Manager Universe (Benchmark)
The universe of money managers is a big fat one...or at least the compensation is. And that compensation is highly leveraged to success. Beat the market by a lot, and you get paid a lot.
The harder question: "What is the market?"
Is it the S&P 500? Nasdaq? The FTSE? A smallcap index? A Lipper Growth...something?
The manager universe almost always has a relevant benchmark against which they're measured to determine whether or not they actually added value. Like...if the S&P 500 was up 20% in a given year and the manager was up only 16%, well...in a vacuum, that 16 might seem like a good number. But it's not. Investors would have done better just owning the index fund.
Cold, cruel world out there if you're not beating your benchmarks. Ex-money managers are oft found driving Uber and/or Lyft for a living.
Related or Semi-related Video
Finance: What are Assets Under Managemen...8 Views
Finance a la shmoop what are assets under management?
[People meditating in a park] yeah that's how it's pronounced.... the yoga mantra AUM mutual funds charge
fees based on the assets they have under management the larger the asset base the
bigger the fees they can charge and you know size matters mm-hmm all right well
most fees are based on a given set of percentages of the total and a lot of [Woman approaches starbucks employee]
people only want the big mutual funds because well they pay their employees
the big bucks and presumably big money buys big talent and that's generally [Boy strikes baseball]
true in baseball right well in a mutual fund family for example there are break
points in fees that look a lot like the structure of break points in the
progressive tax system of the United States that is different percentages are
charged on different levels of you know size for the first billion dollars under
management a fund might charge 2% like 20 million dollars a year for managing
that first billion but then from one to five billion the fee might be one and a
half percent so on that next four billion the fee might be sixty
million bucks a year then from five billion in assets under management to 15
billion ie that next 10 billion in size the fee might be one percent or a hundred
million dollars on that next ten billion of assets for enormous mega funds like [Mutual fund breakpoint table]
ones with over fifty billion dollars in assets well the fee on that last dollar
might be just a third of 1% or less and that fee structure creates a wonderfully
stable revenue base to the fund manager why and like why is this important well [Man discussing mutual funds by a farm]
you know the stock market volatile so the assets go up and down with the market right well why
is it valuable because the lion's share of fees are generated from the [Lion walking in a desert]
"early" part of the fund i.e the low dollar asset amount where the fees
are a relatively high percentage think about a mega fund with 50 billion
dollars in AUM well the fee on that last billion might [$50 dollar sack of cash in mega fund]
be just that 30 basis points or 0.3 percent or just three million dollars
note that the fee on the first billion dollars of this
fund was 2% or 20 million bucks a year so if that fund contracts well it's not
that much of a loss like it could lose that last 10 billion in assets, assets
under management by going from 50 billion to 40 billion which would be 20%
of the total of the fund but only lose like 3% of its revenues for the
privilege of managing all that money why this fee structure?
well the marginal additional work to manage 50 billion over 40 billion well
just isn't that much extra work got it that's how assets under management
generally work at big mutual fund families and that's the lion share of [Mutual fund breakpoint table and lion shadow appears]
actively managed money at least today in this country so yeah while the fund
manager sits back and collects those glorious fees while she can be at one [Fund manager performing yoga and woman carrying pile of cash]
with the universe and keep chanting that AUM, as she collects her fees say it with
me fee collecting...[Man meditating]