Imagine you're an investor looking for something more than the usual options, something that makes sophisticated investment strategies accessible without all the barriers. This is where AMCs come in,  AMCs are changing the game, offering a way for investors to tap into actively managed strategies that were once only available outside of private banking. Instead of just sticking to basic products, AMCs open the door to a wider range of opportunities managed by skilled professionals, giving you more flexibility and a better chance to make the most out of market moves. It's like having the best tools of the investment world right at your fingertips, without needing to be part of an exclusive club.

AMCs are structured financial instruments that provide investors with the ability to gain access to actively managed strategies, offering the flexibility of a managed fund but with additional benefits like lower operational complexity and greater transparency. They allow asset managers to construct a portfolio based on specific strategies, adjusting holdings as needed in response to market conditions and opportunities—all without the need to set up a separate fund structure. To understand why AMCs have become a favourite tool among investors, let’s delve into their underlying structure, who invests in them, and why they represent such a compelling option for today's markets.

What makes AMC different?

In the previous article, we have introduced AMC structure from front to back, but what actually makes AMC different and suit for your investment appetize? We have summarized it into 1 point, Market Access.

1.        Market Access

In an AMC, market access is elevated beyond what is traditionally available through private bank services. Unlike private banks, where clients are generally limited to cash equities, cash bonds, and structured products, instead AMCs provide access to sophisticated institutional level services from the prestigious investment banks. This includes more complex solutions such as exotic options, interest rate swaps (IRS), total return swaps (TRS), asset-backed securities (ABS), and different kind of derivatives, which offer greater flexibility and solutions for risk management and return enhancement. For instance, if a client wants exposure to the performance of the CSI300 index without directly purchasing the underlying securities, the portfolio manager can enter into a TRS contract, which is something that private banks typically do not offer, thereby optimizing the client’s investment with a more tailored approach.

Understanding the AMCs in Transactions

An AMC is essentially a structured product that replicates the returns of a specific, actively managed strategy. Unlike passive instruments like ETFs (Exchange Traded Funds), AMCs are dynamic and can change their portfolio composition based on the fund manager's discretion. The structure of an AMC generally consists of several critical components:

1. Issuer: Typically, an investment bank or financial institution acts as the issuer of the AMC. The issuer is responsible for creating and managing the certificate, providing investors with exposure to the underlying assets as defined by the manager's strategy.
2. Investment/Portfolio Manager: The investment or portfolio manager provides active management of the portfolio. They make decisions about the allocation of assets, selection of securities, and rebalancing the portfolio to optimize performance in line with the stated strategy. The AMC essentially allows the manager to implement their trading ideas and adjust the holdings over time.
3. Underlying Assets: The underlying assets of an AMC can vary widely, including stocks, bonds, commodities, derivatives, structured products, or other instruments. The portfolio diversification enables portfolio manager to tailor the AMC to pursue different investment themes, risk levels, or return targets, often blending traditional and alternative assets for optimal results.
4. Investors/Certificate Holders: Investors in an AMC are essentially certificate holders. They benefit from the returns generated by the underlying actively managed strategy, without directly owning the underlying assets themselves. This indirect exposure allows for greater flexibility and efficiency.
5. Custodian: The custodian bank usually private banks, holding the AMC in a segregated account. This separation ensures security and transparency, allowing investors to view the composition of the portfolio while ensuring that the issuer does not have direct control over the underlying assets.

Who Invests in Actively Managed Certificates?

The target audience for AMCs is varied, encompassing both institutional and retail investors. Here’s a closer look at the types of investors attracted to AMCs:

1. High-Net-Worth Individuals (HNWIs): Previously, access to actively managed, bespoke investment strategies was reserved for private banking clients with significant wealth. AMCs democratize this access, enabling High-Net-Worth Individuals who may not be serviced directly by private banks to invest in sophisticated, actively managed strategies. This allows them to tap into strategies managed by well-known investment advisors, leveraging their expertise.
2. Institutional Investors: Institutional investors, such as family offices, pension funds, and asset managers, also see value in AMCs. They provide a means of gaining exposure to niche investment strategies or tactical allocation plays without creating dedicated mandates or fund vehicles. AMCs provide transparency and flexibility, often aligning well with institutional needs for both control and scalability.

Why Invest in Actively Managed Certificates?

The appeal of AMCs lies in their unique features that cater to a wide array of investment needs. Here are some of the primary reasons why investors are attracted to these products:

1. Access to Investment Bank Expertise: One of the most significant advantages of AMCs is that they provide investors with direct access to the expertise of investment banks and specialized asset managers. Unlike traditional private bank offerings, which often come with high fees and barriers to entry, AMCs offer a more direct route. This allows investors to leverage the sophisticated capabilities of investment banks in structuring and managing diverse portfolios, thus gaining exposure to unique market opportunities that were previously restricted.
2. Diversified Investment Options: AMCs offer a wide range of investment strategies, from traditional equities and bonds to more exotic instruments like derivatives or alternative assets. The flexibility in constructing AMCs allows portfolio managers to create diversified, tailor-made portfolios that meet the specific risk-return profiles of investors. This diversity of options gives investors more freedom to choose strategies that align with their investment goals, whether it's capital preservation, income generation, or aggressive growth.
3. Greater Transparency: AMCs are often more transparent compared to traditional hedge funds or even some mutual funds. The Net Asset Value (NAV) of an AMC is typically available on platforms like Bloomberg on a daily basis, meaning investors can easily track the performance of the certificate by using just an ISIN. Allowing them to easy access to real-time NAV, investors could stay informed about their investment performance without waiting for periodic reports, providing a level of visibility that can be reassuring, especially for sophisticated investors who prefer up-to-date information to make timely decisions.
4. Efficiency and Cost-Effectiveness: Setting up an AMC is typically faster and more cost-effective compared to establishing a dedicated fund. The operational complexities of launching a traditional fund can be both time-consuming and costly, involving regulatory requirements and administrative overhead. In contrast, AMCs can be structured quickly, allowing investors and asset managers to capitalize on market opportunities without the administrative burden of traditional funds. This efficiency often translates into lower fees for investors compared to the fees charged by mutual funds, hedge funds, and ETFs.
5. Liquidity and Flexibility: Unlike other private investment vehicles, AMCs generally offer greater liquidity. They can be listed on exchanges, allowing investors to buy and sell them more easily, similar to traditional securities. This added liquidity is attractive to investors who want the ability to enter or exit positions without extended lock-up periods, unlike many hedge funds or private equity investments. Further, if the clients want to unwinds, they could just exercise the holder’s put option or sell in the market to unwind the AMC, and do not have to pay for the redemption fee like funds as AMCs are in a note form.

Moreover, AMCs can be customized, allowing managers to rebalance portfolios or change investment strategies as needed, making them highly adaptable in volatile markets.

1. Customization and Thematic Exposure: AMCs are often customized to reflect specific themes, whether it’s a focus on emerging technologies, sustainable investments, or macroeconomic trends. This customization allows investors to target precise sectors or themes they believe will perform well. For example, an investor interested in the rise of AI sector can find an AMC that actively manages a portfolio of companies engaged in the global technology sectors, thereby aligning their portfolio with their convictions.

Potential Risk Factors

When investing in an AMC, there are important risks factors that investors should be mindful of:

• Portfolio Manager Dependency: AMCs are actively managed, which means their performance is tied closely to the portfolio manager's expertise and decision-making. If the manager makes poor market timing decisions or fails to adapt to changing market conditions, it could lead to underperformance. It’s essential to assess the manager's track record and understand the strategy they employ to ensure it aligns with your risk tolerance and investment goals.
• Issuer Credit Risk: AMCs are typically issued by a bank or financial institution, and their value depends on the creditworthiness of the issuer. If the issuer encounters financial issues or defaults, your investment could be at risk, regardless of the performance of the underlying assets. It's crucial to evaluate the credit rating and financial health of the issuing institution before investing.
• Risk Management and Costs: AMCs often use complex instruments such as derivatives, swaps, and other structured products to enhance returns or manage risk. These instruments can increase the overall risk and make the AMC more volatile, especially in uncertain market conditions. Although the portfolios are tailored made, it is still crucial to know what are the underlying instrument and risk factors within the portfolio. In additional, understanding the total fees involved is important as well, which could help you to make better decision.

Conclusion: AMCs as a Gateway to Broader Investment Horizons

AMCs have emerged as a powerful financial instrument that provides investors with access, flexibility, control, and qualities that resonate with the demands of a rapidly evolving financial landscape. By offering access to the expertise of investment banks, AMCs bridge the gap that once existed between private and institutional-level investment capacities, opening up a world of opportunities for UHNW individuals outside the exclusive realm of private banks.

With a flexible structure that allows for dynamic, active management and the ability to access a broader range of investment options, from traditional equities to niche, thematic exposures, AMCs provide a unique balance of diversification, transparency, and liquidity. Whether it’s an institutional investor seeking niche market exposure, a financial advisor looking to offer value-added products, or an individual investor wanting to engage in sophisticated strategies, AMCs stand as a robust and versatile investment vehicle that meets a wide array of needs.

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