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Asset management involves investing across different types of financial asset, such as equities, bonds, monetary products, commodities and derivatives. This capital can be own-account or come from a third-party (either institutional or individual), which is known as third-party asset management or fiduciary management. Asset managers and asset management companies act in line with regulatory and contractual constraints. Their aim is to get the best possible return given an investor’s level of risk tolerance.
Collective management accounts for the lion’s share of the asset management universe. It consists of attracting funds from a range of investors, all of which are then managed within a mutual fund, which follows an overarching asset management policy.
Two major approaches coexist within collective management. In the case of active management, the asset manager picks the stocks that they are going to buy or sell after having carried out a range of analyses of them. Their aim is to outperform the benchmark.
In contrast to this, passive asset management (also known as index-linked management) involves replicating a benchmark’s performance as closely as possible. Proponents of this approach believe that markets are efficient, meaning that they incorporate all relevant information and that an active approach is unnecessary. Passive management costs are generally lower than active management costs.