Asset Management and Insurance
1. Huge margins and constant streams of fee income, asset managers are perennial profit machines.
2. The best asset managers can present truly outstanding investment opportunities when they are selling at the right price
What Makes Asset Managers Tick
1. Asset management firms run money for their customers and demand a small chunk of assets as a fee in return.
2. The real assets of the firm are its investment managers, so typically compensation is the firm's main expense.
3. This business has economies of scale. This adds to stellar operating margins, which are usually in the 30% to 40% range - something you wont see in many industries
4. Attaining scale in this industry is evidence of a solid moat.
5. Gathering assets take time and gaining significant scale (at least $10 B AUM) takes a track record.
6. Most funds toil in obscurity until their third birthday, and even then, it takes years to build up an asset base. This puts large, established asset managers at a huge advantage.
7. Most important competitive advantages we look for are diversification and stickiness of assets
Diversification
1. Diversity of products is one way asset managers overcome fluctuations.
2. Bonds and money markets, which may look as dull as ditch water in a great equity market, can be an oasis in a bear market.
Asset Stickiness
Asset Management Accounting 101
1. The single biggest metric to watch for any company in this industry is assets under management (AUM)
2. Unlike a bank or insured, where big losses can cause the firm to become insolvent, big losses in asset management portfolios are brone by customers.
3. Big losses will affect income by reducing AUM, but an asset manager could lose well over half the value of its AUM and still remain in business.
4. Because the asset management requires almost no capital investment, these companies can pare back to the bone to remain in business
Key Drivers of Asset Management Companies
Inside the Back Office
1. Custody and asset services are the lesser known sidekick of asset management.
2. Custody operations are essential to many pension plans, insurance companies, asset managers and even wealthy individuals who need someone to keep track of their investments and perform the back office accounting work every day
3. Custody and asset servicing business works on a principle similar to the asset management business, but the lower fees and economies of scale. E.g. - State Street and Bank of New York have huge custody operations that manage trillions of dollars in assets.
4. Custodians don't invest the money they are entrusted with; they just keep track of it
5. Mutual fund companies frequently outsource their back offices to custodians because they don't want the hassle of record keeping
6. Custodians keep track of the securities that their customers buy and sell, collect dividends, and calculate an accurate value at the end of the day. Many offer a huge array of additional services, such as performance analytics, risk management and pension accounting.
7. This business requires hefty investment in technology and a penchant for absolute accuracy.
8. Fees for custody typically come in below .05 percent of assets under custody, making scale essential to support the necessary technology investment
Key Drivers of Custody Companies
1. Watch out for custody firm's loan portfolios. Most custodians also lend money to their clients as part of their overall service relationships. As with any bank, these loans can become too concentrated in one company, one industy or one sector.
2. Concentration Risk - During the tech and telecoms bubble of the 1990s, Bank of New York loaned billions of collars to cable and telecoms companies, forcing it to write off the bad loans when many of these firms collapsed.
Hallmarks of Success for Asset Management Companies
Diversity of products and investors - Asset
Sticky assets
Niche Markets
Market Leadership
Property/Casualty Insurance
1. P&C insurance provides enormous benefits to the US economy by transferring financial risks that could otherwise impede profitable transactions and raise living costs
2. The average PC insurance company earns a ROE of less than 9 percent, and over time, most insurers achieve ROEs that are half that earned by S&P 500 companies
3.There are few diamonds in the rough - consistent performers that produce attractive returns over long periods. Studious investors, armed with the keys to identifying better performing insurers, can earn solid returns inn this sector
How P&C Insurers Make Money
1. Insurers enjoy a peculiar business advantage - premiums are received well in advance of the firm's requirement to pay claims. This money is often referred to as the float, and an insurer enjoys the use of this money between the time ir receives a premium and the time it has to pay a claim
2. Insures writing long-tail insurance hold premiums longer and hence can invest more in equities. Short-tail policies are those where the damages incurred during the insured period become quickly known, such as a car accident, whereas long-tail policies cover damages that may nor become apparent for many years, such as asbestos injury
P&C Insurance Accounting 101
1. Huge margins and constant streams of fee income, asset managers are perennial profit machines.
2. The best asset managers can present truly outstanding investment opportunities when they are selling at the right price
What Makes Asset Managers Tick
1. Asset management firms run money for their customers and demand a small chunk of assets as a fee in return.
2. The real assets of the firm are its investment managers, so typically compensation is the firm's main expense.
3. This business has economies of scale. This adds to stellar operating margins, which are usually in the 30% to 40% range - something you wont see in many industries
4. Attaining scale in this industry is evidence of a solid moat.
5. Gathering assets take time and gaining significant scale (at least $10 B AUM) takes a track record.
6. Most funds toil in obscurity until their third birthday, and even then, it takes years to build up an asset base. This puts large, established asset managers at a huge advantage.
7. Most important competitive advantages we look for are diversification and stickiness of assets
Diversification
1. Diversity of products is one way asset managers overcome fluctuations.
2. Bonds and money markets, which may look as dull as ditch water in a great equity market, can be an oasis in a bear market.
Asset Stickiness
Asset Management Accounting 101
1. The single biggest metric to watch for any company in this industry is assets under management (AUM)
2. Unlike a bank or insured, where big losses can cause the firm to become insolvent, big losses in asset management portfolios are brone by customers.
3. Big losses will affect income by reducing AUM, but an asset manager could lose well over half the value of its AUM and still remain in business.
4. Because the asset management requires almost no capital investment, these companies can pare back to the bone to remain in business
Key Drivers of Asset Management Companies
Inside the Back Office
1. Custody and asset services are the lesser known sidekick of asset management.
2. Custody operations are essential to many pension plans, insurance companies, asset managers and even wealthy individuals who need someone to keep track of their investments and perform the back office accounting work every day
3. Custody and asset servicing business works on a principle similar to the asset management business, but the lower fees and economies of scale. E.g. - State Street and Bank of New York have huge custody operations that manage trillions of dollars in assets.
4. Custodians don't invest the money they are entrusted with; they just keep track of it
5. Mutual fund companies frequently outsource their back offices to custodians because they don't want the hassle of record keeping
6. Custodians keep track of the securities that their customers buy and sell, collect dividends, and calculate an accurate value at the end of the day. Many offer a huge array of additional services, such as performance analytics, risk management and pension accounting.
7. This business requires hefty investment in technology and a penchant for absolute accuracy.
8. Fees for custody typically come in below .05 percent of assets under custody, making scale essential to support the necessary technology investment
Key Drivers of Custody Companies
1. Watch out for custody firm's loan portfolios. Most custodians also lend money to their clients as part of their overall service relationships. As with any bank, these loans can become too concentrated in one company, one industy or one sector.
2. Concentration Risk - During the tech and telecoms bubble of the 1990s, Bank of New York loaned billions of collars to cable and telecoms companies, forcing it to write off the bad loans when many of these firms collapsed.
Hallmarks of Success for Asset Management Companies
Diversity of products and investors - Asset
Sticky assets
Niche Markets
Market Leadership
Property/Casualty Insurance
1. P&C insurance provides enormous benefits to the US economy by transferring financial risks that could otherwise impede profitable transactions and raise living costs
2. The average PC insurance company earns a ROE of less than 9 percent, and over time, most insurers achieve ROEs that are half that earned by S&P 500 companies
3.There are few diamonds in the rough - consistent performers that produce attractive returns over long periods. Studious investors, armed with the keys to identifying better performing insurers, can earn solid returns inn this sector
How P&C Insurers Make Money
1. Insurers enjoy a peculiar business advantage - premiums are received well in advance of the firm's requirement to pay claims. This money is often referred to as the float, and an insurer enjoys the use of this money between the time ir receives a premium and the time it has to pay a claim
2. Insures writing long-tail insurance hold premiums longer and hence can invest more in equities. Short-tail policies are those where the damages incurred during the insured period become quickly known, such as a car accident, whereas long-tail policies cover damages that may nor become apparent for many years, such as asbestos injury
P&C Insurance Accounting 101