What is asset management ?
The term “asset management” covers all private and institutional wealth management activities aimed at generating financial returns through investments in equities, bonds, diversified or alternative investment instruments. The pursuit of financial performance distinguishes asset management from philanthropic or charitable activities.
Buying shares on the financial markets allows direct investment in companies listed on those markets. Over the long term, shares often outperform other asset classes such as bonds, real estate, or alternative and monetary management instruments. As a direct counterpart to this performance, the risks associated with purchasing shares are the main factor contributing to their volatility.
Global GDP growth is closely linked to companies' capacity for expansion and innovation. The surplus value generated by these companies enables a virtuous circle of consumption, investment, and growth.
Choosing companies that create sustainable value
Asset management objectives can be broken down into different types of strategies. Growth strategies aim to take positions in companies whose growth potential is considered particularly high. Despite a purchase price that is sometimes above average, growth stocks are supposed to reflect a strong trend towards significant, long-term profits.
Value strategies focus on gains generated by identifying and selecting companies that are undervalued by the market, despite their solid fundamentals. In this context, managers look for available stocks that are priced below those of comparable companies in the same sector. This strategy is often associated with a longer-term horizon than growth strategies due to their higher average volatility. Value investors believe that periods of low economic activity create excellent buying opportunities whose potential should be seized.
Diversifying investment strategies and vehicles helps to limit the disadvantages associated with either strategy. It also makes it possible to capture the potential of each strategy and reduce portfolio volatility.
Active management or passive management: a difference in nature?
Active management results from deliberate choices often derived from in-depth financial and extra-financial analysis at the sector level or at the individual company level. Asset managers therefore seek to determine the real value of the assets of the companies they are interested in. To measure their profitability, they carry out an in-depth financial diagnosis and an assessment of their intrinsic value. They then assess the sustainability of the business and its profitability by conducting a comprehensive strategic analysis and, if necessary, by meeting directly with management.
Management companies then select the companies that have the best prospects for value creation in the medium and long term and that are undervalued by the markets in order to optimize the performance of their portfolio. They then independently evaluate the results to confirm the relevance of their strategy.
Conversely, tracking or “passive management” consists of investing in a portfolio specifically designed to reflect the exact composition of a stock market index such as the S&P 500 or the CAC 40. Buying and selling decisions are therefore dictated by changes in the composition of the index and exclude any conviction-based management.
The principles of socially responsible management
Active management also allows non-financial principles and convictions to be applied to portfolio construction and management. Socially responsible investing involves aligning an investment strategy with social, environmental, and governance commitments, often referred to as “ESG” principles.
The construction of sustainable portfolios is a relatively recent development. It involves taking ESG indicators into account in the company selection process, excluding the least virtuous companies and choosing those whose commitment is rewarded by good ESG performance.
The rise of thematic portfolios shows a growing desire to create investment vehicles limited to companies committed to addressing a specific issue. For example, funds dedicated to green and renewable energy invest only in companies that have a significant impact on the energy transition. There are also certain investment instruments specifically designed to promote gender equality and diversity.
Impact investing is the most assertive form of responsible investing. It seeks to have a positive effect on the environment and, more broadly, on society. This effect must be quantifiable and subject to transparent reporting and rigorous evaluation, on a par with financial performance.
The Global Impact Investing Network (GIIN) summarizes the principles of impact investing in three rules:
1. Intentionality: investors and companies must voluntarily commit to one or more causes, as the positive impact must not be the result of chance or a potential or random consequence of their participation.
2. Definition of indicators: managers must determine relevant indicators and quantitatively assess the impact of investments made within the framework defined by management objectives;
3. Return on investment: unlike philanthropic or charitable activities, the investment aims to generate a financial profit.
Asset managers committed to this approach favor areas such as sustainable agriculture, low-energy infrastructure, wind and solar power, as well as microfinance, housing, and healthcare.
Rigour, transparency, and discipline: the qualities of a good asset manager
Not investing or investing in low-yield assets poses a long-term risk to the purchasing power of your capital. Performance therefore involves taking risks in order to reap the rewards of medium- and long-term corporate growth. It is therefore essential to determine an investment time horizon. This allows you to factor volatile market fluctuations into your investment strategy and avoid a permanent loss of capital if you sell at a low point in the economic cycle.
In order to invest with caution, insight, and transparency, it is therefore advisable to base investment strategies on an in-depth analysis of the macroeconomic environment, a careful selection of assets that create sustainable value, and an accurate assessment of risks. It is also prudent never to invest in assets that are difficult to understand or overly complex, as these are often linked to bubble phenomena.
At Lazard Frères Gestion, our management teams constantly share and compare their investment assumptions. They make informed decisions based on this dialogue and seek to avoid the effects of fashion and emotion. Once market instability and volatility have been taken into account, purchase decisions are made with rigorous conviction and discipline.
