Is It Wise To Pursue A Career In Asset Management?

I know the topic of active vs. passive has been discussed in great detail on here, but I would like to know if active management is still a smart career choice. Sometimes I feel like the decline of active management is exaggerated, but when I read about all of the outflows, I feel inclined to believe it. Asset management sounded like a great career choice at one point; it offers good pay, stimulating work, and a good lifestyle. But now, it no longer sounds like a safe choice, and one is left to wonder if they will have a job in the future. What do you guys think? If you were just starting out right now, would you pursue a career in asset management?


Active management is not dead but Greenwich Associates warns money managers in a new report that changes in preferences by institutional investors toward passive investing could create some rough patches ahead.

Passive strategies hit $16 trillion in 2015, up from $6 trillion in 2008, the report says. It predicts passive strategies will reach $23 trillion in 2020.

At one point Asset Management seemed like the perfect career, but is that so anymore?

Reference:
Active Management Will Survive But Shakeup Is Expected

 

Bump. As someone in college aiming for a career in Investment Management, I'm fairly concerned with the shift to passive Management. My hope is that things will start to turn around in the next few years and active management will start to pick up again. I did read in the WSJ recently that there will always be a need for active management because not all investors will want to invest in passive funds and some strategies revolve around active management so for now this gives me hope there will still be space for new hires.

 

I have also read that there will always be a need. My only concern, however, is that only the "rockstars" of the industry will remain. I feel like just being "good" will not cut it. This is fine if you're a top performer, but most people aren't. I agree with you in that hopefully things turn around and active picks up again!

 

Not to mention as well a lot of the 'rock stars' have a lifestyle like IB in terms of hours. So if you believe it will only be the rock stars left (which I disagree with) you can forget the lifestyle aspect of AM.

 

Didn't read the post, but consider this - there will always be a need for active management since it's an impossibility for all money to be in passives. The reason is simple - all trades will become crowded and prices will completely stop following real fundamentals, the moment this becomes slightly more pronounced there will appear a batch of active investors who will want to monetize on this irrationality before the impeding burst of the bubble.

 
Wolfofgeorgestreet:

But I though most AM couldn't short securities?

Most traditional managers can't outright short, but active traditional managers would abandon the dearly loved names (i.e. sell at some point after a run or not buy in the first place at all) that are part of some given index and it will always be the case that a sufficient amount of short money will be available to ultimately be able to correct the disparity between fundamentals and stock prices.

 

As others have mentioned, there will always be a need for active management. Good managers that can consistently outperform their benchmarks will continue to manage assets and win new business.

With that being said, the Asset Management industry as a whole is in a race to lower fees in response to index funds. Most shops have been substantially lowering fees across all strategies in an effort to retain business. In the last few years, I have seen margins shrink dramatically. As such, people in the AM industry are making less money. I expect this trend to increase.

It's true that the hours aren't bad, but I do not see AM as an industry where it will be common to make big bucks. If you are smart and willing to work hard, I highly encourage people to enter other areas of finance.

 

I came across some data recently illustrating how passive management has outperformed active in bull markets and active outperformed in bear markets. Since we currently are in one of the longest bull markets in history the underperformance and outflows from active strategies can be expected. However, this trend likely to revert after next recession as active once again outperforms passive.

 

Let me save you the time. Buffet, being a rich bored 137 year old man, is embarking on his crusade against the rich, and frames his entire argument around this.

Basically he made a bet with a fund of funds guy, told him to pick a set of actively managed hedge funds to stack up against an S&P tracking fund of his own to see which would outperform over a 10 year period. Surprise surprise, Buffet won the bet and now claims that passive management is better than active management. This is a tunnel-vision view of hedge funds. For one, hedge funds are designed to outperform over a full market cycle, not year by year. They also typically outperform in bear markets. In addition, who is this fund of funds guy and how did he pick the funds? This is a very relevant question, because yes, most active management will underperform, but that's always been the case. The top 10-20% of firms however WILL outperform. According to Buffet, you should just give up and go passive instead of trying to find these outperformers, not only because of the challenge of doing so, but what I'm about to say next.

All of that is fine, even if it ignores many key facts. The annoying thing is, Buffet makes the argument that rich people are too entitled and feel like they deserve something better than "regular" people (painting them to be greedy idiots rather than just people who are trying to protect & grow very sizable assets which is the reality). All he's trying to do is illustrate that rich people are villains. Look, Buffet, you ran a hedge fund yourself once, even if you had a different fee structure. Second of all, not everyone needs to be like you and give away 99% of their sh*t. Do it if you want with your money, but stop trying to shame everyone else with significant assets to do the same.

 

I don't think you read the annual letter. Not sure what grudge you have against this man but from his words I don't think he's implying that. He may come across as having a holier than thou attitude to you, but not to me. Why don't you pull out some data on hedge fund performance over a longer period of time and show that overall they have outperformed S&P index? He stated clearly that there will always be capable active managers, but it's rare. And the hedge fund industry on average underperforms it, obviously with a few exceptional ones that do well.

 

I would say unless you are Bobby Axelrod, go with passive. Active just means you actually believe that you, a 12-year old boy, has more intelligence, skill and insight than the 2000-year old market. Give me a break.

 
Hustleharder:

I would say unless you are Bobby Axelrod, go with passive. Active just means you actually believe that you, a 12-year old boy, has more intelligence, skill and insight than the 2000-year old market. Give me a break.

That's a myth - you don't have to be smarter / more intelligent than the rest of the market. Just need to pick your battles.

 

Disagree, its hard to even name 10 well-known "active" shops that have outperformed the market overtime, have lasted for over a decade and are of any significant scale (talk about 1b and above). What are these battles which you speak of? Even the greats like Ackman (whom I really respect) are unable to show case their skill consistently over time.

 
Best Response

Posted this on a similar thread a few weeks ago in case of use:

I work at a big AM and ask myself these questions often.

The first key conclusion I have reached is I love the work, which I think is very important. In this industry you are paid very well for doing a very interesting job. The direction for active AUM is undeniably negative but I do not think the industry is going to evaporate over the next 10 years. It will get smaller, yes, but not disappear. In the interim I get to do a job that I genuinely enjoy, and as long as I am reasonably careful with my money I should have saved a fair amount over that period. Maybe in 10-15 years I do indeed need to do something different - but I will have really enjoyed the high percentage of my life spent at work during that time. I also believe the transferable skills from being a sector specialist in AM are very good, especially combined with the network you acquire through for example meeting c.50 CEOs every quarter.

My second key conclusion is there are many, many, many industries out there today which are also facing significant structural challenges over the next 10 years. Doctors, lawyers, accountants - the structural headwinds for other "top jobs" like this are very well-known with exponentially improving AI, and AM is merely one of many industries where these questions are rightfully being asked.

 

???? I am very confused. How is a rise in interest rate a burden to passive businesses? Not being sarcastic but if you have a well-reasoned link, I do want to know.

The trend now is that clients are moving into passive funds with low expense ratios.

Anyway OP, from my experience, having worked/interviewed for both ends of the active-passive scale (think Point72/Maverick to Vanguard/AQR/DFA). The skills required are very different and you need to decide which are your strengths:

Active: Mainly bottom-up, excel modeling heavy, financial statement technicals need to be solid. Passive: More quantitatively focused, driven much more on empirical research and data, managing cost is more of a concern than in the active shops.

My experience is that passive shop guys are more humble and smarter, active shops are more sure of themselves (read: full of themselves) but still very smart. Passive shops are more logical in their approach while active shops sound a little more speculative. Personally I relate better with the nice, humble, low-key genius people, but your might find them boring.

All from personal experience, active people don't get butthurt. Maybe in 10 years you might see me heading an active shop myself too.

 

This is a really good question. One thing I've noticed is that institutional AM arms at banks operate on very unbiased level. Their jobs are to analyze the global economy and to identify opportunities for portfolios. Since the work AM arms do is critical to helping investment teams construct portfolios, the value of AM within banks will always be recognized.

Since they are still banks, they are subject to some of the same compensation constraints that the rest of the bank divisions have seen. The advantage banks have are a vast range of resources, strong talent, and breadth of resources to pump out research. It also helps that banks are putting further emphasis on these divisions to grow operations. While trading and IB are seeing cuts, AM/PB are growing. As PB and the level of assets in these divisions grows, AM is in a better position than most to weather the storm.

The Volcker rule to me is less detrimental to AM, but it may change the type of research AM does. They may be doing less research into derivatives and more into fundamental long term trends in equities or traditional fixed income. Being in AM, I'm definitely not worried about the future of the industry. Things may change, but AM will always be around, both at banks and other institutions.

 
undefined:

This is a really good question. One thing I've noticed is that institutional AM arms at banks operate on very unbiased level. Their jobs are to analyze the global economy and to identify opportunities for portfolios. Since the work AM arms do is critical to helping investment teams construct portfolios, the value of AM within banks will always be recognized.

Since they are still banks, they are subject to some of the same compensation constraints that the rest of the bank divisions have seen. The advantage banks have are a vast range of resources, strong talent, and breadth of resources to pump out research. It also helps that banks are putting further emphasis on these divisions to grow operations. While trading and IB are seeing cuts, AM/PB are growing. As PB and the level of assets in these divisions grows, AM is in a better position than most to weather the storm.

The Volcker rule to me is less detrimental to AM, but it may change the type of research AM does. They may be doing less research into derivatives and more into fundamental long term trends in equities or traditional fixed income. Being in AM, I'm definitely not worried about the future of the industry. Things may change, but AM will always be around, both at banks and other institutions.

Thank you for this post! Great way of looking at it.

 

The big effect Volcker Will have on AM units in banks is finding seed capital for new proprietary products. The Fed put out a FAQ saying that seeding mutual funds for up to 3 years isn't considered prop trading, but that doesn't ease the capital requirements. Any non-systemically important institution can quietly seed any number of new strategies through an SMA with their own capital.

Basically, under volcker, it's easier for a bank to go out and buy a small RIA that already manages a certain strategy than it is for them seed the strategy themselves.

This in no way puts bank owned AM units at risk, but will make it easier for banks to focus on open architecture vs proprietary products.

 

I'm not sure why you assume that macro funds are some safe haven. There is no evidence that macro funds perform any better than fundamental funds. If anything, macro funds tend to charge higher fees and thus are more vulnerable to the trend towards passive.

The question you should be asking yourself is whether you want to stay in the industry at all.

 

The industry is in a structural downturn. You can find plenty of posts on here about the topic if you search a little.

Also, what do you think the exit opps are for someone out of AM covering TMT? Startups hiring has slowed and it seems like a lot of them shy away from hiring people with equity research background.

If you want to work at a tech startup you should take some computer science courses or at least some MOOCs on programming. Alternatively, study marketing and marketing analytics. I wouldn't go into equity research because you want to work at a startup; in fact, that's probably the most indirect route you could take.

 

Well, do you have any other offers? What are your long term goals, what do you want to be "when you grow up". I would say this would be a wise decision to accept if you don't have any other offers. Don't listen to people who say you're going to pigeon hole yourself. That's a bunch of BS. If you want it you can get it. Go for it, but you need to be able to move to the more analytical side of the AM firm, in a specific group where you are learning.

Really all depends on your goals.

-- "Those who say don't know, and those who know don't say."
 

I have a couple of opportunities in corporate finance roles at F500 companies that I am considering as well. I know that a lot of people will tell me that I am pigeon holing myself here which is why I am adding that disclaimer, but at the same time I want to make sure that it is somewhat reasonable to transition from that group - whether it be by way of CFA, MBA, etc. Thank you for your input.

 

I would go AM. Everyone in finance needs to go:

IBD / ST / AM / PE / HF / VC / Consulting

IBD/ST/Consulting are most common out of UG.

PE HF VC are usuals for after B-school / the previous jobs listed above.

Corp Finance at companies like Apple, Disney, etc is cool but you don't get paid that much. More textbook finance. The categories listed above are real world.

-- "Those who say don't know, and those who know don't say."
 

Very hard to transition elsewhere unless you can get your managers to support it. Usually client positions have very little leverage in terms of moving to the analytical/ investment side.

If you can convince your manager(s), good luck! I wouldn't bet on it.

 

In the short term, you'd be insane not to accept a research internship offer from a place like Wellington. These sort of firms are incredibly selective (their incoming associate classes are usually in the single digits) and you may not get a chance like this again.

In the long term, yes, the Asset Management industry is facing secular headwinds and nobody knows quite where the bottom will be. Active investing won't disappear by any means, but it's definitely not the 80's anymore.

That said, even if you're worried about your long term prospects, take the internship anyways. A name like Wellington or PIMCO will be enough to get you an interview pretty much anywhere during full-time recruiting (except maybe for banking, where FT recruiting essentially no longer exists), and it'll also get you a good look by MBA admission committees if that's your plan going forward.

 

Ditto what "Fantastic" said above. I'm not sure what your opportunity set is, but in most scenarios you would be nuts not to accept a research internship at Wellington or PIMCO. Now if it's a back office role, that's a different story. I wouldn't let long-term industry considerations come into this decision. If nothing else, having a PIMCO or Wellington on your resume will do wonders for your career trajectory.

why is this trend affecting only a few of the largest Asset Managers and not others? I heard Fidelity/Putnam had huge layoffs but haven't heard anything of the sort from Wellington/BlackRock/PIMCO.

There are a variety of factors, but it comes down to a few things:

  • PIMCO is almost entirely fixed income focused, since I believe they closed their equities business. For various reasons, passive products do not work as well in fixed income, so fixed income focused shops should do ok still.

  • Putnam is basically a closet indexing shop which relied on high cost "push" channels (i.e. financial advisers selling Putnam funds and receiving huge commissions) to gather AuM. Their performance was never good. With the advent of indexing, Putnam's business model is basically destroyed especially as clients have become more sophisticated.

  • A huge part of BlackRock's business is passive products, so that part of the firm is doing ok. That firm as a whole has been a winner in the shift to passive.

  • Wellington is one of the more highly regarded equities managers and has a good fixed income business too. They're a "best of breed" player when it comes to active management, so they are doing relatively well still.

 

Groups like Vanguard and BlackRock are massive passive index funds. Typically a passive fund is done through some sort of optimization method - i.e., using quantitative tools to figure out how to use 100 stocks to replicate the entire index. BlackRock and Vanguard letting go of some of their top equity guys is no surprise - their business is not fundamental analysis. Not to mention some of the active products they have are suffering given the low volatility and low interest rate environment.

Analyst's jobs are to process information - stay on top of news, digest the news and put it into a model that indicates an opinion to buy or sell. It used to be Warren Buffett style - print out some 10-k/Qs, and talk to management. Now you can use statistical models and model how many widgets you expect company XYZ to sell. So in order for you to be a good analyst now, you need other tools in your belt. So the days of traditional analysis won't be done and you can cover more and in better detail if you know how to use technology to your advantage. Should you learn to code? Yes, but you should learn to be a good investor first and foremost. Maybe others will know better, but I think computers are able to process better than us but most haven't been able to do the interpretation better (yet...). Sure, for the quant hedge funds almost everything is automated and they don't need as many analysts (or any at all), but not so much in the world of fundamental.

Passive management is the main cause for this shift in Asset Management. It's incredibly scalable and has done extremely well over the past 10 years. Active management has been challenged because of the low interest rate environment and low volatility and people now have an easy alternative. So long as passive continues to grow and active suffers, yes, the analyst pool will likely shrink. It is probably deserved - the weak get culled in any business - it just took this long for it to happen. But let me tell you why I think this won't go away and/or will reverse:

1) Everyone can't be passive. I think there's a terminal point where passive becomes too big and you start to see huge dislocations in the market. When that happens, active will easily make money and then you'll see the debate swing the other way. At that point, what do you think happens to active management? People love to chase returns. Once there is noise and an opportunity to justify the alpha process again, it will swing back.

2) There's always new products to sell that highlight active management/fundamental research. Perhaps the traditional long only active game isn't going to persist, but you'll start seeing the institutional shops evolve. More concentrated, or more exotic opportunities or illiquid stuff. These shops have ammassed trillions of dollars of capital representing billions of revenue. They are going to find ways to keep a hold of those assets.

3) There will always be people that want something different - if you want to be an analyst it's going to be for an institutional shop (perhaps as opposed to a pure retail shop) - when you have people that have specific risk tolerances (i.e,, endowments, insurance, SWF, HNW, etc.) or purposes to be active in the market there will always be a need for custom mandates or in-house management that will require real fundamental.

Is it possible that investing becomes completely automated? I can't say it's never going to happen, but I really don't think we are at a tipping point for that and my guess is that it won't happen in our lifetimes. We're still struggling to get a car to stay on a road. I don't think a computer is going to be calling the shots on whether FB or Snap is the better pick over a 5 year outlook.

At the end of the day the AM industry has always been a tough nut to crack. It's just getting a bit tougher. But no reason to believe (in my opinion) that analysts will go the way of the dodo bird - it's just adapting and evolving. You just have to love it and be really good at it.

 

one simple fact will keep you employed: you're a bond analyst and the average actively managed bond strategy outperforms passive strategies because of tracking error. it's incredibly difficult to replicate an index of 18,000 line items which trade inefficiently versus an index of 500 or 3,000 stocks.

stay on the credit side, you'll be employable. underperforming strategies will shrink headcount as they always will but I don't think the same shifts will happen in fixed income. for one, you have the performance issue, secondly, there's not the massive delta in costs like there was on the stock side.

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