Jeff Ringdahl Networking Series: Article #1

This article is the first of a new series. Stay tuned for more installments.

Traditional Asset Management Industry: Extreme Pessimism

I’ve been in the asset management industry for 27 years, and I've never experienced more pessimism about its fundamentals and future than the current mood of industry participants.

I have spent significant time engaging with my network while I’m on a voluntary career break and exploring opportunities (see my May 1 LinkedIn posting for more info). As I engage with my network and I’m asked to describe the type of firm I desire to join, my list includes a requirement that the business has growth potential. That statement is usually met with skepticism at best. Most often, I will hear something like:

• “If you’re looking to narrow the field of target companies drastically, then that’s a good place to start.”
• “Well, that will eliminate three-quarters of the industry.”

Some degree of pessimism is to be expected. Anyone reading this article knows the nature and severity of the challenges facing our rapidly changing and maturing industry. However, even if the pessimism isn’t off base, I have been surprised by the near unanimity and strength of opinions, leading to a few reactions.

First, overwhelming consensus about the serious challenges of the industry suggests that continued (if not worsening) challenges are already priced into the valuations of publicly-listed and privately-held businesses. Indeed, valuations of publicly-listed traditional asset managers are a fraction of the S&P 500. Forward P/E ratios (based on 2025 earnings) for the S&P 500 and traditional asset managers are approximately 22.0x and 8.5x, respectively. The logical follow-up question is whether a 61% discount for a traditional asset management business is high, low, or about right. (For the avoidance of doubt, I’m not offering investment advice here.)

Second, change creates opportunity, and incumbents should capture the majority of any upside benefits. Despite the industry’s current challenges, it benefits from significant barriers to successful entry. Newcomers can gain some market share, but institutional and retail investors are careful about where they invest their assets and are reluctant to invest with firms that lack a demonstrable performance and/or regulatory track record. Incumbents should be their own disrupters or else outsiders will play that role.

Third, I am a “glass is half full” person and see opportunity among the noise. Some traditional asset management businesses can’t be reinvented, but most have capabilities that can be extended or redirected in more productive ways. For these businesses, it’s up to management to reimagine the firm and drive change. For some firms, change can be evolutionary; for other firms, revolutionary change may be needed. Perhaps the hardest decision lies with owners and boards of directors of highly profitable traditional asset management businesses with flat or declining growth. Owners and boards, who govern budgets and capital deployment, must weigh the tradeoff of (a) current cash flow, and (b) capital investment required to develop new and more durable earnings streams for the future.

??

“Not everything that is faced can be changed, but nothing can be changed until it is faced.”

― James Baldwin

P/E ratio sources:

YCharts for S&P 500 (as of 7/12/24) and Bank of America for traditional asset managers (as of 7/1/24; median P/E ratio used)