Is Asset Management shrinking?
I've seen on a couple threads now people saying mutual funds are shrinking and laying off/decreasing the number of people they're hiring. Some people said their comp has been cut to as much as 50% as a couple years ago. Is there any truth to these statements or is it just an exaggeration (like how people are saying accountants will be gone in 15 years). How long do you think AM will last as it currently is?
The AM model as a whole is facing large headwinds in terms of technology and indexing.
Even a few years ago, generally poor-performing funds (+5 years of underperformance, questionable alpha-gen/dated investment thesis) were able to win mandates with good salesmanship and a bit of luck. This is due to a few main factors: 1) It is difficult to judge a fund without full realization of its market cycle relative to its investment strategy, which can take a long time and 2) Pension plans, Taft-Hartley, etc. were not always properly incentivized (e.g. Navnoor Kang), and would invest in a fund that wined and dined them well.
With the scrutiny towards low-cost passive; as well as increasing complexity and innovation in the space, it is becoming difficult for underperforming or non-differentiated funds to source or even keep their existing capital. The main trend I have seen in regards to layoffs, etc. is funds shedding or spinning off non-core or non-performing funds that were part of a larger "suite" (e.g. Small Growth, Small Value, Small Core), or a large asset manager choosing to exit an asset class entirely. Essentially, Asset Mangers are being forced to justify their value to clients, whereas before many mediocre performers, funds, and investment professionals were allowed to coast.
AM will always exist in one shape or another - Asset Allocators do need help placing their capital intelligently in the market, and good AM's offer alpha and differentiation not captured by an algorithm. However, it has recently become a much more competitive environment.
This gets asked like once a week, need a pinned topic at the top.
"When people invest more in certain stocks than others, the prices of those stocks rise in relative terms. And when everyone decides to refrain from performing the functions of analysis, price discovery and capital allocation, the appropriateness of market prices can go out the window (as a result of passive investing, just as it does in a mindless boom or bust). The bottom line is that the wisdom of investing passively depends, ironically, on some people investing actively. When active investing is dismissed totally and all active efforts cease, passive investing will become imprudent and opportunities for superior returns from active investing will re-emerge. At least that’s the way I see it." -Howard Marks
Passive and closet index funds will get blown apart in the cycle ending next draw down. It's easier now than ever before to panic sell. You can quickly blow out of your entire equity allocation in one trade if you're passively invested in an index fund. Look at the wild swings we had in Feb and March, and that was with a positive fundamental backdrop. That was just a precursor to what is likely to come when conditions actually deteriorate. In that kind of environment, bids for ETFs and crowded stocks will disappear as everyone rushes for the exits, and good value additive managers should outperform by a wide margin. Unless you believe that the variable that has changed is human psychology.
Active management is cyclical, just like everything else in life. Active strategies typically underperform at the end of the cycle as prices and valuations get distorted, there are just better alternatives this time around with index ETF's charging next to nothing for their funds, and ETF's themselves are fueling further distortions. Good active managers typically show their value add in a downturn and the early stages of the recovery. Just as all boats rise with the tide when passive ETF's receive new capital, they will fall just as fast when this cycle comes to an end.
To circle back to your original question, no, asset management will not continue to exist as it currently is, nor will anything else. Markets, business, and economics are all dynamic and constantly evolve and change over time. No one static strategy outperforms over the long-term or in all market environments. The managers that survive and continuously create value are the ones that are able to adapt (and not many are able to abandon a strategy that has worked previously in response to a changed environment). The deck gets shuffled but the industry isn't going away.