How intelligent automation can transform asset management

An asset management company is a firm that pools capital from institutional and non-institutional investors. Then the pooled capital is invested in various asset classes on behalf of their investors. Such asset managers are also known as money managers or money management firms.

Why an AMC?

AMC appoints specialized investment personnel with years of experience in investment management and research. A specialized investment manager or fund manager can handle the fund better than an average individual investor due to the following:

An individual may or may not have the time to research before making investments.

An individual may not have the expertise to assess and evaluate the best securities for the portfolio.

Further, a fund manager also identifies the investment options that are in line with the expectation of individual investors. He also makes appropriate investments as per the risk profile of the investor.

The AMCs can pool a greater quantity of funds together than an individual investor. Therefore, an AMC can provide diversified investment options to its investors. Pooling a large quantum of funds may also allow AMCs to achieve economies of scale by getting a price discount on the cost price of the security. Individual investors are not permitted to invest in certain funds/asset classes having a high minimum prescribed amount. However, as an AMC invests on behalf of individual investors, they get access to asset classes/funds where they would not be allowed to invest otherwise.

Incentive for AMC

AMC charges a fixed percentage of the total assets under management (AUM) as a charge for fund management. It is also known as the expense ratio from the investor’s perspective. There is a maximum limit imposed by SEBI on the expense ratio to be charged by the AMC.

Also, higher AUM is equivalent to higher investor trust in the AMC. Hence, the quantum of funds managed by AMC lends it credibility.

How does an AMC manage funds?

An AMC manages funds by appointing a fund manager for each of their schemes. A fund manager is responsible for decisions about the investments of his scheme. However, a fund manager is not allowed to only take decisions within the boundaries of a Scheme Information Document. Scheme Information Document is one of the funds offer documents and has almost all the information about a mutual fund scheme.

1.  Asset Allocation

Each scheme of an AMC sets a particular financial goal or a theme, which helps the fund manager with the scope of investment assets. For example, fund managers in charge of hybrid conservative funds have to invest at least 75% of the funds in debt securities. Another example of asset allocation is balanced funds that invest only 60% of equities securities.

2. Research and Analysis

Building the fund’s portfolio rides a lot on researching and analyzing the performance of the asset classes. The researchers study the market sentiments, micro-economic and macro-economic aspects, and fund performance, and pass the reports to the fund manager, who then make decisions to generate good returns.

3. Portfolio Construction

An AMC typically has researchers and analysts who report their market findings and trends to the fund manager. Based on these findings & investment objectives, the fund manager chooses the stocks to buy or sell. This process is how an asset management company builds a portfolio, which depends predominantly on the experience & expertise of the manager.

4. Performance Review

Despite the disclaimers in the fine print, AMCs face a lot of hostility from the investors and trustees, when the AMC cannot justify its investment decisions. For instance, the company must provide unitholders with information that has a direct impact on their holdings. It must also send regular updates on sales and repurchases, NAV, portfolio details, and so on to investors.

Value Chain of an AMC in India

As per the activities conducted by an AMC, there can be three broad buckets where the activities can be classified:

1. Research, Investment and investment administration team

An AMC generally has research analysts who track various sectors and their happenings right from government policy, results or earning updates, etc. The analysts track companies belonging to a particular sector that they are assigned. The analysts present their findings from the sector. They also give out their targets considering the momentum, liquidity, and performance of their stocks. Based on the analyst’s presentation and the investment philosophy of the fund, the CIO and the fund manager decide on the securities to be included in the portfolio.  An AMC uses a similar process for investing in debt and liquid mutual funds.

The investment administration team that investment decisions carried out by the fund managers are executed & the assets acquired/liquidated are delivered against the consideration. There is a Chinese wall that is required to be maintained between the research and the investment administration team to avoid conflict-of-interest situations. The Chinese wall ensures that there is no flow of information between the dealing and the research team. Such information flow can influence the decisions of the research team.

2. Distribution and Marketing

The functions of marketing and distribution are carried on separately in an AMC. The role of the distribution teams is to collaborate with the financial intermediaries to promote the schemes of the AMC. They distribute products directly or through the intermediaries like private wealth managers, independent financial advisors, or even distributors.

The marketing team creates awareness about the AMC, the scheme, the investment philosophy of the AMC, and the brand of AMC. The activities handled by this team include marketing initiatives of the AMC like mass marketing, targeted social media marketing, etc.

3. Operations

The operations of an AMC include all the activities for the smooth functioning of the aforementioned value-adding functions. The operations of an AMC can be classified into the following broad functions:

a. Compliance

AML – The AMC needs to place processes, controls, and checks to ensure that the provisions of Prevention of Money Laundering Act, 2002 and Prevention of Money Laundering (Maintenance of Records) Rules, 2005 have adhered.

MIS and regulatory reporting – The RTA is the repository of all information relating to customers’ transactions. Reports received from RTA are customized to provide sales-related MIS to a spectrum of users from the senior management to the sales personnel and regulators from time to time.

Releasing public documents like the SID, SAI, Fact sheet from time to time are also undertaken by the compliance team.

b. Fund Accounting

Fund accounting is a daily job where the AMC has to value the portfolio of securities every day by the respective valuation principle of securities as laid down by the SEBI. Along with the computation of NAV, the fund accounting team also disseminates the NAV to the Registered Transfer Agents and the customers.

The team also accounts for the accrual of expenses and the units of the funds subscribed. This calculation helps in the determination of NAV.

c. Banking operations

The AMC also maintains relationships with banks for carrying out their operations. Banks collect the subscription amount for the AMCs and remits them to the AMC for their investments. Banks process the pay-outs (in terms of dividend) or redemptions. Moreover, AMCs promote their clients to use banking channels for transactions as a part of the digital initiatives of the AMC.

d. Unit administration with RTA

The RTA manages unit administration for the schemes of the AMC. RTA services range from acceptance of transactions at their front offices to allotment of units, issuing account statements, computation and payment of brokerage to distributors, dividend and redemption processing, and support digital initiatives. Therefore, the team coordinates with RTA to smoothly facilitate the aforementioned operations.

Automation initiatives at Pirimid Tech

With newer technologies, complete automation is possible in the research function of an AMC. The article “Investment Research – On the Cusp of Automation?” (https://pirimidtech.com/investment-research-on-the-cusp-of-a-revolution/) provides the extent of automation and the pros and cons of investment automation.

Further, the AMCs these days have been starting their quantitative funds, where the complete investment research and the investment administration processes are automated. A forthcoming three-part series of articles will cover more on quantitative funds.

Drop a comment or write us an email at info@pirimidtech.com for any feedback about this article. Do check out our portfolio in building Robo advisory, Large Scale Trading Systems, Algo Trading, Stock Sentiments, Price Trends Forecasting, Backtesting frameworks, Credit Model, Open Banking, etc. on our website. Connect with us to discover how our Fintech expertise can help you build cutting-edge solutions powered by AI/ML.

This is a guest post by Yash Surana, who is a CA and an MBA (Finance) from SPJIMR, Mumbai, and loves writing about finance, strategy, startups & Personal Finance.

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