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?

Comments (31)

 
Jan 13, 2021 - 12:20am

Worked in the industry for a while now, and you mentioning it now is the first time I've seen someone equate AM to just long equities.

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Jan 10, 2021 - 8:21am

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.

 
Jan 10, 2021 - 12:40pm

As long as there are institutions/individuals who need to diversify their portfolio, the active equity investing market will be there. Given that the information edge has become hard to get and highly competitive, a fund or an analyst should possess some form of analytical or strategic advantages not to fall behind. Since the switching cost has been increasingly lowered for the clients, the consistent underperformers will be phased out more easily and promptly than in the past. If you are just starting out, it is important to have a long-term view and be cautious if you are entering an overly crowded market (e.g., US large-cap) or joining a shop with a poor long-term track record.

 
Jan 11, 2021 - 12:33am

Resonating with the folks who have given their opinion here - Yes, you can expect to have a worthwhile career in asset management. But, be prepared to rub your elbows with the best in the industry. As more dumb money moves out of the market, you are left with the better players competing for the same pie - that is why it gets tougher to first generate and then keep your alpha.

Specialize, network, and be open-minded. And you should be fine. 

 
Jan 11, 2021 - 11:12am

Im thinking there will be more actively managed ETF's like Ark Invest than the regular index etf's.  Index ETF's also need to do research to add more companies to their portfolio, especially the infrastructure one.

 
Jan 13, 2021 - 10:20pm

bobmiller123

Index ETF's also need to do research to add more companies to their portfolio, especially the infrastructure one.

which specific ETFs are you referring to?

Quant (ˈkwänt) n: An expert, someone who knows more and more about less and less until they know everything about nothing.

 
  • Prospect in HF - EquityHedge
Jan 14, 2021 - 11:00pm

Why do you say that? I don't know that many quants but I am not sure how coding can be combined with fundamental analysis of a company.

 
Jan 11, 2021 - 8:51pm

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.

 
Jan 12, 2021 - 2:34pm

sl55amg

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).

 

 
  • Analyst 1 in AM - Other
Jan 12, 2021 - 8:52pm

While I agree in parts with above posters that AM will continue to shrink, I believe there will be an equilibrium between passive and active, and that there will always be a place for active management. Check out Howard Marks' Memo, "Investing Without People."

 
Jan 13, 2021 - 10:22pm

 

Check out Howard Marks' Memo, "Investing Without People."

Good looks, I was going to recommend this too. Thought it was a great read.

Quant (ˈkwänt) n: An expert, someone who knows more and more about less and less until they know everything about nothing.

 
Jan 13, 2021 - 1:48pm

There are still funds that produce alpha in long only equities. Go look at Dodge and Cox track record for example. The space will just continue to consolidate, and those who aren't producing alpha will lose assets over time until they exit the business

 
  • Analyst 2 in HF - EquityHedge
Jan 13, 2021 - 4:21pm

You are trying to make a point that funds can outperform and out of all the funds that do, you decide to pick D&C???????

 
Jan 14, 2021 - 1:10am

Without active there is no passive. Passive is great but it's a free rider on the price discovery that active produces. Most likely there will be an equilibrium but it can't consolidate around only those that provide alpha as it's a zero sum game. There will continue to be a role for active it will continue to change high fees are dead but active is not.

 
Jan 14, 2021 - 4:05am

You will see the industry move in two directions: (i) large benchmark hugging players will continue to consolidate into a small number of multi-trillion dollar players that can offer active funds at sub 10 bps fees which will be attractive to institutional clients who can basically name their fees anyway. And (ii) small scale specialist players who run highly active products that can command higher fees. The guys in the middle, say the manager running USD 300 bn in active money with a large retail base, are likely going to get eaten by the bigger players or left to slowly die. In terms of career, either you love markets and can't imagine doing anything else, or you find something else to do. The people that will survive in this game are people who can't imagine doing anything else and are confident in taking calculated risk. 

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