Asset managers and funds · RiskAtoms Academy

By the end you will be able to

1Compare mutual funds, ETFs and segregated mandates: how you buy, how they are priced, and who owns what.
2Explain the asset manager's business: it runs other people's money for a fee and does not own the assets.
3Calculate how an annual fee compounds over time.
4Tell active from passive management.

Why it matters

A 1% fee sounds tiny. On $10,000 growing at 6% a year for 30 years, it takes $14,215: about 25% of what you would have had.

Core explanation

Running other people's money

An asset manager invests money for others: pension funds, insurers, charities, governments and ordinary savers. It earns a fee, usually a percentage of the money it runs, its assets under management (AUM). The gains and losses belong to the clients, not the manager. This is the big difference from a bank: a bank lends its depositors' money on its own account and owes it back, while an asset manager acts as an agent.

Think of a taxi rather than a car you own. The driver chooses the route, you pay a fare, but it is your journey: if the destination is a disappointment, the driver does not refund you.

ExploreWho does what in a fund

Click a box to see what happens there.

Investors

Investors buy units or shares in the fund. Each unit is a slice of everything the fund holds, worth the net asset value (NAV) per unit.

Three ways to hire a manager.

	Mutual fund	ETF	Segregated mandate
Who uses it	Savers and institutions	Savers and institutions	Large institutions only
How you buy	From the fund, once a day	On a stock exchange, all day	Contract with the manager
Price	NAV, set once a day	Market price, kept near NAV	Value of your own holdings
Who owns the assets	The fund, for all investors	The fund, for all investors	The client itself
Can you set the rules?	No	No	Yes
Typical cost	Low to high	Usually low	Negotiated

A mutual fund issues new units when you invest and cancels them when you sell, at that day's NAV. An ETF is also a pooled fund, but its shares trade between investors on an exchange. If the ETF's price drifts away from its NAV, large dealers called authorised participants step in: they create new ETF shares or redeem old ones and profit from the gap, which pulls the price back. A segregated mandate (a “separate account” in the US) is not a fund at all: a pension fund hands a manager the right to trade its own account, under rules it writes, such as “no tobacco shares” or “match our pension payments”.

Active or passive. An active manager picks investments to try to beat a benchmark index. A passive manager simply buys the index. Passive funds cost much less, and after fees many active funds fail to beat their index over long periods. That is a big reason ETFs and index funds have grown so fast.

Sort itWhich vehicle fits?

A Canadian pension fund with C$2 billion wants bonds that exclude fossil-fuel companies, held in its own name.
A day trader in Singapore wants to buy and sell an index fund several times a day.
A UK saver puts £100 a month into a fund through a pension platform, dealt at the day's price.
An insurer wants a manager to buy bonds that match its own claim payments, with full control over the holdings.

Where the risks sit. Investors carry the market risk. The manager carries business risk (fees fall when markets fall) and conduct risk (mis-selling, breaking the fund's rules). A further risk sits in the fund itself: an open-ended fund that promises daily dealing but holds hard-to-sell assets can be caught out if many investors leave at once.

The formal version

Fees work against you through compounding, which is new here (Module 1.3 covers it fully). Let $V_0$ be the amount invested, $r$ the annual return before fees, $f$ the annual fee and $n$ the number of years.

The formulas, for reference

V_n = V_0 (1 + r - f)^n \qquad \text{Fee drag} = 1 - \left(\frac{1 + r - f}{1 + r}\right)^n

Convention: annual compounding, with the fee taken off the return once a year. Real funds take the fee a little each day, which gives almost the same answer.

Try it

Start with the hook's numbers. Then halve the fee and watch the shaded gap shrink. Then set the years to 40: the gap grows faster than the years, because the lost money would also have grown.

Try itWhat a fee costs over time

Open the compound interest calculator →

Amount invested$10,000

Return before fees, a year6.00%

Annual fee1.00%

Years invested30

With no fee$57,435

After fees$43,219

Cost of the fee$14,215

Share of the pot lost24.8%

Growth with and without the fee no fee after fees lost to fees

Worked example

Two investors, two price tags

A saver in Tokyo. Aiko invests ¥1,000,000 for 20 years. She assumes 5% a year before fees, compounded annually. She compares an index ETF charging 0.10% with an active mutual fund charging 1.50%.

ETF or active fund?

Step 1 of 4

1
Fees in the first year
ETF: ¥1,000,000 × 0.10% = ¥1,000. Active fund: ¥1,000,000 × 1.50% = ¥15,000.

A pension fund in the Netherlands. A pension fund gives a manager a €500m segregated mandate at a negotiated fee of 0.20%: €1.0m a year. Size buys a low percentage fee, and the fund keeps the assets in its own name.

Regulatory lens

United States: mutual funds and ETFs are registered with the SEC under the Investment Company Act of 1940, and managers under the Investment Advisers Act of 1940.
European Union: funds sold to the public follow the UCITS rules, which limit what they may hold and let them be sold across the EU with one licence. UCITS funds are also widely sold in Asia and Latin America. Other funds, such as hedge funds and property funds, fall under the Alternative Investment Fund Managers Directive (AIFMD).
United Kingdom: the FCA authorises funds and managers. Its Consumer Duty requires firms to show their products give fair value for the price.
Asia-Pacific: Hong Kong's SFC, the Monetary Authority of Singapore, Japan's FSA and Australia's ASIC authorise funds sold to the public.
Global: IOSCO (L1.2.09) and the Financial Stability Board have recommended tools for open-ended funds that hold hard-to-sell assets, such as charging leavers the cost of selling.

Fund liquidity risk returns in later levels, where it meets the wider study of non-bank finance.

Sparks

SparkThe index fund that was laughed at

In 1976 John Bogle's Vanguard launched the first index fund for ordinary investors. Critics called it “Bogle's folly”: why settle for the average? Passive investing now accounts for a very large share of US fund assets.

SparkDaily dealing, illiquid assets

In June 2019 the UK's Woodford Equity Income Fund suspended dealing: investors wanted out faster than it could sell its small and unlisted holdings. It never reopened and was wound up. The case pushed regulators to look harder at funds that promise daily exits but hold assets that take weeks to sell.

Key takeaways

Asset managers invest clients' money for a fee; the clients own the assets and bear the gains and losses.
Mutual funds deal once a day at NAV; ETFs trade on an exchange all day; segregated mandates are a client's own account.
A separate custodian holds fund assets, so they are protected if the manager fails.
Fees compound: value after n years = V₀ × (1 + r − f)ⁿ. Small yearly fees take a large share over decades.
Passive funds track an index cheaply; active funds must beat it by more than their extra cost.

Reaction

Check what stuck

Glossary

Asset manager: A firm that invests money on behalf of clients for a fee, without owning the assets itself.
AUM: Assets under management: the total value of the money a manager runs for clients.
NAV: Net asset value: a fund's assets minus its liabilities, divided by the number of units or shares.
Mutual fund: A pooled fund that issues and cancels units every day at net asset value. Called a UCITS fund in Europe and an OEIC or unit trust in the UK.
ETF: Exchange-traded fund: a pooled fund whose shares trade on a stock exchange throughout the day.
Authorised participant: Authorised participant: a large dealer allowed to create or redeem ETF shares directly with the fund.
Segregated mandate: An arrangement where a manager runs a single client's own account, holding the assets in the client's name.
Custodian: A bank that holds and safeguards investors' assets, separate from the manager.
Ongoing charges figure: Ongoing charges figure: the yearly cost of a fund as a percentage of the money invested.
Active and passive: Investing to match an index, at low cost. Active investing tries to beat the index.

Deep Dives & Origins

Deep Dives

Bogle, The Little Book of Common Sense Investing (Wiley), on costs and index funds. Beginner.
Investment Company Institute, Investment Company Fact Book (published yearly), on US fund and ETF markets. Beginner.
Bodie, Kane and Marcus, Investments (McGraw-Hill), the chapter on mutual funds and other investment companies. Intermediate.

Origins

Investment Company Act of 1940 and Investment Advisers Act of 1940 (United States).
Directive 2009/65/EC (UCITS) and Directive 2011/61/EU (AIFMD).
Financial Stability Board, Revised Policy Recommendations to Address Structural Vulnerabilities from Liquidity Mismatch in Open-Ended Funds, December 2023.
FCA statements on the Woodford Equity Income Fund, 2019; Bank of England, Financial Stability Report, July 2019.

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