Asset management is a great business.
I should know … I used to work as a portfolio manager, research analyst and trader for a private wealth manager with over $1 billion in assets under management.
During my 10 years with the firm, I met hundreds of representatives (analysts, partners, portfolio managers and wholesalers) from various asset management firms (mutual fund families, ETF issuers, etc.).
I also met lots of financial advisers at dozens of industry conferences over the years.
All the asset management professionals I’ve been around have two goals in common:
- Help their clients.
- Make more money.
Typically, the two goals are tied to each other.
In basic form, asset managers take other people’s money and invest it for them. They make money (fees) off the money they manage. The more money they manage, the more money they make. So, they’re incentivized to grow their client’s assets. In the end, both parties’ interests are aligned.
 |
Because these businesses can increase their size without increasing their costs in the same proportion, they’re very scalable.
In the everyday world, most businesses aren’t scalable. They have to produce more widgets, operate more factories and hire more people to grow. Generally, 10 times the work means 10 times the employees.
Asset managers don’t have these issues. They don’t have to produce more widgets … they don’t have to operate more factories … and for the most part, they don’t have to hire more workers.
|
URGENT: Supercycle Investing Summit October 18, 19 and 20 If you’ve been following the work of Dr. Weiss and Sean Brodrick, you know that the most powerful cycles in the economic universe are set to converge on October 31 of this year. Together, they will form a supercycle like we saw in the 1930s when it triggered the Great Depression. Now, they need to tell you about two additional cycles that not only confirm their analysis … but also signal that we’re staring down the barrel of a crisis, which could make the Great Depression pale by comparison. To give you the details on this shocking new evidence, and also to help make sure you have everything you need to protect yourself and profit – including SPECIFIC investments to make right now — The Edelson Institute will present a three-day Supercycle Investing Summit on October 18, 19 and 20: Next Wednesday, Thursday and Friday. |
If an asset manager receives 10 times more money to invest, the workload barely budges. Basically, they just buy 10 times the investment. For example, 1,000 shares of a stock instead of 100 shares or a $100,000 bond instead of a $10,000 bond. (They can allocate appropriate portions to multiple client accounts.) But, they earn more fees on those additional funds.
On the investment side, this scalability leads to attractive investment potential.
There are over 180 publicly traded U.S. companies listed under the “asset management & custody banks” industry.
The biggest names in that group – 20 recognized asset managers like BlackRock, T. Rowe Price and Northern Trust – average 28% net profit margins. (In contrast, the S&P 500 has an average profit margin of 10%-11%.) Those big profit margins from asset managers are due to scale.
At last year’s Morningstar Investment Conference, which I attended, two of the company’s senior analysts outlined key attributes of asset management companies:
- Produce a steady stream of fee income.
- Generate above average profitability.
- Highly scalable.
- Require little capital investment.
- High switching costs. (For example, the average annual redemption rate for long-term mutual funds is 30%, historically.)
With high profitability, high scalability and little capital investment, the stock prices of publicly traded asset managers tend to move in-line with their assets under management. So, it’s important to know how much money asset management firms have under management. And which way the asset flows are moving or could perceivably move in the future.
One thing we know for certain in “asset flow land” is money is moving from active funds to passive funds. Primarily, the movement is out of mutual funds and into ETFs. ETFs offer several advantages over mutual funds: lower costs, tax efficiency, intraday trading, transparency, better performance and easy access to any area of the markets.
It’s obvious why they’ve been such a slam-dunk choice for investors.
Check out asset flows since the financial crisis …
In the last eight calendar years, mutual funds have lost more than $100 billion and ETFs have gained $1.5 trillion! This movement shows no signs of slowing down, either …
FactSet reported year-to-date ETF inflows tallied $289.4 billion in mid-August this year. Meaning, in only eight-and-a-half months, ETF inflows had surpassed last year’s annual record of $287.5 billion.
Here are a few asset management stocks with noteworthy ETF ties:
Source: Yahoo Finance, Bloomberg
There’s also a new ETF – still in its infancy with close to $3 million in assets – that provides broad exposure to the ETF industry. The ETF Industry Exposure & Financial Services ETF (TETF) tracks the Toroso ETF Industry Index (created by ace ETF strategist Mike Venuto).
|
Why Settle for 2.2% … When 8.4% Yields (and more) The 10-year U.S. Treasury yields around 2.2%. Many investors shrug their shoulders and settle for it. But why should YOU? Especially when yields of 8.4% … and more … are there for the taking? Answer: You shouldn’t! That’s why I created High Yield Investing. It’s chock full of investments that can double, triple, even QUADRUPLE the income your portfolio is spinning off. To find out more, click here – or call us at 877-934-7778 right away! |
It holds 43 companies that derive revenue from the ETF business. So, you get ETF asset managers like BlackRock, Invesco, State Street and WisdomTree and more … but you also get index & data companies, trading & custody providers, liquidity providers and exchanges.
As my colleague Mike told me:
We believe these companies have been growing because they represent services and attributes that clients desire; low cost, transparency and tax efficiency, but the future growth will be driven by innovation and access to exposures that have traditionally been available only to institutions.
To gain exposure to the fastest-growing part of the asset management industry, consider adding one of the aforementioned stocks or TETF (learn more about the ETF and index here) to your portfolio.
The growth of ETF assets looks to be an unstoppable force for many years to come.
Best,
Grant Wasylik
{ 3 comments }
RETAIL INVESTORS VOTE WITH THEIR FEET
Mutual Funds have been steadily losing client assets because they could not keep-up or justify their performance, after (net) of fees. Historically high fees to actively manage assets only matched, or often, lagged their respective Index Benchmarks over the long term. Sure, some funds beat the index, but not consistently and those that do rotate in and out of the “dog house”. Retail investors have finally noticed this lack of superior performance by many large mutual fund companies and are “voting with their feet”. Can’t blame them.
Wealth Management is a relatively easy business for new entrants to come into ( Just need a Registered Advisor License from their state). As you say, no capital investment is required, as its a service business. However, growing assets under management and achieving scalability is very difficult in this industry. So, the largest firms dominate and in effect, have a moat to defend their positions because its so difficult for any competitor to gain sufficient size to be a competitive threat to their business, despite high mobility by individual clients.
We assume that domestic and foreign securities are close substitutes, that lenders ie bond purchasers are nearly indifferent concerning the nationality of borrowers bond sellers and care only about the yields incomes that will be received. Treasury bills or t-bills are low risk securities issued by the us government. Perpetuities are sums that pay out in equal amounts for infinite time periods. Ordinary annuities are examples car loans or home mortgage loans. The key is to invest in some commodity which will be worth more in the future above the rate of inflation.
First time I’ve been motivated to respond so well done. U manage the 28pct profit margin that Asset Mgrs generally make. And, how it compares favorably with S&P 500 cos. But, wot return (on average) do they usually produce for their clients?
My experience is that such Asset Mgt companies should be remunerated on performance and not take commissions, especially as they take those commissions from the companies where they are placing the money!!!
Regards, Glyn