A report from consultancy PwC entitled Mutual fund outlook: The time to act is nowhas found the shift toward passive management in the US could lead to 50% of the assets under management (AUM) for US mutual funds being passively managed by 2025, the equivalent of US$13.4 trillion.
“Passive management is gaining ground rapidly – far faster than earlier anticipated – buoyed by record equity market performance,” wrote author Peter Finnerty, US mutual fund leader at PwC. “Institutional investors continue to surge into passive strategies, due in part to the transparency and low fees these products offer and the inability for many asset managers to consistently outperform their respective benchmarks.”
The report found that US mutual fund AUM is expected to grow by 5.6% annually between 2018 and 2025, reaching $26.8 trillion, compared to 8.7% AUM growth between 2011 and 2018 with passive funds having accounted for 36% of total US mutual fund/ETF industry assets in 2018. The increased level of passive by 2025 would result in profits being further squeezed.
“The rising demand for passive products has already intensified competition among all asset managers – those who pursue active and passive, alternative, and traditional long-only strategies,” Finnerty wrote. “To stay competitive, active managers are evaluating performance-based fee models, such as outcome-based fees, volume discounts, [and] ‘early bird discounts’. Some managers are promising zero or minimal fees on select funds to acquire new clients. They are also cross-selling other alpha-focused products and ancillary services. These fee models are helping to reshape the passive landscape.”