Wednesday, 20 July 2016

A Guided Tour of the Market 5

Asset Management and Insurance

With huge margins and constant streams of fee income, asset managers are perennial profit machines. However, these companies are so tied to the markets that their stock prices often reflect oversized doses of the current optimism or pessimism prevailing in the economy, which means it pays off to take a contrarian approach when you're thinking about when to invest.

Asset management firms run money for their customers and demand a small chunk of the assets as a fee in return. This is lucrative work and requires very little capital investment. The real assets of the firm are its investment managers, so typically compensation is the firm's main expense. Even better, it doesn't take twice as many people to run twice as much money, so economies of scale are excellent.

The single biggest metric to watch for any company in this industry is assets under management (AUM), the sum of all the money that customers have entrusted to the firm. Because an asset manager derives its revenue as a percentage of assets under management, AUM is a good indication of how well – or how badly – a firm is doing.

Investors should look for asset management companies that are able to consistently bring in new money and don't rely only on the market to increase their AUM. Look for new inflows (inflows higher than outflows) in a variety of market conditions. This is a signal that the asset manager is offering products that new investors want and that existing investors are happy with the products they have.

Given the commodity-like products of the life insurance industry, it is next to impossible for one insurer to successfully grow – without acquisitions – above the industry's long-term annual revenue growth rate.

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