Managing assets is important

Asset management firms play a crucial role in growing and safeguarding these and other savings and investment "pots".

A great way to get to grips with a complex topic is to break it down into its component parts. The first step towards understanding asset management, therefore, is to define the English words "asset" and "management".

An asset is an item of economic value owned by an individual or company that can be converted to cash. Joe Average's largest asset is usually his house, but Joe's car, -computer, appliances and gold coin collection also qualify.

There are a number of savings and investment products that fit the asset description too. A fixed deposit, an investment in RSA Government Retail Bonds, a unit trust fund, your pension fund or shares that you own in a company (whether listed on the stock exchange or not) are all considered assets in your hands.

 The word "management" is easier to define. Management is the process of dealing with or controlling things or people. A store manager, for example, is responsible for staffing, purchasing and merchandising functions to ensure a pleasurable shopping experience.  

Buying and selling
Armed with an understanding of assets (something of value that you own) and management (the process of controlling things) the definition of asset management is easy.

"Asset management, also referred to as investment management, is the buying and selling of shares, bonds or other financial instruments within a portfolio in order to give an investor a better return than they would get by leaving their money in the bank," says Candice Paine, head of retail at Sanlam Investment Management. defines asset manage-ment as any system that monitors and maintains things of value. The "thing of value" that asset managers monitor and maintain on your behalf is money. Asset managers, or fund managers if you prefer, look after the trillions of rand that you and I have saved through mandatory retirement structures such as employer pension funds and voluntary savings mechanisms such as retirement annuities and unit trust funds.

The bulk of these assets are held in deposit at the country's banking institutions. Midway through 2012 there was some R2 447-billion in deposit accounts nationwide, with households accounting for R461-billion and non-financial secto-r corporations R573-billion. The rest of the cash belongs to -government (national, provincial and local) and government-backed companies.

A further R1 449-billion is held by the life insurance industry in long-term insurance and savings -pro-d–ucts. Finally, according to the Association of Savings and Invest-ments South Africa the assets under management in the Collective Invest–ment Schemes industry, -com–prising 951 unit trust funds, stood at R1 041-billion at June 30 2012.

"Asset managers also look after the savings of medical aid funds, life insurance companies, banks and other institutions," says Mike Ronald, head of the investment team at Marriott Asset Management. The performance of your medical aid scheme and life insurance policy is linked to how good a job the asset management team does with these assets.

Joint power
The cash that you contribute to your pension fund or retirement annuity is pooled with other savers' money to buy various assets in the savings and investment universe. Asset management firms look after these funds and are accountable to the trustees (in the case of pension funds) or to individual retirement annuity holders. They employ asset managers to decide how this capital should be allocated in order to meet their investment objectives.

Likewise, the cash you invest in a unit trust fund is pooled with other investors' money and used to purchase assets in accordance with the funds' rules. Once again fund managers decide how best to apportion these funds to the available asset classes.

The four basic building blocks (asset classes) that asset managers can invest your funds in are cash, bonds, equities (shares) and listed property. You can gain a better understanding of the asset management function by placing the unit trust industry under the spotlight.

A unit trust is an investment product that pools the money of many investors and invests these funds into a portfolio consisting of assets such as JSE-listed shares, government bonds and listed property.

Our first observation is that fund managers do not have carte blanche to do with your money as they please. Each unit trust fund is run according to a fund mandate that spells out its investment objective, fund manager strategy, return history, assets under management and investment fees among others.

The asset manager in charge of your unit trust is thus constrained by the fund mandate as to what asset classes it can invest in. By way of example there are four broad investment strategies listed for domestic unit trust funds, including equity funds, asset allocation funds, real estate funds and fixed interest funds, each with numerous sub-categories.

Your choice
It is you, as investor, who makes the first asset management decision by choosing a unit trust from the available categories and sub-categories. If you think it is as easy as picking a run of the mill equity unit trust fund – think again – because there are nine sub-categories under equities and just as many under each of the other investment categories.

Under the equity heading you could select a unit trust that invests in shares based on sectors of the economy (such as mining and resources funds, industrial funds or financial funds); based on company size (large capitalisation funds and smaller companies funds); or based on investment philosophies (value funds, momentum funds, or growth funds). This complexity is the reason- you are better off taking financial advice before making discretionary- investments.

South African savers tend to be fairly conservative. What this means is they direct their money to unit trusts where the risk is lowest. For this reason R231-billion was tied up in fixed interest (money market) unit trusts midway through this year. More recently the investor bias has swung in favour of asset allocation unit trusts, with R331-billion in assets under management, or 31% of the industry total.

The magic with an asset allocation fund is that it transfers the asset class decision from you to the asset manager. Asset managers buy and sell shares, bonds and listed properties in proportions that ensure their fund meets its risk and return objectives and delivers the investment return you demand.

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