Asset management is a funny business. By funny, we mean an unending, bloody, Mad Max-style battle to avoid death irrelevance in an industry that is rapidly changing. The traditional business model of actively managed funds charging high fees is under threat from a combination of factors, including the rise of passive investing, increased competition from lower-cost entrants, and a shift towards more sustainable investment strategies.
Real estate and infrastructure are the biggest sources of fees for the new Brookfield Asset Management (NYSE:BAM). BAM stock is rated as a buy by many analysts and is expected to continue to perform well due to the company's strong focus on these lucrative sectors. However, even BAM is not immune to the challenges facing the industry as a whole.
One of the biggest threats to asset managers is the increasing popularity of passive investing. Passive funds, which simply track an index, have grown rapidly in recent years and now account for around a third of all assets under management. This trend is expected to continue, with some analysts predicting that passive funds could eventually overtake active funds in terms of assets under management.
The rise of passive investing is partly due to the fact that active funds have struggled to outperform their benchmarks in recent years. This has led to increased pressure on active managers to justify their higher fees. In addition, the growth of low-cost entrants such as robo-advisors has put further pressure on fees across the industry.
Another challenge facing asset managers is the increasing focus on sustainable investing. Investors are increasingly looking to invest in companies that are making a positive impact on the environment and society. This trend is expected to continue, with some analysts predicting that sustainable investing could eventually become the norm rather than the exception.
The changing market is also leading to increased consolidation in the industry. Smaller players are struggling to compete with larger firms that have the scale and resources to invest in technology and other areas. Brookfield Asset Management predicts that consolidation will continue in the private capital industry as challenging financial markets force smaller players to merge or exit the market altogether.
In addition to these challenges, asset managers also face increasing regulatory scrutiny. The Inflation Reduction Act, for example, is expected to spur the takeover of infrastructure by private entities, particularly large global asset managers. This could lead to increased regulatory oversight and scrutiny of these firms.
Despite these challenges, there are still opportunities for asset managers that can adapt to the changing market. One of the key ways that asset managers can differentiate themselves is by focusing on long-term investing. Intelligent long-term investing is the way to go, but that doesn't mean long-term investors can avoid big risks.
Asset managers can also differentiate themselves by focusing on sustainable investing. Companies that are making a positive impact on the environment and society are likely to be in high demand in the coming years.
Overall, the asset management industry is facing a challenging period of change. However, there are still opportunities for those firms that can adapt to the changing market and differentiate themselves from their competitors.
