Asset Management

The business of managing pools of capital on behalf of clients in exchange for fees. Kyle’s corpus addresses two angles: the structural disadvantages of the professional asset management industry for individual investors, and a thesis for where the industry is headed.

Structural disadvantages (individual investor edge)

Brian Feroldi’s thread (10 Reasons Why You Have… (tweet)) identifies 10 structural drags on professional money managers:

1. High fees — management fees act as a return drag
2. Misaligned incentives — managers are paid to accumulate assets, not outperform; a $1B AUM fund earns 100× more than a $10M fund, so incentives point toward asset-gathering
3. Size constraints — large funds move the market when they trade, limiting the investable universe
4. Shortened time horizon — client redemption pressure forces short-term thinking
5. Window dressing — buying recent winners before quarter-end to look good to clients
6. Closet indexing — tracking an index closely to minimize career risk, killing the ability to outperform
7. Taxes — active trading generates taxable events on behalf of clients

The future of the industry

Patrick O’Shaughnessy argued in 2020 (For the Last Year at… (tweet)) that the future of asset management would be defined by “custom indexing” — deeply tailored strategies for individual clients at scale. O’Shaughnessy Asset Management’s Canvas platform had opened 500 accounts by late 2020, 70% of them totally unique in their settings. His thesis: “if you squint and look out 5 years, EVERYONE will manage their index strategies this way: customized for the needs, circumstances, and preferences of the individual.”

Where this appears

• 10 Reasons Why You Have… (tweet) — Feroldi’s 10 structural edges individual investors have over professional managers
• For the Last Year at… (tweet) — O’Shaughnessy on custom indexing as the future of asset management