Long-term career future in Equity AM
I'm an assistant PM (~8 years exp) at a small/mid-sized asset manager, long-only mid/large-cap.
I'm early 30s, I really enjoy my job, but I can't help worrying about the long-term future for equity asset management. I think I saw another thread with a similar topic so apologies for some duplication.
I can imagine the majority of users will be younger and looking to get into the sector (as I was many years ago using these forums), but would be really interesting to hear from some more experienced users how they're thinking about this.
I worry that I like my job, earn a good salary, but that in 5-10 years it might look a lot worse and suddenly I've got a niche skill set (being in a smaller team, as asst PM, not a lot of technical work required i.e. modelling that could be used elsewhere although appreciate always able to learn/improve on this) and wouldn't be able to command anything like the comp I do now in a job that I'd actually enjoy.
Fears of an existential crisis are reasonable. I'm of similar age though as an equity analyst. The rivers of gold that flooded the industry in the past are now shallow creeks.
My concern is passive and smart beta products taking an increasingly large share of equity fund flows. But that should weed out closet indexers and serial underperformers whose value proposition should be rightly questioned. If you perform through cycles over time, your clients should stick by you (unless you have large institutional clients and there is a change in allocation towards alts or some core/satellite allocation to equity). I think if you can generate alpha of 2-3%, you should be okay. It doesn't sound like much but adjust that for tracking error, upside/downside capture, etc. and you are probably looking good. Alternatively you can run a strategy that is less susceptible to passive because it can't absorb large licks of capital such as EM micro-caps.
If we say the industry is like an ice cube sitting in the fridge, I would much rather work at a medium to large sized manager because generally there will be stability and longevity, and because of the slow(er) decay in the AUM base (famous last words!). You may not get the supersized upside compared to a situation where there's equity or a similar arrangement, but having worked at a couple of boutique managers, I have had to deal with concentration risk in the AUM for one and a not-so-great culture at the other. The latter situation is when you really question why you are in this industry. A larger AM can dilute the horrible (and the good, to be fair) elements. But if you have the know-how, client base and wherewithal to go out on your own, then that shouldn't be discounted as an option.
Alpha of 2-3% is not much, but 2-3% compounded over the cycle is real value-add that justifies the fee.
Agree that the small/micro space will be more sheltered from the passive debate and stay fragmented due to liquidity constraints and the natural size limits on a small or micro fund. Hard to have more than $1-2B in a small cap product, you easily can end up owning 5-10% of the company and that breeds liquidity/concentration risk.
Here comes another late-cycle bull market existential crisis thread. And yes, I AM trying to break into long-only.
I'm going to (respectfully) disagree with Alman. I work in Equity Smart Beta, and I can say that I've put out both benchmark huggers (priced as such) and full on ridiculous active quant strategies wrapped up as an index and billed as "officially passive." ( I'll tell any potential client that sits still long enough to listen that it's basically 90% active share active)
The vehicles are changing, ETFs have notable functional benefits compared to mutual funds, but the ideas aren't. Bogle once said that he doesn't believe that active is going away, but high priced underperforming active is. Keep trucking and you'll probably be fine.
I've learnt something new. So what you're saying is the label doesn't match the product? And that my concerns are unfounded?
OK, so 'passive' means that the PM is given an index and told to replicate it. The fund itself just blindly follows the index. What the index does is entirely up to the index provider/you. Beyond standard cap weighted indexes you can do stuff as simple as equal-weighting all the way to some of the most intense macro-quant strategies as long as you can write down the rules for the index provider. Our most complex strategy was a collaboration between my factor investing team and our global macro team.
Could you ask the PM about that fund? Yes, but he'd probably forward your email to me. When there's a question I don't know I don't punt up that ladder, I go to my coworkers who designed it with me or the research team at the major index provider that designed the factors that we time.
You have the skills and others with your background have successfully exited to managing in house core models at RIA's where they can legitimately charge a 100 bps advisory fee and are incentivized to having an in house equity core PM to bypass a manger fee, you can leave to go work for a family office, or you can become an allocator at a pension fund or endowment. You can also move on to a portfolio specialist role where you leave to a larger AM and become the intermediary between the PM team and the client, while only needing to talk about that specific fund. If you are young enough and willing to continue to learn, your skills will be transferable.
Bumping this. As someone who wants to go into AM, albeit Fixed Income, how much safer are those jobs in the long-term?
I feel like fixed income is more fragmented than equity, harder to index and LT safer. I also think there may be more analyst opportunities in fixed income. Outside of the typical investment firms, all the large insurance companies also have huge fixed income portfolios typically and thus need analysts. I don't have the data to support these thoughts but it is just from anecdotally talking to friends in fixed income and observing the market.
Hard to say what it will look like in the future, but I would say it’s more secure for now at least. The fixed income market is far more opaque than the equity market. There’s not a lot of liquidity in certain parts of the market (even in IG corporates). Bonds trade over the counter. For one company, there might be 20+ bonds outstanding. Each bond will have a different maturity, coupon, yield, currency, dollar price, structure (hybrid, call, step, etc). If you like the fundamentals of company X, there are many ways to express that in fixed income market. Do you care about dollar price, currency, 10yr v 30yr? IMO, this all makes the fixed income market difficult to automate and move to passives. Replicating a benchmark is pretty difficult given the nuances / costs associated with building positions. Additionally, the benchmarks don’t capture the whole market. Not all bonds are benchmark eligible (size, registration, etc) despite being issued by well established corporations.
Additionally, there are a lot of structural buyers and sellers in fixed income. Pensions, life insurers, etc have significant investment accounts and have a lot of restrictions over what they can own (tenor, rating, etc).
Putting this all together, you get a very opaque market with a lot of opportunities for active management. A quick google search will show most active fixed income strategies consistently generate alpha.
Yes - Much better said
Rich people aren’t settling for 7% average annual returns + 20% annual standard deviation.
If you can consistently achieve better returns or lower risk than that, or both, net of fees, people will be willing to pay you a lot.
whilst markets will and never will be 100% efficient, passively managed funds that track index' inherently rely on some form of efficient market. Active managers provide some form of efficiency to markets and without anyone doing this how would an index/stock be somewhat accurately priced for a passive fund to track it?
We're also in one of the best bull markets in existence, it's easy to get caught up in the narrative that stocks only ever go up. So it's important to remember that an active manager (even long only) can still significantly protect from downside risks that maybe a passive fund can't (i.e. strategic cash allocations etc).
whilst I think the passive fund and ETF space still have a long way to grow and can still capture a lot of market share, I think they will predominantly be taking market share from underperforming funds. If you have consistently outperformed and can continue to do so I don't think the wide adoption of passive funds will be a terrible thing to career prospects.
What about your job do you enjoy? What about your skill set is so niche that you are afraid won't be transferable? As an asst pm you should have some measure of control over your fate, so if you're good you should have no issue getting picked up somewhere else.
My worry is that being a generalist I know a little about a lot, and I know about public equity investment, but it's far more "art" than "science" in my opinion. And therefore in a non-investment role I'm not sure how much that knowledge or those skills will matter. Since a lot is experience more than anything, rather than specific hard skills I suppose.
What I enjoy more than anything is that part of the job is getting paid to learn. I like the variety of things I learn (being a generalist) too, and think I'd get quite bored if I went off to work for X corporate focusing on just one thing.
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