Is it wise to enter into AM in 2018?

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Make hay while the sun is shining. Everything will probably be outsourced or replaced by new tech at some point. Keep learning and evolving

Also what about the pressure on fees and the fact that people are going passive? I think I really want to start my career is an asset management firm as a research analyst or equivalent for equities but I get discouraged because it seems like AM is shrinking in equities. Thoughts?

I had the very same question recently. I asked a couple Portfolio Managers in my network what their opinion was on the future outlook of this industry. The consensus I got from each of them is that, Robots have always been around and the debate is simply getting more attention these days. Although AI can perform tremendously better in the short run at evaluating price expectations, human emotions play a significant role in trading that unfortunately AI may not fully grasp. Therefore, the industry will be in need of Asset Managers. The skills needed are surely evolving rapidly and good asset managers should be aware of those especially the importance of being able to understand how those AI systems work, how to employ them in order to identify gaps that we humans can fill in order to gain alpha. Also, wouldn't you like to be part of an industry that forces to continuously develop new skills and increase your knowledge? I sure do.

short answer: yes

caveat: I'd look for a job in non-US equity, credit, money market/short term fixed, or global macro, with my preference being credit

Depends if and when someone can come up with an algo that can consistently beat the market and can can confidently gain better returns than any PM. Obviously emotions will come into play during the bears and whether a PM can keep his cool and think rationally, or whether the algo will perform better or worse than him depending on this.

To speak to the PWM space, we're definitely feeling the burn from passive in the sense that fees are being suppressed as more clients start to wonder where the real value add for active management comes from. In my opinion, the industry will never die, but we'll continue to see high churn rates as the advisors not worth their salt will fail out and the top performers will get bigger and bigger. To answer your question directly though, yes, PWM headcount is shrinking at the wirehouse firms.

Edit: To qualify my response, I want to make clear that I believe that good advisors can and will always continue to provide a value prop that goes above and beyond passive.

Depends what role you have in investment management. Exit opps are different for portfolio and non-portfolio roles.

Generally IM jobs tend to be less meritocratic than IB or PE/HF.

For what it's worth, I spoke to a very senior MD at BlackRock and he told me not to go into asset management, and if I was interested in investing, to go to PE or a specialized HF instead. Said he's worried about his own job a few years down the line and wouldn't encourage anyone capable of going elsewhere to go into AM. Just another data point to consider.

I feel as though an AI would likely be completely technical in its "research" and investing practices. In that sense it would look at a stock / price / trend and extrapolate based on data. That's fine and all but if the markets did have a clear cut pattern / rules that governed it we would see a lot of people taking advantage of that.

I'd like to akin it to the premise of learning Econ / Finance in college. You know those passages that say "assume away XYZ" or "All else equal" or "Investors act rationally"? Yeah that's all complete horse shit. (Most) Investors act immensely irrationally and don't even realize it... Only an equally aware and irrational investor can see that and capitalize on those inefficiencies. Just my .02 though.

People here seem to be missing the point that there doesn't need to be a market-beating robot to displace humans - just need people to continue converting to passive investing. And yeah sure at some point too much passive means no price discovery but I don't want to bet my career on guessing when that is

Anyways fixed income AM seems to be a lot safer (active fees are lower and the greater number of securities / imperfect forms of trading make it easier to beat an index) so look into fixed if you want to go AM. High yield is a decent substitute if you were really set on equities.

If the criteria is the ideal combination of prestige, money, job security and life balance I would say that you should try to align your passions with your work. If your passion is that ideal combination, go for the job that fits it best.

I love AM. I am never bored. Every morning is a new swath of information and opinions thereon. Every morning can offer a new level of psychology. I doubt that one can say that about many other jobs. Coding, law, even PE, seems kind of repetitive?

As to the passive issue, there is no doubt that many mid-age to old dogs fear it. They will dissuade you from AM.

They won't tell you why passive is taking share from my experience. The answer devalues them. Their careers have been built on the perception that they offer stock picking skill. In reality they were much more market conduits than financial experts to many of their clients.

So now these clients have Vanguard as their conduit and are perfectly happy. This trend will continue for several years.

The new wave of successful asset managers, I believe, will learn to counteract the ETF trend by arbitraging time horizons. It will require a more nimble trading philosophy. But basically, when the algorithms get out of a good group, like semiconductors, you buy near the bottom.

I, for one, welcome the popularity of indexing, which I simply call "natural selection." Too long has active management escaped the scrutiny of opportunity cost analysis. Too long have shitty closet indexers charged exorbitant fees for less than mediocre returns. Just as I welcome MiFID II to cull the weak sell-side shops, I look forward to index funds to draw assets away from the poor-performing active funds in the buy-side.

I cringe when I see people calling behemoth funds like Fidelity or Blackrock "top funds." This is not banking; there is an optimal AUM range for asset managers to deliver outperformance. These giant, lumbering "asset accumulators" do not offer differentiated products. For an asset manager to increase its revenues, it has to increase its asset base. How do you increase your asset base? By either sales or by performance. For "asset accumulators," it is far easier to raise assets by sales rather than by outperforming the market (and thereby risking underperforming). Let's suppose you have a $100B fund. You expect to get 10% return in the market this year, so assuming you do nothing, your revenue should increase by 10%. It is MUCH easier to sell $5B of this product than to outperform the market by 500 basis points when your fund is this huge, so if you want to raise revenues by 15% instead of 10%, it would be better (and cheaper) to hire more sales reps than to hire better analysts/PMs!

On the other hand, if you are working at a shop with a long history of consistent, high quality outperformance, you have nothing to fear from index funds. Top-tier value shops generally stay within a targeted range of assets as to not dilute the returns of their existing investors. Also, great investors have enough integrity to return capital to investors when there isn't enough compelling opportunities in the market rather than "reaching for yield" (for fixed income) or "buying on relative valuation" (for equities).

So long story short: if you think you can outperform, do not fear index funds.

Let me add my perspective as an analyst at a fairly large long only firm (post MBA with let's say ~10 years experience total).

I think the traditional long-only, actively managed equities industry is in huge trouble. Across the board institutional clients are switching to passive strategies or, at the very least, negotiating significant fee reductions. I mean fees are going from 80bps down to 20-30bps, or even lower. We have a significant number of institutional clients -- think pensions, unions, endowments -- and they are switching to passive funds en masse, often at the advice of their consultants.

The retail (i.e. mutual fund) side is more resilient, if nothing else because many individuals don't pay too much attention to their investments or rely on an advisor to do it for them. For whatever reason, advisors tend to love the concept of active investing, perhaps because it helps them justify the fees they charge clients. So that client base is sticky, but even there the trend is towards net outflows to passive investments.

The reality is that 15+ years ago if you wanted to invest in a diversified portfolio you had to use a long-only manager and would pay 100bps+ for their services. Today the choice is between active and passive, and frankly there is little evidence that most actively-managed funds can outperform over time, much less justify huge fees.

My advice would be to look at a career in an asset class that cannot be easily replicated by passive. That would be fixed income, private equity, real estate, etc. There are also certain equity niches such as activist investing that will still be around. Unfortunately the traditional LO industry is going to keep declining. I'm not saying it will go away entirely, but the glory days are definitely over and many firms and funds are simply going to going out of business or get merged away.