Assets in global passive investment funds have surpassed the $10 trillion mark as investors continue to transition away from costly, actively managed funds.
According to data compiled by trade association the Investment Company Institute (ICI) assets in passive investment vehicles reached $11.4 trillion at the end of November last year, of which over $6 trillion of assets are held in exchange traded funds (ETFs).
Assets in global passive investment funds have surpassed the $11 trillion mark as investors continue to transition away from costly, actively-managed funds. According to data compiled by the Investment Company Institute (ICI), assets in passive investment vehicles reached $11.4 trillion at the end of November last year, of which over $6 trillion of assets are held in exchange traded funds (ETFs).
The new record exemplifies how asset managers continue to be overwhelmed by investors fleeing pricier, actively-traded products in favour of index-tracking investment vehicles. In May last year, assets under management in passive funds overtook active strategies for the first time. The seismic shift from active to passive management spells significant implications for traditional investment managers. According to estimates from BlackRock, global ETF assets could reach $12 trillion by the end of 2023.
“There is an existential shift in the environment and business model for asset managers,” said Patrick Curtin, global head of sales and client management for custody and fund services, Citi. “The inexorable shift to passive investment which is putting pressure on active management revenues and fees, combined with the tumultuous move into alternatives, means the structure of the traditional asset management product is under serious threat.”
Since the financial crisis, a cut-throat pricing war on fees of passive funds has created unrelenting pressures, forcing traditional investment firms to seek out new revenue sources such as illiquid, private investments that hold more risk.
Data from Morgan Stanley has estimated around $1 trillion has left active equity funds over the past decade. Most recently, the $380 billion California Public Employees Retirement System (CaLPERS) announced it would be cutting most of its external equity fund managers, slashing its allocation from $33.6 billion to just $5.5 billion, according to specialist publication CIO Magazine.
“These are all seismic trends, and we may be in the early days of those trends, even though they have been talked about for a number of years. Relative to a 10-year view, I believe these trends will only pick up speed,” added Citi’s Curtin.
The dramatic changes facing asset managers will most likely send ripples to everyone involved in the investment servicing process, due to the heightened level of transparency and efficiency associated with the ETF market.
“This is putting a lot of pressure on the full end-to-end value chain, affecting all participants, driving the need to focus on both technology and how we interact with one another,” said Sam Riley, head of strategy, Clearstream.