Days of Easy Money Are Over for Fund Managers - By Alice Schroeder

Found via the Corner of Berkshire & Fairfax.

As a profit-making endeavor, managing other people’s money is hard to beat. The business requires very little invested capital. There are no worries about getting paid in full when the bill comes due, since fund managers control their customers’ money. And lackluster performance is no bar to hefty profits because fees, based on the dollar value of assets under management, are paid even when returns are abysmal.

Wall Street, it often seems, is exempt from the laws of economics. Most active money managers produce worse returns than an index, such as the Standard & Poor’s 500. But making enough money to look respectable to clients has been relatively easy as long as falling interest rates boosted the value of most asset classes.

What’s more, new competitors constantly enter the business, yet rarely discount fees to gain market share. Instead, funds rely on investors to chase the latest high- performing manager, like gamblers who ignore their losses while seeking a hot slot machine. This has given the business a pricing umbrella that shelters it from competition.

From the owners’ standpoint, all this has been fabulous. They work in a business that produces abnormally high profits and forgives incompetence, a rarity in modern capitalism.