The role of asset managers is quite vast, but, put simply, can be split into three distinct roles.
Firstly, asset managers need to grasp and decipher market direction by taking a close look at the way the global economy is developing and evolving, closely monitoring economic data, political events.
Given the information at hand, asset manager would then need to come up with an outlook by formulating an opinion on where he thinks market are heading, both in the short and in the long term.
Secondly, an asset manager's role is to use that information (market outlook) and translate those views into an optimal asset allocation of the portfolios under their remit, given the mandate and restrictions such as risk tolerance, limits to asset class, of the portfolios being managed.
The next role is to choose the best-in-class companies (be it equities or bonds) which would form part of the portfolio, based on roles 1 and 2 mentioned above.
At this stage, asset managers, together with their team of analysts, will be populating a list of companies through a thorough research process whereby literally all aspects of companies and looked into great detail.
From management style to shareholder structure, from balance sheet composition to levels of leverage, from cash flow generation to revenue streams, from profits generated and evolution of the company, these are only a few of the numbers of aspects analysts scrutinize when choosing one company from another.
Apart from looking at a historical time series of trends of financial information, analysts will also strive to devise forecasts on the fortunes of these companies, and whether they could fit into the portfolios they manage.
But if we had to stop to think about our own personal consumption patterns and the way we manage our monies, be it as individuals or as families, it is fair to say that we can all be considered to be micro (small) companies. If as asset manager had to choose out of all the individuals in the world to form part of his/her portfolio of individuals (assets), do you think, given your current financial position, you would stand any chance?
Our salaries/wages are equivalent to revenue streams. Our daily consumption in the form of food, clothing, insurance, car expense, fuel, utilities, mobile phones, form part of our fixed and variable costs. Our loan repayments can be seen as our ability to finance our debt. Our cost savings at the end of the year is just like a company’s profit and loss.
Most individuals/families have loans, either in the form of mortgages or car/boat loans, and that determines how levered they are vis-à-vis the profits they manage to generate year-on-year, and the size of the outstanding debt, pretty much like companies. The construction of an extra floor on the roof is just like capital expenditure, whilst the re-painting of your house is equivalent to capital expenditure maintenance.
Schooling, vacations, and money spent on leisure can also be classified as ongoing expenses, which effectively impact bottom line, just like expenses impact profitability of a company. Our ability and propensity towards consumption and savings, keeping in mind the revenue stream we as individuals have (in the form of salaries, rental income, gains on investments, etc.) shape our ‘credit profile’ and determine how risky our model is. Our spending patterns and how we deal with out-of-the-blue compulsory consumptions/expenses shape our management style.
Did we ever stop to ask ourselves, how healthy our personal balance sheets are? How profitable are we? Are we net savers or net spenders? Do we question where our expenses are focused on and how we could improve our personal profitability? What is our tolerance towards risk? Not necessarily investment risk I’m talking about here but the willingness to be risky to buy that second property, and stretch our cash flows further? How leveraged do we want to be? What are we doing with our profits? Are we ploughing them back in our company (our daily lives) or are we setting money aside for future generations? Can we classify ourselves as cash cows, growth stocks or is our business model outdated?
If an asset manager had to dissect us in just the same way as they do to large corporations, would we stand out? Would they place a buy recommendation on us or just shrug us off. I think we have come a long way in educating people on how to manage their finances, both in terms of day to day cash management and how to invest. But I guess that we all agree that there still is a lot left to be done, and if we begin to manage our finances in the same way we perceive companies ought to be run, I think that, in the long run, our overall credit profiles will inevitably improve.
This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.
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