Operational risk, market risk and value of the asset managers

Abstract

Asset management has been one of the fastest-growing industries in the financial industry for a long time (Bigelli & Manuzzi, 2019). Moreover, after the eruption of the financial turmoil in 2008, financial intermediation has been characterized by a rapid increase in the role of the asset management industry. This paper aims to analyse the determinants of asset manager value and, in particular, it is focused on the value implicit in the assets under management. Starting from the works by Huberman (2005) and Joenväärä and Scherer (2017) the paper proposes a model for determining the enterprise value (EV) of asset managers by assessing the role of the contribution margin and the degree of risk (operational and market risk). As noted by Scherer (2008), following the financial crisis, asset management companies suffered a decline in profits, also due to the exposure of their revenues to the market risk. Although, as it’s known, the asset management firms are not directly subject to the market (and credit) risk, their revenues are exposed to the market risk, not only to the operational risk that had been thought of as the main risk factor (Hull, 2007). Management companies, in fact, operate in a cyclical context closely linked to the performance of the financial markets, which contributes to determining the size and volatility of the assets under management (AuM). Starting from a discounted cash flow (DCF) asset side model, a simple stochastic Monte Carlo simulation is provided in order to capture the relevance of the asset under management return and volatility and, therefore, the volatility of the benchmark return and management style. In this theoretical framework, the key point is that the enterprise value depends on the specific asset class the firm is involved with. Given the asset class, the enterprise value depends on the management style also.