In the near future, what will be the fastest growing Asset Classes and practices in the financial industry?
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?
bump
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.
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:
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
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!
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
What about the cryptobubblessss?
Most Lucrative Asset Class (California) - Investment Sales (Originally Posted: 06/28/2017)
What is the best asset class to work in for investment sales in LA and Bay Area markets?
By "best" I mean from an earning potential standpoint.
This is more directed towards other brokers in California but anyone can contribute with what they see in their respective market.
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.
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.
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?
REITs quietly the best performing asset class (Originally Posted: 07/18/2016)
Many people these days talk about diversification in their portfolios. Stocks, bonds, ETFs, cash and commodities. However, not many people are talking about including REITs into their mix of holdings.
Many managers have yet to allocate real estate separately from equity exposure but that could change soon in September. REITs not only make up 20% of the S&P Financials and are valued at a combined $609 billion.
Why were REITs never allocated separately? Their performance is too good to ignore at they are up 12% on an average annual basis. What’s driving this is the fall of in treasuries which is a mirror image of the Vanguard REIT ETF ($VNQ) which has been steadily on the rise since Sept ’15.
With the bond yields breaking down in February, there has been accelerated growth in all asset classes as the REITs were one of the most popular. I also want to note that $VNQ’s makeup is 57.19% commercial real estate and its top ten holdings include the likes of Simon Prop Group, Public Storage and Prologis.
My thoughts for the allocation of REITs separately raise some questions for tax issues that could come into play. Beyond that what are your thoughts?
source
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.
In-Depth Asset Class Breakdown? (Originally Posted: 02/13/2012)
I am just starting to get into the markets, and I can't seem to get a clear breakdown of the different asset classes. Is there a way to efficiently label them into 3-4 classes and then list subcategories within them?
Sorry for sounding like an idiot if this is wrong, but here is what I have come up with so far...
Equities -growth, value, small-mid-large cap Fixed Income -bonds (investment and junk), emerging market Money Market Funds, ETF's, Mutual Funds
Alternative Investments -commodities, hedge funds, reit's
And the last question I have is if active and passive just refers to the investors attitude, or are there specific classes that can be labeled as active and passive such as indexes? Thanks for the help, and if anyone wants to go above and beyond. A current view on the classes (which ones are doing well / poor) would be extremely helpful. Cheers!
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-mutual-fund/chp3-invest-…
Bump...
Best Asset Class? (Originally Posted: 06/01/2017)
Ideally I would like to work at a company that invests in multifamily, vertically integrated with a developer, and would allow me to invest in the deal. I like California and New York but I'd like to go to other markets that I think will take off in the near future and won't be an area where it will cost as much to invest in.
Getting experience in a company that is on the equity side and or develops multifamily will help tremendously for my own investment choices or for starting my own company in the future.
How many companies allow you to put your own equity in to the deal and what position do you need to be at ?
Also, Im curious as to what asset classes you guys like the best and why?
Hotel is interesting, but I feel like it requires a lot more equity usually than smaller multifamily deals and hotel is more of an operating business.
I'd be curious to hear more about industrial but it doesn't sound sexy at all.
I do like commercial real estate because of the impact it can have in a community but it's riskier because of the tenant base.
Thanks
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.
Best performing asset classes of 2011? Gold, Fixed Income and Real Estate?! (Originally Posted: 12/30/2011)
What were the best performing asset classes during 2011? Any surprises?
Gold, Fixed Income and Real Estate (pending Q4 data)? In that order or am I off? Thank you central banks / Fed . . .
Equities: MSCI World is negative. S&P is flat. MSCI Emerging Markets Negative.
Private equity: The listed indices are negative (any other benchmarks?)
Commodities (ex-Gold): Negative for the year?
Hedge Funds: Negative for the year (HFRX indices).
the summer/fall US debt and europe debacle slapped my portfolio around like a dominatrix beating an MD ;\ SO MUCH FOR GLOBAL EXPANSION STRATEGY
US Treasuries
Me.
Buy emerging markets' bonds, they pay high yield with no real risk.
Least Restrictive Asset Class (Originally Posted: 10/21/2017)
Hi all,
After doing some preliminary research, I have been unable to find much information regarding the issue that I am currently facing. I am about to begin my brokerage career in investment sales in a primary market, and I have a couple of options to choose from in terms of the asset class that I will be specializing in. I am interested in several asset classes (mainly hospitality, multi family, self storage, industrial and office). Despite my wide range of interests, I will still need to pick a specialization and join a team that represents that specialization. My main concern in deciding on a particular asset class is to limit myself from becoming pigeon-holed into working in a single asset class for the rest of my career, in the event that it doesn't work out or if I want to pursue opportunities working with other asset classes down the road.
Correct me if I am wrong, but it seems to me that asset classes such as hospitality and self storage tend to be more highly specialized, which makes me think that it would be harder to transition out of asset classes of this type. Although I am very interested in both of these asset classes, it seems to me that an initial specialization in classes such as multifamily, industrial, or office might be more likely to lead to the development of a skill set that is more transferable towards working in other asset classes down the road. Again, I could be wrong here, but would anyone here be willing to weigh in? Of multifamily, office and industrial, which asset class is the least limiting in terms of allowing the opportunity to move to other asset classes down the road?
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.
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.
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.
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