In the near future, what will be the fastest growing Asset Classes and practices in the financial industry?

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Rank: King Kong | banana points 1,243

The PE/buyout and high yield boom in the 80s, the Asset Backed Securities and Prop-Trading boom pre-2008, and more recently the rise of Quantitative strategies - these are some examples of fast growing asset classes or practices within the finance industry that made some people very wealthy.

As the finance industry has matured, it has become harder to exploit opporuntities in slow growing sub-sectors. For example, starting a L/S hedge fund now is extremely difficult in the crowded space.

So what do you predict it will be in the near future - impact investing? a second PE boom? ETFs? Some niche thing that I don't know about? And why?

Comments (29)

Apr 12, 2018

bump

Apr 12, 2018

Personally I don't see it being PE or ETFs. There is so much cash being raised in the private space, current deal flow is barely sufficient to sustain it in certain areas (NBIM have stopped allocating to buyout). For ETFs, some more institutional guys might stop bothering to pick stocks, but again there isn't much room for that either (grossman-stiglitz). You raise an interesting point re sustainable investing - I've seen a lot of asset allocators come under pressure in recent times from their investors on this point - so far for negative screening demands more than positive/impact investing, but a significant move nonetheless. The governance needs to improve first though. Being honest though, if I knew what it was going to be with some certainty, I'd be there's not here haha.

Best Response
Apr 13, 2018

credit and PWM. talking my own book here, but let me share why:

credit: after 35+ years of declining interest rates eventually bottoming out sub 2%, people have all but forgotten about the bond market. investors aside from the retired look at fixed income and think "why the hell would I buy something that loses 2% per year after accounting for inflation and expense ratios?" but that is all changing. in a declining rate environment, you could do shit credit analysis but make it up because of the price boost you got from falling rates. with the decline of inventories at B/Ds, end of muni bond insurance, and a rising rate environment, you will need to know your shit when it comes to credit. furthermore, when the US equity market goes through its next bear, people will take a hard look at why they own stocks in the first place, and the shift may not be from active to passive or passive to active, it could be from stocks to bonds. an IG corporate paying 5% or a high quality muni paying 4.5% tax free becomes a lot more attractive. watch the flows, they will tell the story. finally, the argument for active/passive just does not exist in fixed income. yes, many investors flock to passive, but the average bond manager actually outperforms the index net of fees, and that's just the AVERAGE. it's not like US large cap value where 75-80% underperform, over 50% in the bond world outperform net of fees, and expect firms to pick up hiring as the flows go back over to bonds from stocks.

PWM: I think the number of advisors will shrink or stay the same, but there are peripheral effects for a growth in PWM. the main reason is demographics. gaggles of people retire every day, most of them don't want to manage their assets on their own, so they will take money from company 401k plans and move them to everything from GS PWM on down to betterment, fido, and schwab. fido, TDA, and Schwab all do personalized portfolio management, and while I'm unsure if this is algo driven or not, you will see flows to those shops as well as the big 3 pick up. and then there's Vanguard, the 800lb gorilla. do you think vanguard=index investing? you're wrong. look at all of their oldest funds: morgan growth, windsor, us growth, explorer, all subadvised by places like wellington, jennison, clearbridge, and so on. I don't know that wellington needs a ton more people if Vanguard doubles their assets every 5-10 years, but I do know that Vanguard will need more people. this could mean client facing advisors, risk management folks, compliance people, capital markets people, traders, and so on. the same goes for all the other firms, UBS may not add 5,000 more advisors, but they will continue to need people in the other functions of PWM.

other areas that are interesting but won't be the equivalent of the PE boom in the 80s or quant for the past 15 years

SRI (socially responsible investing) - it's not a fad, but it's also not going to change the world the way everyone thinks. speaking from experience, the people curious about this are mostly the ones without a lot of money, and being a capitalist, I can understand why firms like mine and the others in the big 3 aren't putting all of their resources into this space. sure, you might have an ETF suite that screens for companies giving 5% of their profits to charitable causes, have independent governance, whatever, but it's not going to be bigger than the other things I mention above. quick sidebar: how delicious is it for larry fink to make $28 milly not even 1 year after he asked CEOs to consider how their companies impact society and help solve things like climate change and lackluster wage growth. I'm all for making the most amount of money that's legal, but I also am a big fan of charities doing charitable work. if your employees and customers want you to behave a certain way, you should behave that way because it's in your best interest as a capitalist, but I'm going to tell you right now I'm not sacrificing my practice's return on equity to save a few trees. the two are not necessarily at odds with one another, but the hierarchy of any company should be as follows:

  1. employees
  2. customers
  3. shareholders
  4. society

ETFs - I believe this space will actually shrink. do you know there are over 3.2 million indices yet only 50,000 publicly traded companies in the world? yeah, that won't continue to expand. ETFs are a better way to manage money versus a mutual fund (even just putting the exact same strategy into an ETF makes it cheaper because of the lack of custody costs and so forth), but that doesn't mean that everything else will go away.

I believe the startup investment scene will also change. I heard an ad for a company that allows you to invest at least $5. number 1, it's impossible to make money in investment advisory unless you go up market. number 2, that's not going to solve the problem in this country that americans just don't have enough money to retire on. you can make 20% compounded for 30 years on your $100, but if all you have is a small savings, you're still fucked, you just have bragging rights for your CAGR. sorry Robin Hood, you won't ever get more AUM than the big boys.

lending in the frontier markets is also interesting, though it won't be big enough in the very near future to warrant you changing your employment decisions. for example, when the hell will Africa capitalize on its endless resources and go from frontier to EM and then EM to developed? do they need capital? do they need infrastructure? maybe all it takes to get a viable tourism industry in mozambique started is a few public private partnerships to build water infrastructure and roads. perhaps the EU and US exempt these bond investors from federal taxation and create the worlds first global muni bond. if I can get 9% tax free and the world bank is pitching in 30% of the deal, that risk might be worth taking, and it'd mean a helluva lot for those countries. ditto for the equity markets, you just need better defined property rights, reporting standards, and capital. I think the lending has to come before the equity markets can really take off

speaking of, I also believe infrastructure will be big, yes you've all heard the MLP story, but what about more esoteric investments like cell towers, power trading, water storage? I foresee firms doing a lot on both the debt and equity sides of those areas, there's still a lot of growth to be had across the globe. why should gasoline cost so much more in europe? why do I get shitty cell reception in Alabama? why does Costa Rica have scheduled blackouts in summer? why does california have a perennial drought problem? those are rhetorical questions, I'm not looking for answers as I believe I know most of the answers, what I'm saying is that things like infrastructure finance and power trading can solve those issues, so they could be an area of growth.

finally, ag commodities and shipping. I believe world hunger will be nearly ended in my lifetime, and you have to get food and goods across borders and all around the world easily, and up to this point, commodity trading is part of how that gets done, so I wouldn't be shocked at all if that space grows. doesn't mean it'll be a good investment opportunity, but it could be a good career path.

tagging @APAE to see if he can get some more interest in this thread, these types of discussions are always fascinating to me

    • 8
Apr 17, 2018

Hey Prof, really appreciate your detailed posts as usual. Something you talked about is pretty interesting and pertinent to a firm I'll be at; would you mind if I PM'd you to pick your brain a bit more? Thank you!

Apr 13, 2018

feel free, but it's generally good to have convos out in the open if you think it's something other users might be curious about. if you PM me, I'll answer, but I can't promise how quick or how detailed. thanks for the kind words

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Apr 16, 2018

What about the cryptobubblessss?

Apr 17, 2018

Apartments, A B and C. Retail A & B. Office A & B. Industrial A & B. Land in good locations.

Basically anything institutional or anything in a good location.

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Apr 17, 2018

I would say hospitals/medical. A lot of retirees in Southern Cal due to weather, and this is a market that will probably have strong sales numbers and growth, and not as many people look at going into this space as other spaces.

Apr 17, 2018

That space has been on my mind quite a bit. Especially with retail taking the hammering it is, it's makes you wonder what could fill that void.

Have you been actively targeting medical use? If so, how have the results been?

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Apr 17, 2018

I think the tax issues are what is holding it back, IMHO and the due diligence for that is why it hasn't been separated from the financials. Firm I worked at actually had them separated but that is just an unusual case.

Apr 17, 2018

you're on the right track. most use the 'style box' grid. i'd recommend you sign up on morningstar and poke around and investopedia is also a great resource.

http://www.investopedia.com/university/quality-mut...

If the glove don't fit, you must acquit!

Apr 17, 2018

Bump...

Apr 17, 2018

Almost all developers will let you get an equity stake in deals; that's sort of the endgame in development (besides starting your own shop) and is how you really start making money. Some firms bring in partners who are early 30s, some not until much later - it depends on the value you bring and much more importantly your relationship with the firm/partners.

I personally don't have a favorite asset class - I think more of it as favorite deals. Each deal is (to some degree) it's own little investment strategy, it tells a story, it has ups and downs.

From the perspective of just sitting at my desk underwriting, I'd probably say I like MF/condo/mixed-use the best just because I find it more interesting to look at the more granular submarket rents and think about how the design impacts marketability/revenue/dev costs than it is to spend the day in Argus modeling CAM pools and looking at lease comps/tenant quality. Never dove deep into a hotel deal but I agree that it's absolutely like running a business and from what I've seen the underwriting is a lot more nuanced. Industrial may not have the sex appeal of a Ritz Calrton or a luxury condo project, but it can still be pretty cool. Logistics facilities and high-bay deals are pretty damn interesting.

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Apr 17, 2018

the summer/fall US debt and europe debacle slapped my portfolio around like a dominatrix beating an MD ;\ SO MUCH FOR GLOBAL EXPANSION STRATEGY

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Apr 17, 2018

US Treasuries

Apr 17, 2018

Me.

Follow the shit your fellow monkeys say @shitWSOsays

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Apr 17, 2018

Buy emerging markets' bonds, they pay high yield with no real risk.

Apr 17, 2018

Hotel is very niche. I would pick office as it's generally more complicated, though not always, than industrial, multi family, and retail. But in the beginning of your career, you're not going to pigeonhole yourself too quickly. Don't worry. Choose one, have fun, and switch down the road if you want.

Apr 17, 2018

i've always said industrial or office or retail because it forces you to learn about reimbursements etc and possibly forces you to learn Argus. i feel like office investors look at apartments as a less sophisticated product type, whether or not that's right.

having said that, remember that the faster you figure out exactly what you want to do, regardless of product type, the faster you can move up in life and not be somebody else's bitch.

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Apr 17, 2018

Learn which asset class you like the most as soon as possible and then hyper-specialize. The single biggest career mistake I made was going the generalist route. You can be a complete moron, but if you know your niche really well, you can be especially valuable.

Apr 17, 2018
Dances with Dachshunds:

Learn which asset class you like the most as soon as possible and then hyper-specialize. The single biggest career mistake I made was going the generalist route. You can be a complete moron, but if you know your niche really well, you can be especially valuable.

this is exactly what i was hinting at above. good friend of mine did exactly this. he was super focused on one thing and he didn't get distracted. at the time i was like wow, that's all you want to be? looking back, he was right and i was wrong. he is making a ton of money now (significantly more than i) and is not that smart. of course, he is the type of person who would never hang out on wso, and he is the type of person who has balls. he doesn't want to be a generalist associate at Morgan Stanley slaving over perfect models and presentations. and he makes more and has more fun.

he's just one example but if you pick something asap and move up fast in that one thing, you could end up with more money and more, for lack of a better word, 'power' than you expected. so while the dainty kid from trinity college is out "trying xyz product out" for 24 months and then spending another two years in grad school in new hampshire "finding his passion," you could be out there learning a product and getting shit done and moving up in the world. just an idea.

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Apr 17, 2018
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