Cathie Wood and the Sound of a Changing Market
Investment firms, not just investors, have to listen hard to strike the right balance amid market volatility.
If investing is hard, managing an investment firm is harder. It requires balancing two sides of a ledger – investor capital on the one side and an investment portfolio on the other. Much of the time the two sides operate in harmony. Especially in the bull market of the past 10 years, a simple dynamic has driven the success of many investment firms: Money flows in, it’s invested in markets, markets go up, and more money comes in.
But the two sides occasionally get out of balance. That happens because firms’ revenue models skew towards the capital side of the ledger more than the investment side. They typically get paid according to total assets under management, which means they are incentivized to grow investor capital – regardless of the state of the market. So a dollar of net new money is worth more to the firm’s bottom line than a few basis points of incremental performance.