The Grouchy Investor Epidemic
It’s a bull market. So why aren’t asset managers smiling?
Never in the history of money management — well, fine, in the nine years I’ve been covering it — has such a chasm yawned between the euphoria of capital markets and the malaise of the people who actively manage capital.
Most every indicator, from the stock market to global real estate to fixed income, is at or near a historic high. Something called Litecoin, which doesn’t physically exist, has a market capitalization of $10 billion. What?
And yet, at a recent event I hosted for a hundred or so asset management sales leaders, morale was, at best, middling.
As a handmade sign hanging in the Institutional Investor offices unsubtly puts it: “It’s a Bull Market, Boys!” So why aren’t we acting like it?
Active managers — which almost all attendees at the conference represented — are as good at their craft as they’ve ever been. The idea they’re not, with a few caveats, is absurd. Whatever the market environment, active management is a zero-sum game. If the market goes up 20 percent or down 20 percent, some active managers do well, some do poorly, and their wins and losses net out. I’m reminded of Matthew McConaughey’s chest-thumping cameo in The Wolf of Wall Street, as he tells a somehow sober Leonardo DiCaprio that the stock business is “a whazzy, it’s a whoozy, it’s a fairy dust.” Or as AQR Capital Management’s Cliff Asness more eloquently told me on Twitter: “I think [that argument is] mainly just gibberish. It’s never been a stock picker’s market and never will be.” Put more positively for the active managers at the conference: If ever it was a stock picker’s market, ever it will be.
Their client base isn’t rapidly shrinking or turning on them. Yes, the client base is shifting — no new multibillion-dollar defined-benefit pension funds will pop up anytime soon. But with the notable exception of retail and investment advisory capital, their potential client pool — family offices, which are generally risk-friendly, and outsourced CIOs, which justify their fees through expert manager selection and access — is becoming more comfortable with some form of active management. Yes, in absolute terms fewer investors are demanding active managers — but according to Casey Quirk, a consulting unit of Deloitte, only 18 percent of institutional capital is in passive.
Distribution people are not especially prone to bouts of bleakness, either. According to a 2015 survey of financial service professionals by Thomson Reuters, sales professionals are the most satisfied with their career/work, ahead of portfolio managers, traders, and compliance officers.
Business is healthy. Operating margins for publicly traded managers have dropped to 30 percent from a recent high of 34 percent, according to one study — but they’re up overall since 2016’s 28 percent.
So what gives? My suspicion is that the reality-morale divide emanates from that universal leveler: fear of an uncertain future.
I don’t have a remedy (beyond pointing out that if you feel business anxiety in asset management, try running a print magazine). But to those feeling morose, let me remind you your funk began one, three, five years ago.
Since at least 2012 I’ve been listening to presentations warning of the low-return environment ahead. Hard evidence proves those predictions were mistaken. And so, without hazarding my own return forecast for the years ahead, let me say this: Smart men and women are wrong very nearly as often as they’re right in this business. Like zero-sum alpha, that is not going to change. The habituates of investing know that the future is uncertain, and that winners make educated bets. It’s no different on the distribution side.
To go all Malcolm Gladwell on you, when humans face situations with equal pros and cons, we feel the negatives more than the positives. A seminal 2001 paper titled “Bad Is Stronger Than Good” described this phenomenon:
The greater power of bad events over good ones is found in everyday events, major life events (e.g., trauma), close relationship outcomes, social network patterns, interpersonal interactions, and learning processes. Bad emotions, bad parents, and bad feedback have more impact than good ones, and bad information is processed more thoroughly than good. . . . Hardly any exceptions. . . can be found.
(A further literature review suggests academics continue to beat this dead horse, but perhaps I’m just being negative.) These researchers’ findings could explain how relatively small troubles in the business of institutional asset management seem to overshadow this greatest of bull markets.
Look, it’s all relative. Is the work as easy as it once was? Perhaps not. But business is certainly better than it could be. And, inevitably, better than it will be. I don’t mean to go all Jimmy-Carter’s-“malaise”-speech on you, but as the sign in our office declares: “It’s a Bull Market, Boys!” — and girls.
Let’s act like it.