The Zacks Investment Management industry has been thriving of late, propelled by asset growth, digital transformation, evolving investment vehicles, deeper personalization, and strategic scale.
Asset managers are adapting faster than ever to investor needs and technological change. While passive investment products offer lower fees to asset managers than active strategies, firms like T. Rowe Price Group, Inc. TROW, SEI Investments Company SEIC and Federated Hermes, Inc. FHI are likely to keep benefiting from growing assets under management (AUM) balances fueled by increased institutional inflows, expansion into alternatives and innovative products. Higher technology-related costs may hurt profits in the near term, but will support margins in the long run.
About the Industry
The Zacks Investment Management industry comprises companies that manage securities and funds for clients to meet specified investment goals. The companies earn by charging service fees or commissions. Investment managers, also called asset managers, manage hedge funds, mutual funds, private equity, venture capital and other financial investments for third parties. By appointing an investment manager for one’s assets, investors get more diversification options than if they manage their assets independently. Investment managers invest their clients’ assets in different asset classes, depending on their needs and risk-taking abilities. Hence, the diversification, which investors get by appointing asset managers to manage their assets, helps reduce the impacts of volatility and ensures steady returns over time.
3 Investment Management Industry Trends to Follow
Asset Inflows to Continue to Drive AUM Growth: Equity markets globally have performed impressively in the past couple of years, driven by sustained economic growth, resulting in a rise in AUM balances. With interest rates expected to decline in the near term, investors are likely to rotate out of money market mutual funds or short-term investments into higher-yielding assets. Institutional interest also continues to swell, with pension funds, endowments, and insurers significantly ramping up allocations.
Moreover, as investors reassess their risk levels, there has been a rise in asset inflows into alternative investments, such as index funds, private credit funds and exchange-traded funds (ETFs). The steady growth of tokenized assets — the tokenization of traditional assets, such as real estate and equities — has also been attracting investor interest. On the whole, decent economic growth will likely keep driving asset inflows, thereby resulting in robust AUM growth. Although passive investment strategies typically offer lower fees compared with actively managed investment funds, asset managers are still expected to generate enough fees as the demand for passive investment vehicles continues to increase. Thus, growth in AUM balances will positively impact investment managers’ performance fees and investment advisory fees.
Continued Mergers/Partnerships to Help Expand Scale: In order to stay competitive, investment management firms have been engaging in mergers & acquisitions (M&As) and partnerships for a long time now. In a rapidly evolving, tech-driven and fee-compressed industry, consolidations benefit asset managers by driving scale, cutting costs, improving resilience, diversifying products and enhancing distribution.
By joining forces, larger asset managers can spread fixed costs across a bigger AUM base, thus lowering expense ratios and improving profit margins. As passive products and ETFs drive down fees, scale is often the only way to stay profitable. As M&As allow for diversification across asset classes, client types and geographies, it will help firms reduce reliance on one particular option to generate fees. Further, combining resources will enable bigger investments in artificial intelligence (AI), risk analytics and digital platforms. As such, automation and shared infrastructure will help asset managers reduce costs and improve client experience.
Elevated Expenses to Hurt the Bottom Line: Regulations to enhance transparency have increased compliance costs for investment managers for a long time now. Also, as industry players are constantly trying to upgrade technology to keep up with evolving customer needs, technology-related costs are expected to keep rising. Using AI and machine learning to enhance operational efficiencies may lead to increased expenses in the short term, but will ultimately support investment managers’ operating margins in the long run.
