implying that assets were turning
over every three years (average AUM over the designated period can be used
as well). Unlike open-end funds, CEFs (e.g., PE structures) typically do not
permit redemptions of capital prior to the end of a fund’s specified term.
INVESTMENT PERFORMANCE
It is often noted that the asset management business is a “relative game”
because asset managers are judged by their performance relative to their
benchmarks and their peers. To determine the breadth of value (i.e., alpha)
that asset managers are adding, analysts often calculate and compare the
percentage of investment strategies that are outperforming their respective
benchmarks and peers (via category rankings). Investors and consultants
typically analyze over multiple time periods, with longer time periods
(generally 3–5 years and 10 years) receiving the most attention. In addition,
rolling investment returns over multiple market cycles should be examined to
determine the consistency of returns over time and to mitigate the risk of
endpoint biases.

Morningstar ratings are a highly influential performance metric within the US

mutual fund industry and should be closely followed by traditional asset
managers who have significant mutual fund assets. The ratings, which range
from one (worst) to five (best) stars, are based on a risk-adjusted return
measure that rewards funds for consistent performance with less relative
downside volatility. The top 10% of funds in each Morningstar category
receive five stars; the next 22.5% receive four stars; the next 35%, three stars;
the next 22.5%, two stars; and the bottom 10%, one star. Four- and five-star-
rated mutual funds have historically captured the vast share of industry net
flows despite the questionable predictive power of the ratings.54
(Performance is further discussed in the Major Risks section.)
INVESTMENT CAPACITY
In smaller asset class segments, asset managers are constrained in their ability
to grow assets under management indefinitely in certain strategies (e.g.,
small-cap stocks) because of the inverse relationship that often exists between
AUM and investment performance.

Capacity limits, therefore, can act as a governor on revenue potential; as

assets approach capacity thresholds, asset managers refuse new accounts to
limit AUM growth. Understanding an asset manager’s capacity limits is
crucial in determining forward earnings, and these limits will often prompt
asset managers to deploy capital to develop new capabilities, either
organically or through acquisitions. (See Table 29 for recent merger and
acquisition statistics.)
 TABLE 29. GLOBAL MERGER AND
ACQUISITION ACTIVITY
($ BILLIONS)

US Based Ex-United States

Aggregate Aggregate
Transaction Number of Transaction Number of
Value Transactions Value Transactions
2010 $4.8 84 $13.4 96
2011 5.4 88 11.9 93
2012 7.7 88 11.2 91
2013 5.6 78 16.6 110

Source: John H. Temple, David W. Abbott, and Richard H. Haywood, Jr., “The Cambridge
Commentary: A Review of Developments in the Investment Management Industry during 2013,”
Cambridge International Partners (January 2014): www.cambintl.com/Customer-
Content/WWW/CMS/files/Cambridge_Commentary_2013.pdf.
NOTES
51Preqin, “Hedge Funds: The Fee Debate; An End to ‘2 & 20’?,” Preqin Research Report (April 2010):
www.preqin.com/docs/reports/Preqin_HF_T&C_april_2010.pdf.

52In the United States, alternative asset managers don’t incur negative realized performance fees. Their
performance fees are asymmetrical and can be either zero or positive. However, within the US mutual
fund space, performance fees must be structured symmetrically. It is essential to closely follow
accounting guidelines regarding the recognition of performance fees and carried interest revenue
because these guidelines continue to evolve across jurisdictions.

53A valuable discussion on the fundamentals of PE financials is provided in the Carlyle Group’s
publication “Understanding Carlyle’s Financial Statements” (April 2012):
http://files.shareholder.com/downloads/AMDA-UYH8V/0x0x578284/78a9d61e-4760-4c5e-
80df-0aa883f15c4d/2012_Carlyle%20Financial%20Statements.pdf.

54Christopher B. Philips and Francis M. Kinniry, Jr., “Mutual Fund Ratings and Future Performance,”
Vanguard Group (June 2010): www.vanguard.com/pdf/icrwmf.pdf.
 VALUATION METRICS

Valuation of asset managers typically involves discounted cash flow (DCF)

analysis combined with the use of market multiples. DCF models rely on a
number of key assumptions, including the following:

Market returns

Net flows (gross sales minus gross redemptions) and fundraising efforts

Operating margins

Investment fee rates (Revenue/Average AUM)

Market multiples

Net share buybacks

Recurring versus performance fees

Cash versus accrued earnings (cash earnings are critical for alternative
managers)

Stage of capital market cycle and PE cycle (diversity of funds in

different stages of fundraising, investing, and exiting)

When using market-based metrics, it is important to note that the publicly

traded investment management universe is limited to approximately two
dozen firms and most public managers fall within the “traditional”
categorization, earning most of their revenue from management fees. Because
management fee revenues are “recurring” and more predictable, the market
tends to place a higher multiple on earnings from traditional asset managers
relative to alternative managers, which tend to rely on lumpy performance fee
revenue. In addition, many alternative managers in the United States are
structured as partnerships, as opposed to corporations, and thus have
favorable tax treatment. Some analysts view this structure as untenable and
conservatively input full tax rates in their models. (Table 30 presents
valuation metrics for a number of asset managers.)
TABLE 30. ASSET MANAGERS BY
GEOGRAPHY, VALUATION METRICS

Market Capitalization Enterprise Value/LTM

($ billions) EBITDA
Mar/13 Dec/13 Mar/14 Mar/13 Dec/13 Mar/14
United States
Affiliated $8.3 $11.5 $10.7 14.6 14.6 12.1
Managers
Group
Apollo 2.9 4.5 4.7 NA NA NA
Global
Management
BlackRock 44.0 53.6 53.1 12.4 13.6 12.9
Calamos 0.2 0.2 0.3 0.8 1.1 1.3
Asset
Management
The Carlyle 1.3 1.8 2.2 16.6 19.3 15.8
Group
Cohen & 1.6 1.8 1.8 13.9 13.9 14.6
Steers
Diamond Hill 0.3 0.4 0.4 9.8 12.8 11.5
Investment
Group
Eaton Vance 5.0 5.2 4.7 12.9 11.5 10.2
Federated 2.5 3.0 3.2 8.4 10.8 12.2
Investors
Fortress 1.4 2.1 1.5 8.1 5.8 3.7
Investment
Group
Franklin 32.1 36.4 34.2 10.6 10.4 9.1
Resources
GAMCO 1.4 2.3 2.0 10.1 15.3 12.6
Investors
Invesco 12.8 16.1 16.0 16.2 16.3 15.9
Janus Capital 1.7 2.3 2.1 6.5 7.9 6.9
Group
KKR & Co. 5.0 7.0 6.9 NA NA NA
Legg Mason 4.1 5.2 5.8 10.8 11.4 11.9
Manning & 0.2 0.2 0.2 0.3 0.4 0.4
Napier
Oaktree 1.5 2.3 2.5 NM NM NM
Capital
Management
Och-Ziff 1.4 2.4 2.3 5.5 5.4 6.6
Capital
Management
Group
SEI 5.0 5.9 5.7 13.6 14.6 13.2
Investments
Company
T. Rowe 19.2 21.9 21.6 12.6 12.2 11.7
Price
The 11.0 17.8 21.8 NA NA NA
Blackstone
Group
Virtus 1.5 1.8 1.6 19.9 13.8 9.8
Investment
Partners
Waddell & 3.7 5.6 6.2 10.6 13.6 14.2
Reed
Westwood 0.4 0.5 0.5 14.1 17.0 15.2
Holdings
Group
Subgroup $6.7 $8.5 $8.5 10.9 11.5 10.6
average
Australia
Argo $4.3 $4.2 $4.4 22.4 25.1 23.1
Investments
Limited
Australian 5.9 5.8 5.8 23.6 26.2 24.5
Foundation
Investment
Company
BKI 0.7 0.7 0.8 20.3 25.4 23.0
Investment
Company
Limited
BT 0.8 1.3 1.7 16.6 16.1 20.4
Investment
Management
Limited
Magellan 1.1 1.5 2.0 NM 17.4 17.4
Financial
Group
Milton 2.4 2.4 2.5 19.5 21.6 20.7
Corporation
Limited
Platinum 3.0 3.6 4.0 14.5 18.9 16.2
Investment
Management
Limited
Subgroup $2.6 $2.8 $3.0 19.5 21.5 20.8
average
Canada
AGF $0.9 $1.1 $1.0 7.8 9.9 11.3
Management
Limited
Brookfield 22.8 23.9 25.1 16.1 13.3 13.4
Asset
Management
CI Financial 7.8 9.5 9.0 15.7 17.8 16.7
Fiera Capital 0.6 0.9 0.9 21.3 25.7 20.2
Gluskin 0.5 0.7 0.8 8.3 9.8 6.6
Sheff +
Associates
Sprotte 0.6 0.6 0.8 10.9 26.8 NM
Subgroup $5.5 $6.1 $6.3 13.4 17.2 13.6
average
Hong Kong
Value $1.1 $1.4 $1.1 NM NM 14.6
Partners
Group
Japan
SPARX $0.4 $0.6 $0.4 NM NM 16.7
Group
Company
United
Kingdom
Aberdeen $7.5 $9.5 $7.5 13.0 10.7 8.1
Asset
Management
Alliance 3.7 4.2 4.3 7.6 4.9 5.0
Trust
Ashmore 3.6 4.5 3.7 8.3 9.0 7.5
Group
Caledonia 1.6 1.7 1.8 9.4 5.5 5.6
Investments
Henderson 2.5 4.0 4.7 10.2 13.3 15.1
Group
Jupiter Fund 2.0 2.8 3.2 10.0 11.1 11.8
Management
RIT Capital 2.9 3.2 3.5 NM NA 6.6
Partners
Schroders 8.4 11.2 11.3 5.2 8.6 6.6
Subgroup $4.0 $5.1 $5.0 9.1 9.0 8.3
average
Switzerland
GAM $2.8 $3.2 $2.9 9.5 8.4 7.8
Holding
Partners 6.3 6.9 7.2 21.1 22.7 22.4
Group
Holding
Subgroup $4.6 $5.1 $5.1 15.3 15.6 15.1
average
South Africa
Coronation $1.8 $2.7 $3.3 16.5 13.9 17.3
Fund
Managers
Limited
Singapore
ARA Asset $1.2 $1.2 $1.2 15.5 17.8 16.1
Management
Limited
CitySpring 0.6 0.6 0.6 12.4 13.4 14.3
Infrastructure
Trust
Subgroup $0.9 $0.9 $0.9 14.0 15.6 15.2
 average
South
America
Tarpon $0.3 $0.3 $0.3 12.0 12.0 6.6
Investimentos
Average $5.0 $6.1 $6.1 12.5 13.7 12.5
Median $2.4 $2.8 $3.2 12.4 13.5 12.8

Notes: All dates are as of end of month. LTM = last 12 months. NM = not meaningful. NA = not
available.
MAJOR RISKS
CAPITAL MARKETS
The fluctuations in global fixed-income and equity markets serve as a
constant influence on asset manager earnings. Although financial markets
have generally trended higher over multidecade periods, severe market
dislocations can have a dramatic impact on the ability of an asset manager to
generate sufficient revenue to cover its costs. To smooth revenue volatility,
publicly traded asset managers tend to strive for (1) a balance of equities and
fixed income in their product offerings and (2) a broad geographical base of
clients and capital market exposures.

With regard to PE managers, adverse capital market conditions can have an

especially acute impact on buyout funds as the ability to raise financing
(primarily in the high-yield bond and bank loan markets) diminishes and the
time to exit via IPO is reduced.
INVESTMENT PERFORMANCE
Managers offering actively managed investment strategies are subject to the
risk of underperforming (1) predetermined investment benchmarks and (2)
peers offering similarly managed strategies. Underperformance is routinely
measured in pure absolute terms but is increasingly looked at in risk-adjusted
terms as well (return per unit of risk, derived from either the Sharpe or
information ratio).

Analysts should focus closely on the performance of a firm’s largest

“flagship” offerings and be aware of the skew these products can introduce in
firmwide asset-weighted performance metrics. It is not uncommon for an
asset manager to rely heavily on one to three mainstay products to generate a
significant portion of its revenue. Analysts should also examine performance
at the individual product level to determine the breadth of outperformance
and a manager’s ability to offer a full range of attractive strategies across
investment disciplines.

Table 31 presents data from Janus Capital Group’s 2013 annual report,
providing an aggregate view of the firm’s investment performance versus its
peers (Morningstar quartiles) and benchmarks.
 TABLE 31. INVESTMENT
PERFORMANCE SUMMARY: PERIOD
ENDING 31 DECEMBER 2013

1 Year 3 Year 5 Year

Percentage of assets in top two Morningstar quartiles
Complex-wide mutual fund assets 46% 46% 53%
Fundamental equity mutual fund assets 38 39 54
Fixed-income mutual fund assets 100 100 53
Percentage of strategies that outperformed respective benchmarks
Mathematical equity strategies 59% 79% 42%
Percentage of complex-wide mutual funds with four- or five-star overall
Morningstar rating
Complex-wide mutual funds 56%

Source: Janus Capital Group, “Annual Report 2013” (http://ir.janus.com/docs.aspx?iid=4050265).

OPERATIONAL RISK
Technology has served as a key factor in connecting and driving efficiencies
within and across global financial markets. Asset managers rely on
technology to conduct research, run automated trading platforms, construct
portfolios, account for portfolio securities, model risk, compute performance,
allocate trades across accounts, and perform other key activities. Any system
disruptions or failures represent the potential for serious reputational and
regulatory risk. To mitigate such risk, asset managers often rely on large
internal operational and technology teams or on third-party specialist
vendors. In addition, many asset managers attempt to reduce technology-
related risk by building elaborate disaster recovery plans and redundant
systems.
HUMAN CAPITAL/KEY MAN RISK
Portfolio managers or other key investment personnel who serve as the public
face of a successful investment strategy can often take on celebrity status
among the investing public. The loss of key investment personnel who are
perceived as critical components of a successful investment strategy can lead
to accelerated and significant withdrawals of client assets, with a resulting
reduction in asset management revenues. Following the departure of chief
investment officer David Iben from Tradewinds Global Investors (a Nuveen
Investments affiliate), the firm’s AUM declined from $38 billion to $10.3
billion in a matter of 10 months.55

Equity incentives and deferred compensation packages are most often used to
attract and retain key investment professionals. Moreover, the use of portfolio
management teams, with multiple portfolio managers being named on a
single portfolio, often serves to mitigate the risk of a departure.
COUNTERPARTY RISK
Asset management firms interact with a number of counterparties (e.g.,
brokerages, prime brokerages, custodians) to trade and settle securities and
derivatives contracts. Understanding the risks that counterparties pose,
especially in the wake of the 2008 financial crisis, is a critical function
involving the successful coordination of a multitude of internal departments.
Typically, asset managers monitor counterparties based on a number of
factors, including creditworthiness, trading capacity, concentration exposure,
and regulatory oversight. These factors, among others, are monitored
continuously in the measuring and selecting of counterparties.

Although asset managers clearly face a number of key risks, the 2008
financial crisis spawned questions from regulators about the risks posed by
asset managers themselves to the financial markets. An asset manager’s
clients are the legal owners of the assets held in SMAs, and CIV investors
own an undivided share of the underlying assets of a fund. Accordingly, asset
managers are typically acting in an agency role and thus have largely escaped
the new regulations imposed on other financial institutions, such as banks.
According to Andrew Haldane, executive director for financial stability at the
Bank of England, “As an agency function, asset managers do not bear credit,
market and liquidity risk on their portfolios.… Fluctuations in asset values do
not threaten the insolvency of an asset manager as they would a bank. Asset
managers are, to a large extent, insolvency-remote.”56
NOTES
55Randy Diamond, “Tradewinds’ AUM Falls 72% in 10 Months,” Pensions & Investments (24
December 2012): www.pionline.com/article/20121224/PRINT/312249988/tradewinds-aum-falls-
72-in-10-months.

56Andrew G. Haldane, “The Age of Asset Management?” Speech given at London Business School (4
April 2014):
www.bankofengland.co.uk/publications/Documents/speeches/2014/speech723.pdf.
APPENDIX A. DATA
TABLE A1. TOTAL NET ASSETS,
NUMBER OF FUNDS, NUMBER OF
SHARE CLASSES, AND NUMBER OF
SHAREHOLDER ACCOUNTS OF THE
MUTUAL FUND INDUSTRY
(AS OF YEAR-END)

Total
Net
Assets Number of
($ Number Share Number of Shareholder
Year billions) of Funds Classes Accountsa (thousands)
1940 $0.45 68 — 296
1945 1.28 73 — 498
1950 2.53 98 — 939
1955 7.84 125 — 2,085
1960 17.03 161 — 4,898
1965 35.22 170 — 6,709
1970 47.62 361 — 10,690
1975 45.87 426 — 9,876
1976 51.28 452 — 9,060
1977 48.94 477 — 8,693
1978 55.84 505 — 8,658
1979 94.51 526 — 9,790
1980 134.76 564 — 12,088
1981 241.37 665 — 17,499
1982 296.68 857 — 21,448
1983 292.99 1,026 — 24,605
1984 370.68 1,243 1,243 27,636
1985 495.39 1,528 1,528 34,098
1986 715.67 1,835 1,835 45,374
1987 769.17 2,312 2,312 53,717
1988 809.37 2,737 2,737 54,056
1989 980.67 2,935 2,935 57,560
1990 1,065.19 3,079 3,177 61,948
1991 1,393.19 3,403 3,587 68,332
1992 1,642.54 3,824 4,208 79,931
1993 2,069.96 4,534 5,562 94,015
1994 2,155.32 5,325 7,697 114,383
1995 2,811.29 5,725 9,007 131,219
1996 3,525.80 6,248 10,352 149,933
1997 4,468.20 6,684 12,002 170,299
1998 5,525.21 7,314 13,720 194,029
1999 6,846.34 7,791 15,262 226,212
2000 6,964.63 8,155 16,738 244,705
2001 6,974.91 8,305 18,022 248,701
2002 6,383.48 8,243 18,983 251,123
2003 7,402.42 8,125 19,317 260,698
2004 8,095.45 8,042 20,035 269,468
2005 8,891.11 7,974 20,548 275,479
2006 10,397.88 8,117 21,249 288,594
2007 11,999.73 8,023 21,610 292,553
2008 9,602.57 8,019 22,232 264,597
 2009 11,112.67 7,659 21,661 269,449
2010 11,831.33 7,548 21,907 291,299
2011 11,626.49 7,580 22,249 272,628
2012 13,043.67 7,582 22,605 257,074
2013 15,017.68 7,707 23,353 264,848

Notes: Data tables are from Investment Company Institute, 2014 Investment Company Fact Book. Data
for funds that invest primarily in other mutual funds were excluded from the series.

aNumber of shareholder accounts includes a mix of individual and omnibus accounts.

TABLE A2. TOTAL NET ASSETS OF
THE MUTUAL FUND INDUSTRY BY
COMPOSITE INVESTMENT
OBJECTIVE
($ BILLIONS, AS OF YEAR-END)

Equity Funds
Capital Total Hybrid Investment
Year Appreciation World Return Funds Grade
2000 $1,433.95 $564.75 $1,936.21 $360.92 $245.69
2001 1,105.24 444.47 1,843.26 358.03 311.29
2002 765.54 369.37 1,508.38 335.28 406.26
2003 1,041.14 535.05 2,078.67 447.55 473.95
2004 1,148.56 716.20 2,479.30 552.01 518.25
2005 1,232.82 955.73 2,698.11 621.34 570.10
2006 1,319.36 1,360.45 3,153.76 731.36 640.32
2007 1,419.59 1,718.57 3,275.73 821.28 760.36
2008 808.68 898.60 1,930.43 562.05 736.42
2009 1,085.71 1,307.98 2,479.23 717.78 1,050.05
2010 1,248.18 1,540.98 2,807.67 842.04 1,241.30
2011 1,178.82 1,355.34 2,679.63 882.98 1,364.79
2012 1,319.91 1,611.59 3,008.59 1,030.82 1,571.62
2013 1,725.21 2,034.17 4,004.48 1,270.20 1,450.83
Note: Data for funds that invest primarily in other mutual funds were excluded from the series.
TABLE A3. NET NEW CASH FLOWA
OF LONG-TERM MUTUAL FUNDS
($ MILLIONS)

Year Total Equity Funds Hybrid Funds Bond Funds

1984 $19,194 $4,336 $1,801 $13,058
1985 73,490 6,643 3,720 63,127
1986 129,991 20,386 6,988 102,618
1987 29,776 19,231 3,748 6,797
1988 –23,119 –14,948 –3,684 –4,488
1989 8,731 6,774 3,183 –1,226
1990 21,211 12,915 1,483 6,813
1991 106,213 39,888 7,089 59,236
1992 171,696 78,983 21,833 70,881
1993 242,049 127,261 44,229 70,559
1994 75,160 114,525 23,105 –62,470
1995 122,208 124,392 3,899 –6,082
1996 231,874 216,937 12,177 2,760
1997 272,030 227,107 16,499 28,424
1998 241,796 156,875 10,311 74,610
1999 169,780 187,565 –13,705 –4,080
2000 228,874 315,742 –36,722 –50,146
2001 129,188 33,633 7,285 88,269
2002 120,583 –29,048 8,043 141,587
 2003 215,843 144,416 39,066 32,360
2004 209,851 171,831 53,082 –15,062
2005 192,086 123,718 42,841 25,527
2006 227,103 147,548 19,870 59,685
2007 224,254 73,035 40,330 110,889
2008 –224,997 –229,576 –25,652 30,232
2009 389,155 –2,019 19,888 371,285
2010 241,271 –24,477 35,256 230,492
2011 25,846 –129,024 39,763 115,107
2012 195,922 –152,234 46,531 301,624
2013 151,835 159,784 72,514 –80,463

Notes: Data for funds that invest primarily in other mutual funds were excluded from the series.
Components many not add to the total because of rounding.

aNet new cash flow is the dollar value of new sales minus redemptions combined with net exchanges.
TABLE A4. WORLDWIDE TOTAL
NET ASSETS OF MUTUAL FUNDS
($ MILLIONS, AS OF YEAR-END)

2008 2009 2010 2011

World $18,918,982 $22,945,327 $24,709,854 $23,795,808 $26,835,850
Americas $10,580,914 $12,578,297 $13,597,527 $13,529,258 $15,138,443
Argentina 3,867 4,470 5,179 6,808
Brazil 479,321 783,970 980,448 1,008,928
Canada 416,031 565,156 636,947 753,606
Chile 17,587 34,227 38,243 33,425
Costa Rica 1,098 1,309 1,470 1,266
Mexico 60,435 70,659 98,094 92,743
Trinidad and N/A 5,832 5,812 5,989
Tobago
United States 9,602,574 11,112,674 11,831,334 11,626,493 13,043,666
Europe $6,231,115 $7,545,535 $7,903,389 $7,220,298 $8,230,059
Austria 93,269 99,628 94,670 81,038
Belgium 105,057 106,721 96,288 81,505
Bulgaria 226 256 302 291
Czech 5,260 5,436 5,508 4,445
Republic
Denmark 65,182 83,024 89,800 84,891
Finland 48,750 66,131 71,210 62,193
France 1,591,082 1,805,641 1,617,176 1,382,068
Germany 237,986 317,543 333,713 293,011
Greece 12,189 12,434 8,627 5,213
Hungary 9,188 11,052 11,532 7,193
Ireland 720,486 860,515 1,014,104 1,061,051
Italy 263,588 279,474 234,313 180,754
Liechtenstein 20,489 30,329 35,387 32,606
Luxembourg 1,860,763 2,293,973 2,512,874 2,277,465
Malta N/A N/A N/A 2,132
Netherlands 77,379 95,512 85,924 69,156
Norway 41,157 71,170 84,505 79,999
Poland 17,782 23,025 25,595 18,463
Portugal 13,572 15,808 11,004 7,321
Romania 326 1,134 1,713 2,388
Russia 2,026 3,182 3,917 3,072
Slovakia 3,841 4,222 4,349 3,191
Slovenia 2,067 2,610 2,663 2,279
Spain 270,983 269,611 216,915 195,220
Sweden 113,331 170,277 205,449 179,707
Switzerland 135,052 168,260 261,893 273,061
Turkey 15,404 19,426 19,545 14,048
United 504,681 729,141 854,413 816,537
Kingdom
Asia Pacific $2,037,536 $2,715,234 $3,067,323 $2,921,276 $3,322,198
Australia 841,133 1,198,838 1,455,850 1,440,128
China 276,303 381,207 364,985 339,037
Hong Kong N/A N/A N/A N/A
India 62,805 130,284 111,421 87,519
Japan 575,327 660,666 785,504 745,383
South Korea 221,992 264,573 266,495 226,716
 New Zealand 10,612 17,657 19,562 23,709
Pakistan 1,985 2,224 2,290 2,984
Philippines 1,263 1,488 2,184 2,363
Taiwan 46,116 58,297 59,032 53,437
Africa $69,417 $106,261 $141,615 $124,976
South Africa 69,417 106,261 141,615 124,976

Notes: N/A = not available. Funds of funds are not included except for France, Italy, and Luxembourg.
Data include home-domiciled funds, except for Hong Kong, South Korea, and New Zealand, which
include home- and foreign-domiciled funds. Components may not add to the total because of rounding.
TABLE A5. EXCHANGE-TRADED
FUNDS: TOTAL NET ASSETS BY
TYPE OF FUND
($ MILLIONS, AS OF YEAR-END)

Investment Objective
Equity
Domestic Equity

Broad Global/
Year Total Based Sectora International Commoditiesb Hybrid
1993 $464 $464 — — —
1994 424 424 — — —
1995 1,052 1,052 — — —
1996 2,411 2,159 — $252 —
1997 6,707 6,200 — 506 —
1998 15,568 14,058 $484 1,026 —
1999 33,873 29,374 2,507 1,992 —
2000 65,585 60,529 3,015 2,041 —
2001 82,993 74,752 5,224 3,016 —
2002 102,143 86,985 5,919 5,324 —
2003 150,983 120,430 11,901 13,984 —
2004 227,540 163,730 20,315 33,644 $1,335
 2005 300,820 186,832 28,975 65,210 4,798
2006 422,550 232,487 43,655 111,194 14,699
2007 608,422 300,930 64,117 179,702 28,906
2008 531,288 266,161 58,374 113,684 35,728
2009 777,128 304,044 82,053 209,315 74,528
2010 991,989 372,377 103,807 276,622 101,081
2011 1,048,134 400,696 108,548 245,114 109,176
2012 1,337,112 509,338 135,378 328,521 120,019
2013 1,674,616 761,701 202,706 398,834 64,044

Note: Components may not add to the total because of rounding.

aThis category includes funds both registered and not registered under the Investment Company Act of
1940.

bThis category includes funds—both registered and not registered under the Investment Company Act
of 1940—that invest primarily in commodities, currencies, and futures.

cThe funds in this category are not registered under the Investment Company Act of 1940.

dData for ETFs that invest primarily in other ETFs were excluded from the totals.
TABLE A6. EXCHANGE-TRADED
FUNDS: NET ISSUANCE BY TYPE OF
FUND
($ MILLIONS)

Investment Objective
Equity
Domestic Equity
Broad Global/
Year Total Based Sectora International Commoditiesb Hybrid
1993 $442 $442 — — — —
1994 –28 –28 — — — —
1995 443 443 — — — —
1996 1,108 842 — $266 — —
1997 3,466 3,160 — 306 — —
1998 6,195 5,158 $484 553 — —
1999 11,929 10,221 1,596 112 — —
2000 42,508 40,591 1,033 884 — —
2001 31,012 26,911 2,735 1,366 — —
2002 45,302 35,477 2,304 3,792 — —
2003 15,810 5,737 3,587 5,764 — —
2004 56,375 29,084 6,514 15,645 $1,353 —
2005 56,729 16,941 6,719 23,455 2,859 —
2006 73,995 21,589 9,780 28,423 8,475 —
 2007 150,617 61,152 18,122 48,842 9,062 $122
2008 177,220 88,105 30,296 25,243 10,567 58
2009 116,469 –11,842 14,329 39,599 28,410 15
2010 117,982 28,317 10,187 41,527 8,155 144
2011 117,642 34,653 9,682 24,250 2,940 72
2012 185,394 57,739 14,307 51,896 8,892 246
2013 179,885 99,470 34,434 62,807 –29,870 849

Note: Components may not add to the total because of rounding.

aThis category includes funds both registered and not registered under the Investment Company Act of
1940.

bThis category includes funds—both registered and not registered under the Investment Company Act
of 1940—that invest primarily in commodities, currencies, and futures.

cThe funds in this category are not registered under the Investment Company Act of 1940.

dData for ETFs that invest primarily in other ETFs were excluded from the totals.
INDUSTRY RESOURCES
REGULATORY AGENCIES
Commission de Surveillance du Secteur Financier (Luxembourg)

www.cssf.lu/en

European Commission, UCITS

http://ec.europa.eu/internal_market/investment/index_en.htm

Financial Stability Oversight Council: Established under the Dodd–

Frank Wall Street Reform and Consumer Protection Act to provide
broad oversight of the US financial system

www.treasury.gov/initiatives/fsoc/pages/home.aspx

Financial Industry Regulatory Authority (FINRA)

1735 K Street Northwest

Washington, DC 20006

FINRA Call Center: +1 (301) 590-6500

www.finra.org

Securities and Exchange Commission (United States)

100 F Street Northeast

Washington, DC 20549

+1 (202) 942-8088

www.sec.gov
 Mutual Fund Search

www.sec.gov/edgar/searchedgar/mutualsearch.htm

Division of Investment Management

www.sec.gov/investment#.U53Q7_ldWSo

Investment Adviser Search

www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.
aspx

US Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st Street Northwest

Washington, DC 20581

+1 (202) 418-5000

www.cftc.gov
ASSET MANAGEMENT INDUSTRY
Casey Quirk: Dedicated asset management business strategy and
research consultant

www.caseyquirk.com

Cerulli Associates: Global asset management data aggregator and

researcher

www.cerulli.com

European Fund and Asset Management Association (EFAMA):

European investment industry association

www.efama.org

FUSE Research Network: Asset management researcher and

consultant focused on the US retail market

www.fuse-research.com

Greenwich Associates: Financial services research and consulting firm

with deep institutional asset management expertise

www.greenwich.com

Heidrick & Struggles: Asset management recruiting firm; industry

compensation surveys

www.heidrick.com

International Investment Funds Association (IIFA)

www.iifa.ca
Investment Company Institute (ICI): Retail industry trade group;
conducts comprehensive US investment industry research; excellent data
source

www.ici.org

McLagan: Industry compensation benchmarking and metrics

www.mclagan.com/asset_management

Sheffield Haworth: Global executive search; industry research

www.sheffieldhaworth.com

Strategic Insight: Research and data provider focused on the retail

industry

www.sionline.com
ASSET MANAGEMENT INDUSTRY NEWS
Citywire: Global mutual fund news and performance

http://citywireglobal.com

FundFire: Institutional asset management news and information

www.fundfire.com

Ignites: Retail asset management news

www.ignites.com

InvestmentWires: Retail- and retirement-related news

http://investmentwires.com

InvestmentNews: News and analysis relevant to US financial advisers

www.investmentnews.com
CLOSED-END FUNDS
Closed-End Fund Association

www.cefa.com
EXCHANGE-TRADED FUNDS
ETF.com: ETF-dedicated news, research, and data

www.ETF.com

ETFGI: Global ETF industry research

www.etfgi.com

ICI Exchange-Traded Funds Resource Center

www.ici.org/etf_resources

Morningstar: Performance and investment research data

www.morningstar.com
INVESTMENT PRODUCT–SPECIFIC NEWS
Pensions & Investments: Institutional asset management news,
research, and analysis

www.pionline.com

Institutional Investor: Global institutional coverage

www.institutionalinvestor.com
ALTERNATIVE INVESTMENTS
BarclayHedge: Alternative investment industry research, rankings,
indexes

www.barclayhedge.com

Greenwich Roundtable: Industry think tank dedicated to alternatives

www.greenwichroundtable.org

Hedge Fund Research (HFR): Industry data and indexes

www.hedgefundresearch.com

PE HUB: Global private equity news

www.pehub.com

Preqin: Data and research on alternatives

www.preqin.com

Venture Capital Journal: Venture capital news and data

http://privatemarkets.thomsonreuters.com/venture-capital-journal

Index Investing

William F. Sharpe, “Indexed Investing: A Prosaic Way to Beat the

Average Investor,” presentation at the Monterey Institute of
International Studies (1 May 2002:
http://web.stanford.edu/~wfsharpe/art/talks/indexed_investing.htm).
Sharpe, professor emeritus of finance at Stanford University, makes the
classic indexing argument.
INVESTMENT DATA AND STRATEGY
ATTRIBUTION
Bloomberg: Global data, analysis, news; investment performance
databases

www.bloomberg.com

eVestment: Institutional separately managed account database

www.evestment.com

FactSet: Holdings-based returns analysis

www.factset.com

PSN: Institutional separately managed account database

www.informais.com/psnenterprise.html

S&P Capital IQ: Global data; financial analytics

www.capitaliq.com

Zephyr: Returns-based investment software

www.styleadvisor.com
SPECIALIST INVESTMENT BANKS
Berkshire Capital

www.berkcap.com/Home.aspx

Cambridge International Partners

www.cambintl.com

Colchester Partners

www.colchesterpartners.com

Freeman & Co.

www.freeman-co.com

Grail Partners

www.grailpartners.com