Sunday, July 24, 2016

Information, meaning, and action - the components of asset management

To understand asset management, you need to break it down into its core components. This idea of core components is not about a specific style but something more primal. Think of asset management like a return factory. 

Like any factory there has to be inputs and processing. The raw input is information for return generation is information.  However, information by itself may not have value until it is processed or given meaning. The asset management finds information useful only if it can be given meaning. There is a lot of information that is noise and may be of little value to one manager but valuable to another.

The skill of the money manager is his ability to give meaning to information. The manager forms expectations or beliefs on security returns. If a manger cannot generate meaning from information, then it is better to be passive. However, meaning does not generate returns unless there is some action or decision. The meaning has to cause or be linked to action or it does not have value. Some may be very good at applying meaning to information, but if there is no action, there is no return. 

The other inputs with information are securities. These securities have different characteristics such as risk premium that may be grouped together, but information, meaning, and action have to be combined through a vehicle - the security. The security will change in value based on new information and the action of the managers.

This primal breakdown is important because it can focus on what are the key skills of the manager. 
  • What is the information that the manager uses?
  • How does the manager apply meaning to this information?
  • How or when does the manager take action on the meaning to the information? 
Information is generally available, so the comparative advantage of the manager is usually not with the information, but rather with the processing of the information to extract meaning. Good analysis or meaning is not enough. There has to be action through the explicit buying an selling of risks. No action, no returns. This simple three part framework focuses the functions of money manager into core components that apply to all strategies.

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