Does long-only active management add any value??
Undergrad interested in LO as a career path. LO asset management looks great on paper; significantly lighter workload than IB/PE, more intellectually stimulating, similar career / comp progression. However, I can't get past this idea that traditional long only investing adds no value at all.
First of all, there's the empirical observation that most funds fail to beat their benchmarks. EMH proponents say this is because the market is efficient. I don't believe the market is completely efficient, but based on the research I've done it seems like traditional mutual fund investing is one of the primary causes of market inefficiency, due to the structural incentive misalignments associated with it. I know many mutual fund PMs are very good investors, but the institutions whose money they're tasked with investing are much less sophisticated. The principles of fundamental value investing generally point toward investing in securities that are disfavored by the market, but the short-termism and backwards-looking nature of institutional capital allocators means that LO investors face a constant pressure to invest in the most favored securities. If domestic has outperformed over the last 5 years, for example, institutions will allocate toward domestic even if investors expect international to have a higher return. You can see this in the contemporary rush to allocate more to alternatives. Cliff Asness wrote of his experience investing during the dotcom era: "At the nadir of our performance, a typical comment from our clients after hearing our case was something along the lines of 'I hear what you guys are saying, and I agree: These prices seem crazy. But you guys have to understand, I report to a board, and if this keeps going on, it doesn’t matter what I think, I’m going to have to fire you.'” The structure of LO AM incentivizes procyclical, anticontrarian investing. Career risk compels PMs to invest in what is safe, not what they believe is best, and asset managers face the same compulsion in order to maintain their aum. Hence, closet indexing.
In other words, my perception is that most of the long-only asset management industry is structurally predestined to fail and is pretty much just pretending to be seriously pursuing alpha. If this is the case, I would have a hard time entering an industry like this, even if the career path looks pretty cushy on paper. Is my understanding of the industry wrong? Can someone make a compelling argument that traditional long only asset management actually does add value?
I'm an undergraduate entering long-only asset management, so I can try and speak to some of your points. TBH, I don't have a response to the assertion that long-only asset management as an entire industry is structurally a farce; that's a hefty statement, and answering it is beyond my knowledge/capabilities.
However, as you pointed out, there are nonetheless a ton of issues and inefficiencies within the industry. On a more individual level, it highlights the importance of joining the right firm out of school. The future of AM has been discussed ad nauseam on this forum. A key point in this discussion is that the "middle" will get squeezed, leaving the industry dominated by a handful of large players (think Fido/Well/TRowe/Cap) as well as high-quality smaller players that occupy a specific niche. To maximize comp and career stability, if you're in it for the long run, you'll want to focus your recruiting efforts on these kinds of funds. Based on your post, it doesn't seem like you'd enjoy yourself at a large active manager, obviously. The downside to focusing on niche, boutique managers, however, is the lack of structured recruiting and the tiny number of seats, especially for undergraduates. Even at the largest active managers, class sizes at the entry level are often less than 10 associates total, sometimes less than 5. Another option is to take a look at MM HFs.
Hope this helps! As someone who went through the LO recruitment process not knowing anything, I'm frustrated by the lack of information available online as opposed to banking/PE, so I want to try and help demystify some aspects of the industry as best as I can.
To add specific numbers for those reading, a couple years ago Fidelity hired exactly 3 associates in equity research. So 5 is not an exaggeration by any means, Point72 alone probably hires as many associates a year as all of the large LO AMs combined.
And P72 fires as many associates as all large LO AMs combined too.
Currently working for one of the "large players" you mentioned. I think you are exactly right, and I'll even go to the extent to say that those currently at one of top LOs will see a significantly easier career path as they over the next several years continue to dominate. All of public markets (LO, L/S, Alt. Credit & Distressed, etc.) will see a serious degree of consolidation, and T. Rowe Price's recent acquisition of Oak Hill (in addition to Wellington's continued acquisitions of smaller LOs) makes me believe that being at one of the bigger players does make a huge difference in career outlook for the medium term.
A few thoughts on LO:
Those are my thoughts. I'm sure they're a bit rambling, but that's what I've learned so far since graduating from undergrad
Referring largely if not entirely to post-MBA roles here due to general difficulty associated with internal promotion to those roles (at least at my company, perhaps at others like Fidelity it's a bit easier). Many who start in LO in undergrad even get an MBA just to get promoted to those roles.
Post MBA: Analyst --> Senior Analyst/Associate PM --> Sector PM --> Diversified PM --> Director of Research --> Head of Equity --> Head of Investments. That's the whole pathway. each one of those steps is fairly difficult to reach which leads to the slow promotion cycles discussed in AM, but if you spend enough time in the space, you get get to PM. You just might not get to Diversified PM, which only the best of the best get to (20 at my company with approx. 750 equity staff). When people talk about PMs making a ton of money, they're talking about the Diversified PMs, the one's who are the sole managers of their fund, and generally oversee >$50bn AUM independently potentially across several funds.
MBA summer return offers vary from 30% to 60% at my company. The incoming MBA class at my firm was 7 people and consisted exclusively of graduates of Harvard, Wharton, Chicago, and Columbia.
(BTW I'm assuming beta managed funds are the passive funds that strive to maintain a set beta, which are generally considered a kind of passive-ish fund, so if I'm totally talking out of my ass for the below paragraph, my apologies!)
Concerning those in large LO shops having it easier, having a focus on more beta managed funds is a piece but definitely not the whole picture. As you mention, beta managed funds have more price discovery opportunities but this has led to adverse results in downturns, since most funds push for beta > 1 in order to beat market. My firm is conservative and although we have had strong run for last decade or so (beta managed funds have done well in this time), with pressures from Fed, it might be hard to maintain funds that have that high of beta and continue success. Also, it's effectively just passive investing. Passive has made strides, but three players dominate passive and I think they are going to remain dominant there (I don't work for one of those places).
My firm is focused on ESG and private investment for future success, and I think ESG isn't really a bullshit thing after spending time working there. I think there is genuine opportunity there. That said, I think the primary reason larger firms will maintain more success is due to a wave of consolidation beginning in privates and then expanding to other public equity funds. You always want to be at the place doing the acquiring rather than the place being acquired (I think).