Finance

The asset management industry in the United States developed properly in the 20th century although attempts to manage assets started as early as the 18th century when the US treasury department was established. Many asset management companies proliferated after the first and Second World War which was precipitated by significant fiscal changes especially the establishment of the fiscal operation bureaus in 1919 (US Treasury 1). The primary assets that were initially managed by these companies comprised of pension funds, mutual funds and assets from private banking.

Introduction
Asset management falls under the wide scope of investment management which involves the professional management of various assets such as real estate as well as the management of securities such as shares, hedge funds and bonds.  According to Jacobsen (2005 p. 2) an asset is something with certain value like cash, shares, piece of art or stocks.  The owners of the investments could be institutions such as pension funds, insurance companies, corporations or private investors. Narrowly, asset management is mainly used to refer to the management of collective investments. A collective investment is a way through which individuals invest their money in conjunction with others in a wide range of investments that are practically impossible for an individual investor. The aim of collective investment is primarily the sharing of costs and resultant benefits. Though the meaning of collective investments may vary in definition from region to region, it is normally used to refer to funds such as mutual funds, managed funds or investment funds. When collective investments are done, they normally are specific to regions such as collective investment in Eastern Europe or can be specified towards one line of business such as technology. This study will start by making a schematic presentation of the organization of the asset management industry upon which efforts will be made to make an in depth analysis of the different aspects of the historical and current trends in the asset management industry.

According to Walter (1998), the asset management industry is highly interlinked and can be depicted in an interrelationship as shown in the figure below there exist a significant overlap between mutual funds, private funds and pension funds in terms of contribution regulations and management.

Size of the Industry
The asset management industry has experienced tremendous growth during the last decades of the 20th century and has continued to proliferate in the 21st century. As of 1996, the total global assets under management was estimated at  30 trillion which comprised of  5.3 trillion in mutual funds assets,  8.2T in pension funds assets,  6.4T in fiduciary assets mainly controlled by insurance companies and an estimated  7.5 trillion estimated offshore private client assets. In the last fifteen years, the industry has experienced massive growth in comparison with other financial sectors and has expanded both in volume and also regionally. The conventional assets that are managed by the global fund management decreased from 19 to 61.6 trillion. 24.0 trillion of these were Pension assets while 18.9 and 418.7 trillion were asset investments in mutual funds and insurance funds respectively. Together with alternative funds such as hedge funds, sovereign wealth funds, exchange traded funds and private equity funds and in addition to funds of wealthy individuals, the total estimates of the global fund asset management industry totaled to 90 trillion by the end of financial year 2008, a fall of 17 from 2007. Before the decline experienced in 2008, there had been five years of continued growth in the assets industry which is estimated to have increased by more than double within that period. According to IFSL (2009) some of the factors that could have contributed to the decline in 2008 included decreased inflow of new funds, a fall in equity markets as well as a reduction of investors during the period. In regard to the recent economic meltdown experienced in major economic players especially the US and the UK, IFSL estimates that the effect on funds and assets management was less compared to the effect that the financial crisis produced on the banking sector. However, future predictions are that the economic crisis may produce long term effects on the industry. As of 2008, the US was the biggest source of international assets accounting for over 50 of managed assets in 2008 which was equivalent to over 30 trillion. The UK on the other hand was rated second accounting for approximately 9 of the total global managed assets. The figures below are tables and Ms excel constructs showing the size of the global asset management industry as indicated in the diagrams.

According to the figure above, the global managed assets rose from 41.4 to 76.4 in the period 1999-2007. A decline occurred in 2008 up to 61.6 trillion. The global fund management values shown in figure 1 consist of three main funds namely
Conventional funds-these comprises of pension funds, insurance companies funds and mutual funds which totaled 61.6 trillion by the end of 2008
Alternative funds- comprise of private equity funds, hedge funds and sovereign wealth funds which totaled 8 trillion by the end of 2008.

Private wealth funds-generated 32.8 trillion in 2008 and consists of private equity, private wealth and ETFs.
Asset management is now a global industry which has received a considerable share of interest among major financial strategic groups such as investment banks, commercial and universal banks, insurance companies, trust companies, independent and captive pension fund managers, mutual fund companies and other specialist firms (Walter 4). The entry of these high profile interested groups has been one of the reasons why the industry has grown substantially in the recent times.

Size of the Industry in individual countries
At the end of 2008, the managed assets were as shown in the table below for specific countries.
Table 3 Size of Asset Management industry per country

Main Reasons of Expansion

A number of factors have been identified as being the underlying drivers behind the growth of institutional asset management.

The increased trend towards professional management of assets in the form of unit trusts, mutual funds or other types of investment vehicles. Individuals can easily invest without the worry of losing their investments since the funds managers are committed in providing healthy research and expert advice on the most feasible and promising investment options (Eich 1).

A growing recognition that majority of the government sponsored schemes, most of which were created partially or wholly on a PAYG, pay-as-you-go basis are fast becoming fundamentally untenable and unreliable in the current demographic projections. As such, there has been a shift as individuals look for more tenable solutions that will address the rising numbers of retirees with high likelihood of living longer.

Provision for old age- according to Eich (2008) of Die bank, ongoing demographic changes has resulted to
an increase in interest for the provision of old age resources. Many people are expecting to live much longer due to improved life expectancy. In addition, there has been a decrease in birth rates which in the long run is expected to put a strain on traditional pension schemes offered by insurance companies. As a result, an increasing number of those in employment are being forced to plan for old age provision especially through funded schemes (Eich 1).

Internationalization- asset management is now a global business activity. The presence of professional funds manager who research and identify investment opportunities in different market segments have increased the confidence of private investors to invest in these types of assets. The internalization of asset management business has seen major players partnering with financial service providers such as banks to offer the best investment opportunities for their clients (Walter 4).

Specialization- Over the years, there has been a marked diversification of opportunities for asset investments in different global markets. The combined effect of internalization and increased investment opportunities have led managers to keep on discovering new investment segments. Traditionally, most of these assets were in the form of regional funds, country funds or sector funds but as new segments have risen, new areas of investments such as fiber technology have emerged. To cater for the rise in new segments for investments, professionals specializing in particular types of assets have risen and these are able to maximally pursue profitable investments in their lines of investment. In addition to specialization by the professional asset managers, there has also been an increased trend among investors to be specific about the type of investment they wish to pursue. As such, fund managers are expected by their clients to have thorough knowledge of their areas of specialization to be able to authoritatively gauge yield and risks associated with investing in certain assets (Eich 1).

Displacement of private sector and public pension programs by assets contributed by working individuals and employers due to the pressure demands of evolving demographics and escalation of administrative costs.
An increased shift from the traditional portfolios that have for a long time over weighted domestic financial instrument (especially fixed income securities) for tax, regulatory or institutional reasons towards an increased investment in non-domestic assets classes and equities which have more likelihood of higher returns and also their association with lower inherent risks. The traditional portfolios have for a long term invested highly in diversified areas which has the advantage of diversifying the risks but also have the weakness of investing in financial environments some of which have very little correlations and therefore are unable to maximize profits for the investors.

Nature of the Business Status of the Asset Management Industry in US
In a report compiled in 2006 by Mckinsey and company, the asset management industry had then been rated as performing above average (Mckinsey 3). This was well before the financial crisis that hit major asset market segments in the UK and the US. The asset management industry in the US has the highest ratio of managed funds as a  of GDP when compared with other countries with large asset management industries. In 2008, managed funds in the US were 217 of the countrys GDP as compared by the UKs 204, Netherlands 147 and Switzerland 174 (IFSL 2). The total funds were derived from different sub sectors especially pension funds and funds from the insurance industry.  The total pension fund assets totaled 24.0 trillion. Out of these, more than 50 was derived from the US market, 11 from the UK while Netherlands contributed approximately 3.

Insurance funds by the end of 2008 totaled approximately 18.7 trillion out of which 80 was from long term insurance policies while the remainder was from general policies for instance property, casualty and health insurance.

Mutual funds by the end of 2008 amounted to 18.9 trillion. This represented a 28 decline from the previous year associated to investors switch to cash investments within the period which had been perceived as safer. Generally, the source of global mutual funds originated from the US, holding over half of the global total, followed by UK, France, Australia and Luxembourg. It is important to note that institutions are primarily the primary generator of these funds though there are slight variations depending on countries. For instance, institutions are the primary funds holders while retail investors accounts for more than 50 of the total in France.

In regard to alternative funds, their total by the end of 2008 was approximately 8 trillion. These consisted of private equity funds, hedge funds, sovereign wealth funds and ETFs (exchange Traded Funds).

These funds, as reported by IFS (2009 6) are primarily managed by US and UK owned firms. US firms managed approximately 46 of the funds while the UK managed 12 . Other countries such as Switzerland, Japan, Germany and France firms managed between 6-8 each. Funds managed by the developing countries approximated to around 4.  Of these managers, over 50 are independent managers while the remainders are mainly banks and insurance companies. Generally, the concentration in the asset management industry has grown and stabilized in the period towards and after 2000. For instance, the top twenty fund managers share of the top five hundred assets rose from 30 to 38 from 1997 to 2007.

Recent Developments in the Industry
One of the most significant developments observed in the asset management industry has been the trend towards mergers and acquisitions.  According to IFS (2009), there has been a significant rise in mergers and acquisitions in the asset management industry especially since the beginning of the credit crisis. For instance, the total managed assets that changed hands in 2008 amounted to approximately  1 trillion compared to  300 billion in 2007. This trend is expected to increase in the coming years and more traditional fund managers may be bought by alternative fund managers such as sovereign wealth funds and hedge funds managers. In one of the most significant mergers, Barclays Global Investors accepted a 13.5bn offer from Black Rock in June 2009. The merger represented the second largest deal in asset management and it essentially created the largest global fund manager. Other significant mergers in the industry has been the acquisition of Lehman Brother holdings investment division by MBO which cost 160m, the acquisition by Mitsubishi UFJ financial Group of Aberdeen Asset management which cost 226m and the acquisition by Nippon Life Insurance of Russell Investments which cost approximately 211m (IFSL 1).

Future Prospects of the Industry
According to the economist (February 28, 2008), the fund management industry has its own problems but it also has its own future prospects. The two prospects have been labeled appropriately as the elderly opportunities and the emerging opportunities. In this regard, a notable revolution that has hit the fund market has been the globalization of the fund market. The capital markets have today turned completely global. A characteristic boost to the global fund management has been the sale of BRIC countries funds to markets in developed countries especially Europe and US. It has been possible for fund managers in the US and UK to sell funds owned by BRIC companies to investors in Europe and US without the complication traditionally posed by time and geographical barriers. As such, globalization has positioned itself as one of the biggest prospects for the future performance of asset management. The globalization aspects that are going to positively transform the asset management industry are especially those concerning funds primarily in sovereign-wealth funds. Globalization will continue presenting enough opportunity for fund managers to diversify their investment portfolios. Apart from the sovereign funds, there is an increasing likelihood of individuals spread all over the world becoming wealthier and the subsequent need for them to build their own savings. As such, there will be an increase in the demand for fund-management groups to cater for the rise in wealthy individuals willing and able to invest their assets into appropriate funds. According to the Economist, a likely scenario as more individuals become wealthy will be a tendency to concentrate on more sophisticated products especially hedge funds. If market prediction by the economist are to be relied upon, some of the asset management hotspots in the future lies not only in the developed countries such as UK and US but are rising much more rapidly in emerging trade and technology giants especially China and Japan. In addition, there are likelihood of a booming asset management industry evolution in the Middle East buoyed by the ever increasing demand for global oil and the associated rise in oil prices (Economist 1).

Besides the prospective new markets for this industry, there is the existing demographic dynamics in the developed countries which also present the industry with a sure performance prospects. It is predicted that the old-age dependency in European Union countries will rise from 21 currently to 50 in 2050. This implies that the number of people in retirement and above retirement age as compared to the working class population is likely to more than double during this period. The large percentage of this population are not well versed with the dynamics of investments they need to pursue to take care of their old age and as such, they are likely to pursue organized fund managers for their investments. In recognition that funding retirement income has been on a shift mode from the state and private corporations to individuals, these individuals will most likely be forced to seek funds management through formal funds managers. As such, the demand for asset and funds management is likely to register monumental rise in the period heading to 2050 (Economist Feb 28).

One of the best examples to the trend where individuals are likely to invest in funds has been the Swedish social security system. According to a paper presented at the University of Chicago in 2004, Swedes were in 2000 encouraged to invest in their own funds. Most participants invested their money into funds and in a five year period, one of the favorite funds had risen by 534. Despite the fund performing poorly in later years, very few people were willing to shift their investment from funds. Using this as an indicator, there is a likelihood that the demand for funds by individuals in the future is going to increase manifold (Economist Feb 28).

Another prospect that is almost imminent in the funds industry is the likelihood of emergence of funds and diverse products that are not currently in the market. Such products, generally defined as outcome oriented products are bound to increase if the trend observed in the mid 90s to the current period can be used as indicators. New products introduced into the asset management arena increased by 28 in the period 1994-2005 as compared to conventional mutual-fund industry which grew by only 13.  Analysts prediction has been that 25-30 earnings of the leading asset-management companies would be derived from new products by the end of 2010.  In the same breath, there is a possible increase of products that are going to overshadow the current products offered by asset management firms especially considering the rapid revolution in the technology industry.

One guaranteed aspect that analysts identify is that the next ten years will be marked by significant changes in the asset management industry that may either benefit the investors if smart options are adopted by fund managers or wreak them if the managers do not adapt strategic options of investment. For managers who are going to capitalize on the ageing demographics of the western population and the rising opportunities presented by the developing world, there is a possibility that investors will have significant reaps from their investments. Strategic decisions that may become necessary for managers will be the evaluation of building franchises in the complex world of foreign alternative assets. Fund managers that will fail to utilize some of these monumental changes may end up losing heavily due to uncertainties presented by turbulent markets. All in all, the future asset management industry is bound to increase buoyed by an ever rising population and the wealth of individuals generated in the developing countries (Economist Feb 28).

Challenges faced by companies in Asset management
A fundamental challenge that faces asset management is the loss of confidence by investors in the savings industry. This has been precipitated by a number of reported incidents of poor funds management that have in the past led to loss and a myriad of havoc for investors. As such, companies operating in this industry face the waning loss of investors due to bad publicity and past experiences. To restore confidence in the savings industry, fund management companies needs to develop and communicate strong ethics based on the necessary regulatory practices specified by respective governments. In addition, the companies face the challenge of maintaining confidence in fund governance among retail investors. As mentioned earlier in this study, there is a significant shift among investors as more private individual choose to invest long term funds instead of relying on their states and employers. According to Sants (FSAs Outlook), this confidence among retail investors is low in the US as compared to the UK. The decline in confidence has been precipitated by concerns on the quality and oversight range provided by trustees especially in pension funds. This challenge can be tackled by putting in place working groups that would examine issues surrounding fund governance. Another challenge that has traditionally been associated with companies in this field has been the problem of bundling. This is where fund management companies invest in too many products in diversified fields reducing their efficiency in carrying out healthy and feasible market research that would benefit the investors. In the UK, FSA has been pursuing a goal of unbundling or soft commissioning where companies are required to be transparent in all ventures that they invest the investors funds (Sants FSAs Outlook).

To add on this, the asset management industry is a rapidly growing industry and has been observed in the future prospects there is likelihood that the industry will continue flourishing in the future buoyed by the demographic trends and innovation of new products through new technology. Other fundamental challenges for companies operating in the industry include the emergence of giant conglomerates in the form of mergers and acquisitions. The large companies stifle competition since they raise the expected benchmark standards to levels that the average small and middle size companies are unable to afford. In addition, the company faces the volatility that characterizes the asset management industry. For instance, the current credit crisis that affected major world economies produced catastrophic consequences in the industry with some assets shrinking in value by as much as 30-40. Besides these challenges, there is the always change in trends buoyed by rapid technological changes that companies are unable to keep up in pace with. Clients today prefer more funds invested in technology than in other sectors which make the companies with traditional asset investments to stand at the risk of losing clients. In face of the above challenges, it remains the impetus of these companies to conduct proper market surveys that can always keep them in business and give them competitive advantage (Sants 1).

Customers in Asset Management
Customers who invest in funds are diverse and wide reaching. They include institutions such as public pension funds, insurance companies, corporations or private investors. One of the fundamental trends observed in the funds market in recent times has been a significant growth of investments drawn from private investors.

Competition in the Asset Management Industry
According to Trzcinka (1998) there is no standard yardstick or litmus test that can be used to quantify the level of competition in the funds management industry. There is however a definite intense competition among the industry players depending on the type of fund being managed. It is worthy to note here that unlike the competition in ordinary markets that produces a consequential lowering of prices for products, the competition in major funds industry has not resulted in a drop of investment costs.  There still remain significant hidden costs associated with different funds although different asset management companies have tried to create a competitive advantage over their competitors through downward adjustment of these hidden charges. Normally, the undisclosed fees associated with the transaction of funds are broken into three categories namely the expense ratio which is disclosed in the fund prospectus, the soft dollars which is equivalent to commission charged by brokers and the third covers expenses accrued during the transactions on the particular fund. For new companies gaining entry into the industry, the financial requirements are currently huge especially due to the current proliferation of large mergers that have raised the yardstick for investing in the industry.

Effects of Technology in the Industry
As in all other industries, the asset management industry has been revolutionized by the technology revolution that has changed the global business picture since the late 20th century. Invention of technology has made it easy for companies operating in the industry to maximize their operations by providing services for clients globally without the hindrance of geographical and time limitations. Technology has also enhanced efficient management and tracking of investments by investors through the application of customized softwares that are easy to use and manage. However, the cost of implementing technological changes have led companies to incur extra costs in terms of purchasing technological devices and acquiring skilled staff to handle the new technology. In addition, the ever changing face of technology implies that the companies have to repeatedly incur costs as new technologies emerge within the industry.

Effect of Laws and regulation in Asset Management
Asset management is regulated by laws that govern the general securities industry in the US. The Securities and Exchange Commission is responsible for instituting and implementing necessary regulations and changes within the industry. Currently, laws governing securities are contained in the 1933 securities act the securities exchange act (1934), the trust Indenture Act of 1939 and the 1940 Investment Company Act. In addition, there is the Investment Advisers Act (1940). The most recent changes in the securities industry were contained In Sarbanes-Oxley (SOX) Act of 2002 that instituted stiff regulations pertaining the running of investment companies in the US.  Though the law has been credited for raising the transparency with which investment companies invest their investors funds, many in the asset management industry has blamed the Act for raising the companies operational financial requirements to levels that are unattainable by small and medium sized asset management firms. According to analysts, the cost of implementing SOX as mentioned above was exceptionally high and was relatively unaffordable to the small businesses. A survey conducted by a law firm, Foley and Lardner estimated that the Act increased the costs required for a company to trade publicly by 130. Another survey conducted by a consultancy firm, Korn  Ferry international estimated that the act cost Americas fortune 500 companies compliance expenses of approximately 5.1 million in 2004 (Park, 2009 p, 1). Many financial analysts have criticized the SOX act as being too costly especially in its implementation. A congressman Ron criticized the passing of SOX arguing that SOX was expensive and that the intrusion it created in the American asset market was a heavy burden to the small businesses which found themselves with too much expense to handle in an attempt to fulfill the acts requirements. According to the congressman, the Act has pushed many small businesses into conflict with the government and argued that a considerable number of firms were already conducting their IPOs outside the US and hence disadvantaging the US economy (Park, 2009 p, 1)..

Companies Leading in Asset management
There are many companies that have invested in the asset management industry. Based on size and the amount of asset under their management, some of the largest asset management firms in the US include Black Rock, Barclays Global Investors and Alliance Bernstein. Black rock is global asset management firms whose headquarters are in New York. By the end of financial year 2009, the asset under the companys management were valued at approximately US3.35 trillion which comprised of real estate, equity, cash management, fixed income, and advisory strategies. The company offers services such as risk management, enterprise investment systems and strategic advisory services through its subsidiary Black Rock solutions. The company is a listed publicly traded company and is the major shareholders include Merrill Lynch, Barclays PLC holding and PNC Financial Services which holds approximately 34.1, 19.9 and 24.6 respectively. In one of the biggest mergers in the asset management industry, the company acquired its competitor, Barclays Global Investors in June 2009. Much of the companys growth has been as a result of recent acquisitions with the first one occurring in January 2005 where it acquired State Street research Management.  The company serves retail and institutional clients in over 60 countries including pension funds, endowments, and high net worth individuals, insurance companies, official institutions and private banks. Some of their global products include cash management, alternative investments, marketing, real estate, capital markets, pensions, global consultant relations and wealth management. The company is strategically organized into specific strategic business units (SBUs) that cater for the specific products offered by the company (Black rock 1).

Alliance Bernstein LP on the other hand is a US based asset management firm which is primarily owned by Frances AXA. Its headquarters are in New York.  As of November 30, 2009, the company had assets under management of approximate value US496 billion.  The company offers diversified services globally which includes fixed income services, growth management services, equities valuation etc. The company also offers independent in-depth research in trading, portfolio strategy, and brokerage related services through its subsidiary, Sanford C (Pr News 1).

Effects of Large Firms in the Asset Industry
One of the fundamental effects that the large companies induce in the market includes the setting of standards. Clients the world over are interested in investing their assets with firms that have transparent and profitable asset investment strategies and as market leaders, these companies are looked upon as the benchmark for setting required standards. Due to their recent huge expansion, the large companies have the effect of stifling competition form relatively small companies attempting to enter in the market. Their expansion increases their capital base and profitability which they in turn invest in doing proper market research and therefore are able to offer their clients the best investment opportunities.

Credit Crisis Effect on the Asset Management Industry
In a report compiled by Price water house coopers (PWC 2009) in regard to the effect of the global credit crunch in the asset investment industry, the financial analysts were of the view that the industry performed better than the banking industry although the values of the assets did shrink. PWC estimates that in some worst scenarios, assets shrunk by as much as 30-40 which translated to huge losses for the asset management companies. One of the significant gaps observed among these companies was lack of clear management skills that could have responded more smartly to the credit crisis. PWC argues that the credit crisis ought to serve as a lesson for the asset managers to invest in better risk management efforts to avert more financial havoc in the future. In addition to the shrinking of asset values, some of the top performing companies lost ground due to losses from the crisis and are now poorly positioned to do business in the future (Saluzzi et al 2009). Hence, it can be inferred that the crisis overturned the pecking order of asset management companies and the volatility of asset markets could be a future deterrent for companies inspiring to invest in the industry.