The asset management industry experienced a strong finish in 2023, compensating for a sluggish start earlier in the year. Although the average returns of asset managers were about half the 24% gain of the S&P 500 index, their performance in the December quarter was quite impressive.

Despite the fourth quarter rally, Piper Sandler analyst Crispin Love suggests that many asset managers may face a challenging period as 2024 begins. However, he remains optimistic about certain niches that are expected to continue thriving. Love has "Buy" ratings on alternative asset giant Blackstone and private credit firms like Hercules Capital.

While rates and stocks showed a promising rally in the last quarter of 2023 due to anticipated rate cuts in 2024, Love advises caution regarding the near-term outlook for the sector. Although rate cuts are likely, a slowing economy might hinder acquisition deals that traditionally provide substantial returns for asset managers. As a result, Love maintains a cautious stance overall, despite his mixture of "Buy" and "Hold" ratings.

Over the past few years, traditional asset managers have faced difficulties as investors shift their funds from actively managed mutual funds to passive strategies. Corroborating this trend, most analysts, including Love, have given a "Neutral" rating to fund manager SEI Investments based on data from FactSet.

However, in contrast to traditional managers, alternative asset managers like Blackstone—who specialize in managing hedge funds for institutional clients and high-net-worth individuals—have thrived. Love has an "Overweight" rating on Blackstone and anticipates that alternative strategies will expand their share of the world's investible assets from the current 10% to 25%, leading what he refers to as the "Alternatives Era."

An additional bright spot in Love's outlook for 2024 is the private credit niche, which has gained traction due to retrenchment by commercial banks. Private lenders have seized the opportunity to offer loans to creditworthy borrowers at high prevailing interest rates, resulting in double-digit returns. As a result, Love has an "Overweight" rating on Hercules Capital.

In conclusion, Love is bullish on private credit and predicts that it will continue to shine in 2024 as insurers and retail investors increase their allocations to this asset class. It remains to be seen how asset managers will navigate the challenges and capitalize on the opportunities presented in the year ahead.

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