Investors will continue to shift to passive investments, given their lower costs, better performance and transparency, which will lead passive management to overtake active in terms of U.S. market share by 2024 at the latest, said a new report by Moody's Investors Service.
The report predicts that, as investor adoption of passive and low-cost investment offerings continues, passively managed funds will exceed 50% of U.S. assets under management sometime between 2021 and 2024.
In 2016, U.S. passive inflows totaled $504 billion, whereas outflows from actively managed funds totaled $340 billion. The expansion of passive investments has been further supported by global financial regulation, which has encouraged greater disclosure of fund fees and potential conflicts of interest on the part of fund distributors.
“The U.S. market is very well developed, so you have the settings for passive management to do very well,” said Stephen Tu, a vice president and senior analyst at Moody's and co-author of the report, in a phone interview.
Mr. Tu added that, despite asset owners' need for alpha, he still believes the trajectory for passive investments will continue upward over time.
“If you look at the data, the drag from fees of higher costing investments has been relatively consistent. Active tends to underperform passive. We think the trend of passive increasing will continue,” Mr. Tu said.
Asset managers that have core competencies in exchange-traded funds and other passive strategies will benefit from this growth, the report said. These include Vanguard Group, BlackRock, State Street Global Advisors, Dimensional Fund Advisors and Invesco.
The report also suggests that there is plenty of room for global growth in passive funds.
“Penetration in the highly developed U.S. financial markets is only 28.5%,” the report said. “In the rest of the world, penetration is significantly smaller, approximately 5% to 15%, in part owing to less investor awareness of passive products, sales practices that may not favor the best interests of investors and less shareholder-friendly corporate governance. However, as global and emerging markets mature, there will be opportunities for broader expansion.”