Will asset management industry just wither away?
Just wondering what you think holds for the industry, with so much money moving to indexes and ETFs? Should anyone 22 even consider starting in this industry?
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Asset management is a much wider field than purely picking stocks. There's also private equity, private debt, infrastructure, real estate, tc.
The fixed income market is far more complex and massively larger than the equity market. It is far more actively managed than the equities markets. Seeking and achieving 50bps of alpha makes a big difference in pension (corp and government), endowment, foundation and other institutional funds.
Although equity funds have seen a large move to passive investing , their are still plenty of active funds. The whole ESG movement will require more actively managed funds as mandates will have to seek companies who act certain ways. The larger funds are using scale/leverage to change and/or shape corporate behavior. That sector is growing rapidly and could become a big differentiator between fund families.
I believe the industry will begin to value those with coding and statistics knowledge going forward. Quantamental is here to stay.
The commenters above me are far too sanguine about active equity investing. The 15% annual return of the S&P 500 since the bottom of the financial crisis has grown the asset base of large asset managers, partially obscuring the huge headwinds of outflows and fee compression as assets inexorably go low-fee and passive. When the market finally has an (inevitable) sustained decline, it's going to be a wipe-out. The industry isn't going to 0, but it's going to fade to a shadow of itself.
I think the hope is that they can perform better in a down market. But nevertheless I pretty much agree with what you're saying. You didn't answer the OP's questions though, if you were 22 would you take a job as a stock picker today?
I'm sure you're right that that's part of what they're thinking. And to be fair, many equity funds will outperform in a downturn modestly just because your typical active fund holds a ~1-3% cash balance--it's a non-trivial drag in a bull market, and a meaningful help in a bear market. But it's not like your typical fund is loaded up with defensive stocks set to outperform dramatically in a down market, and it won't change the core logic of passive investing: in aggregate, active investors can only track the market, pre-fees, and will underperform net of fees.
As for whether I'd take a job as a stock picker today... I'd say in some sense it's definitely fine as a first job out of college because if things go bad now, there's always business school, and it's a fun job where you learn a lot about business. But if the plan is to make a high and stable income in one's thirties, that's 8 long years of fee compression and outflows from now, and I wouldn't be too optimistic.
For some color, I work at an equity hedge fund run by a fairly large asset manager, so I'm pretty close to all these trends. I'm in my late 20s and have thought a lot about my own future in the investment management industry--I think I can rely on about 10 more good years in the industry, which at my seniority is all I really need to make enough money to retire/start my own little fund/do my own thing/etc. But I'm already pretty far into my career. I wouldn't want to be in my early 30s in this industry, 10 years down the road.
Nothing I'm saying here about equity asset managers should be controversial. Doing a quick survey, BEN trades at 9x forward earnings; IVZ is at 9x, AB is at 11x, AMG is at 8x... these are not the multiples of businesses the market expects to thrive over the long term. In short, the market agrees with me (and you).
The fat is getting trimmed in AM pretty aggressively - in every aspect. Firms are running leaner personnel wise, streamlining operations and broadly divesting from non-core businesses where they can. If you have size, or fortunate to have some profitable segments, you are getting scale to control costs and make your overall business work. I agree with another poster - the middle is, eventually, toast. They will be absorbed, competed away or exist in a weird, ugly limbo. The only way you hold on there is occupy a niche, however you'd like to define that.
Aside from the literal 'investing' aspect - capex for Asset Managers is through the roof in non-revenue generating areas. HR, Compliance, Technology - they are absorbing more and more dollars than they have in the past, with no end in sight. When many of your strategies are commoditized - you then have to spend more heavily on marketing, which slices even further. Some of this will vary between bank backed, non-bank backed - but the trend is all the same.
In large part - where you can isolate yourself is by providing 'services' vs. simply products. I would strongly recommend that anyone looking to join a mid sized, long only equity focused fund company think hard about that decision - understanding it may not last long - unless they've got something really, really special that you can then parlay elsewhere.
If you are looking at fixed income - there's more runway for a variety of reasons. Active will, most likely, be a big player in municipal strategies (tax advantaged stuff) and there's plenty of firms who run insurance money, or similar, that you can get into. High yield, EM, etc. - all still have opportunities to get exposure if that's what interests you. The key here is to make sure you don't end up at a place that has a big emphasis on liquidity only - unless they literally own it. A place like Federated, by example, is heavily slated towards providing liquidity solutions - tough place to be for the next few years. Important, but brutal in a low rate enviornment. The side note here is you are seeing people get out of that business - MMF's closing, etc. as it's just rough.
Outside of that - institutional wise at least - there's still plenty of opportunities to pursue opportunities at firms that provide 'advice' - think OCIO's where you are basically becoming the CIO of an instutitution, picking managers, allocations, etc. Or in niche areas where you specialize - places like NEAM - in insurance money or have that extra expertise people will pay for. Or, heck, you could go work at the asset owners themselves if they are insourcing - lots of places like that to work at. Alternative managers are also options - HF, PE, VC etc. I think there's still opportunities.
Some might argue I'm conflating Advisory services with Management... I'd say deal with it. You aren't getting away, on average, with being simply managing another core fixed income strategy. Maybe if you have ancillary services you are selling them - but good luck. It's not just easy money anymore, it's far more commoditized but opportunities exist.