Managing money for investors has long been a lucrative business. Asset management firms produce a constant stream of fee income, generated as a percentage of average assets under management. The business is highly scalable and requires little in the way of capital investment, allowing firms to produce high levels of profitability with returns on invested capital falling well above their cost of capital.
But major challenges for asset managers are building. Today, firms face secular and cyclical headwinds in a market that is more competitive than ever. Concerns about the bull-market run ending sooner rather than later, pressures from poor active-equity investment performance, and the growth of low-cost index-based products have not only affected organic growth for many traditional firms, they’ve also raised questions about long-term fee and margin compression for fund managers.
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Greggory Warren does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.