{"id":17462,"date":"2021-11-22T08:30:00","date_gmt":"2021-11-22T13:30:00","guid":{"rendered":"https:\/\/einvestingforbeginners.com\/?p=17462"},"modified":"2022-06-01T15:29:58","modified_gmt":"2022-06-01T19:29:58","slug":"asset-management-stocks-business-overview-and-changing-trends","status":"publish","type":"post","link":"https:\/\/einvestingforbeginners.com\/asset-management-stocks-business-overview-and-changing-trends\/","title":{"rendered":"Asset Management Stocks: Business Overview and Changing Trends"},"content":{"rendered":"\n
Trillions of dollars move around in markets, and many of these flow through large asset management companies. To understand these stocks, and invest in them, requires understanding the basics of the industry and how asset management has undergone major changes lately.<\/p>\n\n\n\n
One of the most obvious developments has been the move from active to passive strategies. Investors are increasingly adopting lower cost passive investment products like ETFs.<\/p>\n\n\n\n
This shift to passive asset management has created pressure for some of the top publicly traded asset management companies today.<\/p>\n\n\n\n
These more traditional asset managers include large companies like:<\/p>\n\n\n\n
Though the winds seem to be permanently shifting towards passive management, you can\u2019t<\/strong> paint this industry with a broad brush and declare active asset management dead.<\/p>\n\n\n\n The truth of the matter is that there are an increasing variety of investment vehicles, and that asset management has so much more to do than just traditional actively managed mutual funds. The very diverse mix of clients extends past just your average Joe investors, and with their varying goals comes different needs and different solutions.<\/p>\n\n\n\n Better said\u2014it\u2019s not likely that asset management will ever go away.<\/p>\n\n\n\n And as some investors move away from the traditional stocks\/ bonds portfolio and towards more exotic alternative options, there are a number of solutions from other top investment firms including:<\/p>\n\n\n\n\n\n\n\n In each of these groups of asset management stocks there have been recent winners and losers; in this post we\u2019ll cover the basic drivers of this industry, how some of the top players have been performing recently, and how investors can take advantage now and into the future.<\/p>\n\n\n\n You can think of asset managers on a broad level as stewards of other people\u2019s capital.<\/p>\n\n\n\n The definition of other people has a broad range\u2014it can start as small as the average mom and pop investor, all the way to some of the largest institutions in the world. Institutions can include pension funds for firefighters and teachers, university endowment funds, insurance companies and so much more.<\/p>\n\n\n\n Because of the broad diversity of types of asset management clients, it\u2019s important to get a basic sense of how the industry has traditionally and currently operates\u2014especially before making any sort of judgments on the direction of the industry or the stocks within it.<\/p>\n\n\n\n The first term to understand for asset managers is AUM, or Assets Under Management.<\/p>\n\n\n\n In most forms of asset management, a manager will provide a product or service which directs the investment (or conservation) of those assets; the manager usually gets a (percentage) fee for delivering this.<\/p>\n\n\n\n So, AUM tends to drive revenues and profits for asset managers, as the larger the AUM the more income is generated just because fees are charged as a percentage of assets.<\/p>\n\n\n\n The next major metric for asset management companies is \u201cnet flows\u201d.<\/p>\n\n\n\n The Net flows metric gives investors in these stocks a sense of how the organic growth of an asset management company is performing.<\/p>\n\n\n\n Asset managers have a variety of ways to grow AUM; one easy way is to acquire the assets from another manager (like a \u201cregular\u201d company would do M&A<\/a>).<\/p>\n\n\n\n However, growing AUM from acquisitions might not be a good indicator of a company\u2019s core business, as it could potentially mask from the real internal performance of the underlying assets being managed (and the ability of the manager to retain those).<\/p>\n\n\n\n There are a few main drivers which tend to influence AUM greatly:<\/p>\n\n\n\n Investment Performance<\/strong><\/p>\n\n\n\n Investment performance tends to be measured against a benchmark because of the various risk\/ return profiles of different types of investments and investment styles.<\/p>\n\n\n\n For example, stocks have traditionally outperformed bonds over the long term.<\/p>\n\n\n\n This intuitively makes sense because stockholders own an equity claim in a business, and get to participate in potentially unlimited upside from their claim on the business\u2019s profits. Bondholders\u2019 returns tend to be capped to the coupon payments if held to maturity, but they are safer than stocks in the case of default, as they have a priority claim (versus stockholders) on any remaining value of a bankrupted company.<\/p>\n\n\n\n Measuring the performance of an asset manager with a product or service which offers bond investments against the stock market would not be a fair comparison; underperforming stocks with a bond portfolio is not the sign of a bad manager.<\/p>\n\n\n\n Most investors intuitively know this, and so they tend to track an asset manager\u2019s performance against its benchmark when making a decision of whether to join with or keep a particular manager.<\/p>\n\n\n\n Client Sentiment<\/strong><\/p>\n\n\n\n One of the downsides of the asset management business is how income tends to fluctuate with the overall markets.<\/p>\n\n\n\n While many investors like to think of themselves as rational, when push comes to shove and markets fall into a temporary panic, some investors will pull their money out from the market even if it\u2019s not the most beneficial thing to do for the long term performance of their portfolios.<\/p>\n\n\n\n Investors and institutions may switch from one manager to another if they perceive that their money is not being managed optimally; just as fear and greed can arise during different market cycles, so can fear of missing out affect an investor\u2019s perseverance in an underperforming strategy.<\/p>\n\n\n\n Just as markets cycle, so does the relative outperformance and underperformance of different investment strategies.<\/p>\n\n\n\n Unfortunately, though people might understand this fact, they still might not act according to these principles for a variety of reasons\u2014which can make retaining AUM for asset management companies difficult if the sentiment against their products\/ services remains negative for an extended period of time.<\/p>\n\n\n\n Client Needs<\/strong><\/p>\n\n\n\n One of the reasons that a client might withdraw the funds from an asset manager would be for reasons outside of chasing performance.<\/p>\n\n\n\n If an institution goes through a liquidity crunch (especially during tough market panics), they might need to withdraw their funds which were originally supposed to remain invested for the long term.<\/p>\n\n\n\n A retail investor might withdraw from a 401k, even if this is detrimental for long term performance, if they have a big, unexpected expense which comes up or they lose a job.<\/p>\n\n\n\n Or, an investor might decide that the portfolio needs to move more into fixed income instead of equities to reduce volatility; the fees for fixed income tend to be less than equities or some alternatives.<\/p>\n\n\n\n Competition in the Asset Management Industry<\/strong><\/p>\n\n\n\n Finally, asset managers can (and have) come under intense competition from innovative products, services, or strategies which can reduce the long term AUM for even the best run companies.<\/p>\n\n\n\n A great example of this is the increasing demand for passive management instead of active management. Passive management tends to earn much lower fees than active does, and the continued pressure from this development has caused AUM fees to fall across the board.<\/p>\n\n\n\n More alternative asset management strategies such as private equity and real estate have put the pressure on traditional stocks and bonds managers\u2014particularly those who offer higher fee mutual funds that are not meeting the changing demand from various kinds of investors.<\/p>\n\n\n\n One of the vanguards which has driven the push towards passive management is the famous Vanguard and their offerings of ETFs which track major market indexes.<\/p>\n\n\n\n Vanguard is privately held as I write this, and so you can\u2019t buy the stock of this tidal wave ETF giant.<\/p>\n\n\n\n However, other companies like Blackrock and T. Rowe Price have increasingly expanded their passive ETF offerings; other publicly traded companies have taken notice and are launching their own passive products\/ solutions.<\/p>\n\n\n\n The pressure on AUM fees from the passive movement has not been trivial, and like I said already it has hit the rates across various investment types.<\/p>\n\n\n\n Publicly traded asset manager Franklin Resources disclosed in a recent 10-k<\/a> the scope of these changes in the US:<\/p>\n\n\n\nThe Basics of Asset Management<\/h2>\n\n\n\n
From Active to Passive Asset Management<\/h2>\n\n\n\n