Associate positions at AMs will die off at an accelerated rate
Growing more convinced that associate positions at AMs will die off at an accelerated rate moving forward. We've already been seeing a lot of this happen as a result of a) dollars shifting to passive and b) active mgmt fees compressing (both of which leave less to go around for bloat).
The new force that we weren't seeing before but I'm increasingly seeing is tools that effectively automate / remove the modeling function (one of the bigger jobs of an associate). Canalyst is just the start, recently came across another tool that will literally update quarterly data in your own custom model for you. Industry will still have some associates but not I think to the same ratio as before where it was often 1 analyst : 1 associate. Increasingly it seems likely to be 2-3 analysts : 1 associate which both decreases the # of associate positions but also reduces investment of analysts into developing an associate as a true apprentice
Not sure if any others have thoughts on this. I'm just hoping to be an analyst within next 2-3yrs because in 5+yrs the outlook seems to be getting bleaker for junior staff, as it it wasn't already given limited upward mobility at top shops due to the active world now taking a shrinking piece of a shrinking pie. Any agreement / disagreement on this?
Hi Sequoia, just trying to help:
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You're welcome.
Hi, I was wondering if you could say who the service provider is for this: "recently came across another tool that will literally update quarterly data in your own custom model for you." Only familiar with Canalyst. Thank you.
Agreed 100%. Seeing associate roles being cut, we now even have associates shared across PMs (which wasn't the case before).
Am not surprised. I came in post MBA and was really surprised at how little training and mentorship there can be for investors fresh out of undergrad. They need to either only hire experienced investors or seriously bulk up training to be more like investment banking
Currently at an AM straight out of undergrad. Can confirm training has been awful
I've had the same experience. I've brought it up to anyone at the Principal/Partner level now that we're hired more interns, analysts and associates they've been very dismissive saying that junior staff will "figure it out".
But at the same time they're not willing to pay market rate for mid level staff to supervise juniors and do the actual work they were never trained to do. It's all very frustrating.
I am starting as an associate at a good firm this summer after I graduate. How worried should I be?
....I would think the above answers this pretty thoroughly
Interesting to hear this perspective from someone with boots on the ground. I once covered asset managers and worked on a white paper with a radical conclusion that in the next 10 years the industry will be solely dominated by single digit firms each managing $5T+ in assets and half of the current roster of asset managers will disappear. The theory was supported by the big trends we've come to accept (fee compression, shift to passive) but it was also based around the fact that technology is rapidly changing every aspect of the industry.
This is where it all becomes a bit circular for me. In order to remain at the tip of the spear, companies will likely need to spend 10-15% of their revenues to invest in and maintain technology resources at the same time that the revenue pie is shrinking (at the end of '19, 20%+ of managed US funds had 5 consecutive years of net outflows) and costs are rising rapidly. The natural conclusion is that technology costs would replace the human capital costs but how long it takes is a big question. The institutions are like cruise ships, they aren't exactly turning on a dime.
Anyway, I realize this isn't much of a contribution but it's a relevant topic and good to get some thoughts.
just wanted to say great work against smoke frog the other night lol. i had your back
Would say you really have 3 sets of AMs:
Large, top notch managers -- T. Rowe, Capital Group, Wellington. These guys will do just fine, will accrue a lot more assets (who you're referring to)
Elite boutiques -- smaller managers under $100bl AUM generally but who have a very differentiated offering (and likely offer the best investment results pre-fee)
Fat middle -- these are the closet indexers who will be the share doners to the above 2 parties (and passive). Probably comprises 60% of the industry on a global basis. These guys are screwed and will face the highest pressures (esp on the associates)
The top 2 categories of firms because of AUM growth should be able to offset fee pressures for the most part. That said, our industry is also focused on efficiency / rationalization so if there are ways of driving greater leverage out of existing analysts they will. So even these firms will see headcount reductions in associates. I've already seen some of this happen or the other scenario where there are still a lot of associates but almost none of them convert into analysts...and not like there are many analyst seats floating around in our industry so very hard to get that seat even if you leave. All in all, great seat if you have it and it will become increasingly rare to have it at a top shop
1) What are structural reasons for the top guys to be taking market share? How do things actually pan out and what mechanisms are involved?
2) Should someone try for a top manager (Capital Group, Wellington, TROW, D&C, PIMCO for FI) now while it's comparatively easier to get? Hard to imagine these seats becoming even more coveted. Recruiting would be a shitshow. Would probably see more people going to other stuff like tiger cubs at this point. I'd imagine that LO as an industry would become less attainable/feasible and therefore less attractive. This might actually shift the equilibrium backwards to make things less competitive.
How do you determine if an AM is a closer indexer? Is there a specific flagship equity fund you would compare to the S&P 500?
Thanks and +SB. Can you elaborate on what kind of technology you're referring to? What are some examples of technological changes that are taking hold and why do they exclusively/disproportionately benefit the top players?
This has happened in Canada over the last few years. Unlike the US, we're a small enough market where the impact of this consolidation is quite noticeable. Lots of MM, small cap and specialty funds have been taken out. Broadly, it's been very detrimental as companies that don't have scale or growth stories have fewer avenues to access capital.
Yea and the other piece that we haven't mentioned is distribution, which is obviously critical and much harder for the smaller players. Investment performance is table stakes and not a lone proxy for inflows. You see a lot of the specialty managers being acquired by, or doing minority interest deals with, the large diversified asset managers (insurance companies love this move). The specialty shop gets increased distribution channels, and even some negotiated capital commitments by the acquirer. The acquirer gets to bring that skillset in house and also has the opportunity to realize some return on the minority stake.
The whole industry is facing headwinds and associates are expendable and get cut first in tough times but everyone's risk of job loss is growing. Becoming an analyst is incrementally better but unless you're truly differentiated and are a good investor, it's only a matter of time before you have to leave. I'm concerned because when I look around the office, everyone else is pretty smart and can figure things out just as well as I can; the fierce competition is stressful.
These tech tools are new, improving, and interesting but nowhere near good enough to replace a junior associate. In fact, it's the associate using those new tools to do their grunt work faster like updating or building models more quickly. There's a learning curve to these new BI and IT tools and more senior investment professionals don't have the time to get up to speed; they'll still outsource grunt work to an associate.
Do you see the headwinds continuing indefinitely? The end of the bull market means investors can't just rely on putting their money in an ETF forever - surely active will make a comeback as passive falters?
Yes, the shift to passive is structural. Active as a whole doesn't outperform the market and will continue to lose share, bull market or not. It may be a slower bleed, but I don't see it stopping.
Remember it’s a cyclical industry and the big players have an insanely attractive business model. The fact that there’s all this doom and gloom probably means we’re closer to the bottom of the cycle than the top. If you’re a college student or a younger professional reading this - my advice is to do what you are passionate about and try to work in an environment that suits you and will allow you to reach your potential. If that’s PE or a pod shop, great. If its a LO - also great. Do not drive yourself crazy thinking about what may or may not happen
Can you elaborate?
50 bps off $1Tn+ at 50% margins feeds a lot of mouths. Market tends to go up over time, meaning you have a natural offset to fee compression
Scurve I wanted to get ur take as someone who's knowledgeable on this: do you think that FO staff will be the first to get cut, or will it be MO/BO? As mentioned somewhere else, some of these large LO's have literally thousands of people working in MO/BO and I can't imagine they're all necessary. I wonder what function these offices serve in the first place / why they're so important to justify comprising the majority of the firm.
What percentage of research associates get promoted to analyst at the top firms, assuming the associate is very smart and works hard? Specifically Wellington and Fidelity.
Low since they prefer MBA hires
Maybe 1/3? People complain but it’s really not that different from other areas of finance
This is completely wrong. The conversion rate industry-wide from associate is closer to 10-15%. People complain specifically because it is that much lower than most parts of finance
Important to look at the recent future vs 5-10yrs ago given structural industry changes. I know at T Rowe the conversion rate in recent years has been 5-10%
For additional reference, there was ONE US-based Associate --> Analyst promote in 2022, and she had 6 yrs investment experience and 2-3 years at firm
Left Fido a couple years ago but the conversion rate for associate->analysts in the equity group was quite high while I was there. Perhaps 50% or even higher for a few years. Direct promotes are def cheaper than MBA hires and have been tested pitching stocks to PMs for a few years at that point, so they are far more of a known commodity when it comes to ability/fit than an MBA intern.
Associate to analyst promotes were far less common in fixed income and they didn't have many associates in the high yield group while I was there, so can't speak to conversion rate for them.
https://www.wallstreetoasis.com/forum/off-topic/the-irony-of-index-funds
TLDR: pendulum thesis. When too many people start investing in index funds, market inefficiency increases, which makes active asset managers more profitable. This drives money towards active, which reduces market inefficiency and lowers the average return of active. This drives money back towards passive. The pendulum swings back and forth but active and passive will always be the two forces in eternal counterbalance with each other. Both are here to stay.
In my opinion, the area of concern here is the fact that within the active category, there is competition and it is unclear who will win. The rise of HFT's in the last 2 decades have been eating into LO AM returns. And I don't believe those who claim that HFT doesn't "price fundamentals" and whatnot; at the end of the day, they are identifying inefficiencies and arbing them, which reduces the total pool of "inefficiency" that active seeks to benefit off of. They may not be doing deep research on the fundamentals, but they use indicators that ultimately act as proxies for fundamentals, thus allowing them to assist in price discovery.
Any thoughts on this from the fixed income perspective? What is the risk for someone more junior (<5 yrs experience with no MBA) but has sector coverage/P&L ties?
Id go into private debt - it’s the future
Sir you must explain
FI is just so much more complex than the equities market. Plenty of room for active mgrs in FI. Many outperform the benchmarks. Especially in choppy markets, having research capability, assessing risk, and ultimately picking winners is an active game.
While I agree that there will be less headcount in AM going forward due to secular pressures, I actually don't think Associate headcount will decline as quickly. Over the past few years, larger AMs have actually created Associate positions by creating full-time and internship programs with the intention of developing talent from within. Even though active management is shrinking, larger AMs have actually been taking share, and were the only ones with the scale to have Associate programs to begin with. Tools like Canalyst will allow an Associate to focus more on value-added research than just model updating.
With that said, my firm has implemented a hiring freeze more recently given the current market. But the operating leverage that larger AMs have will allow them to do just fine past this cycle (markets go up on average). I think majority of the headcount decreases in AM will come from the fat middle and industry consolidation (which affects analyst headcount more).
This is partially correct that analysts will face more pressure than associates, but false to assume associates won't face accelerated pressure. I know multiple firms that have consolidated their associate programs, you just don't need as many today as you might've 20-30yrs ago. These tools will make the associate function more commoditized over time and an even rarer few will ever make Analyst. Fat middle is literally 60% of the industry, vast majority of analysts / associates there will die off. Operating leverage will still matter but fee pressures are going nowhere and those will compress the operating leverage you have to hire new associates & analysts
How can you say analysts will face that much pressure? Analysts are already completely overwhelmed with their coverage, unless LOs move to a model where analysts are covering 200 stocks each (impossible unless you want to crush performance) there’s no way you can reduce HC there. The big LOs have so much fat - but they’re mostly in non investment roles. The analysts will be literally the last place they cut, imo
Many of the large LOs are bloated with thousands of employees. Teams like Marketing, Communications, Institutional Sales, Client Support, Investment Ops, HR, etc will be the first to get cut. This is what happened at tech companies.
How does one return to the LO AM industry if they leave at the end of their Associate program to try something else? This is assuming you don't have a MBA.
Hard to say - I think it's up or out similar to any other professions like law, consulting, banking, PE, etc.
I'll agree it's hard to say, but it's something that happens with some regularity at my firm actually. I've seen PMs leave only to come back later, associates (and even one PM) leave to found startups and come back as associates or analysts (or PM in the one case), I think this really only happens due to occasional need to hire someone quickly in Baltimore, which can sometimes be challenging.
The only thing I'll say is that where I work, it's not as much up or out. You really can stick around in the same position for quite a while (Associate, Analyst, or PM). Some of our associates have been around in the associate role for over 5 years (including one 7-year associate). Some analysts stay analysts their whole career (and can do really well in that position).
(for reference where I work, it goes associate --> analyst --> PM rather than analyst --> associate --> VP --> MD)
Hi @Sequoia,
I would disagree with a lot of what you're saying. It seems that your definition of passive is too narrow as the industry continues to evolve.
You can still work in the passive and ETF portfolio management space, which is vastly growing. Many companies such as BlackRock do a lot of research on developing strategies and unique products for investors. They do very "active-like" research to come up with new indices and benchmarks that they turn into ETFs, where they track these indices. A lot of backtesting goes into developing these indices that passive products track and are built around. This is pure alpha research in the passive space and ETF development landscape. For example, new cover call option ETFs have been developed in the industry recently, in order to take advantage of increases volatility in the market (generate more alpha), where the portfolio trades these options by matching a particular benchmark that trades covered calls through a set of rules and heuristics. A lot of research goes into backtesting where to set the strikes, the expirations, and even when to roll the options. This passive space has unlimited possibilities for growth and requires lots of active investing knowledge.
Also, as we enter into a recession, we have seen lots of cross-sectional volatility in the market and greater sector dispersion. This is the active managers' time to shine. We have started to see reverse flow into the active space. When nearly all assets were having positive returns the last decade, it was difficult to active managers to beat the market, as a rising tide lifes all boats.
I have experience in both passive and active portfolio managament and cannot say passive is very passive at all...
Happy to help if you are looking to break into the industry! Just let me know.
I am interested in breaking in. Please PM me and we can talk off platform.
Thank you
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