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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Comments (36)

Controversial
Jan 10, 2021 - 4:58am

Asset management is a much wider field than purely picking stocks. There's also private equity, private debt, infrastructure, real estate, tc. 

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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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  • Analyst 1 in IB - Gen
Jan 14, 2021 - 10:21am

AkShUaLLy EvRYThinG iS ASseT ManaGeMenT

please just shut up

Most Helpful
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.

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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 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

Funniest
  • 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. 

Jan 14, 2021 - 3:10pm

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. 

Feb 12, 2021 - 7:17pm

Will assume you are talking about public equities. No, it's not quite as simple as that. There are the top guys who have done really well / pretty well / are well enough known by retail investors (T Rowe Price / Wellington / Fidelity) who will do well. Then there are boutique shops with top tier performance who will do well. Everyone in the fat middle (JP Morgan) who have low active share & are undifferentiated by hugging the benchmark will be slowly crushed.

The really big guys will be the ones who face the pressure next, how do you expect to outperform over a 10-20yr period with a $100bl fund? The last shops on the block where people still make good money will be the top boutiques who have enough scale for the research expenses but not too big a fund size to hamper performance. The 1st and 3rd guys in paragraph above are less differentiated and more like the Toyotas of the world selling safe, sturdy but not extraordinary cars. Those top boutiques doing deep research with 5-10yr horizons, these guys are the custom building the Ferraris...this will never go out of style 

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