Recent fund launches and acquisitions show that active mutual fund and exchange-traded fund managers are holding out hope that the ETF marketplace, in particular, and the asset management industry, in general, still have a place for them. But perhaps they are taking the wrong signal from the passive trend.
Mature market dynamics on the passive side have made competition fierce. Vanguard Group, BlackRock Inc. and State Street Global Advisors control nearly 78% of the assets. Over the past five years, the 20 largest passive (and quantitative) fund managers added $2.2 trillion for a total of $6.2 trillion, according to Morningstar Direct — and half that $2.2 trillion has gone into ETFs.
One side-effect of these flows: passive funds are getting cheaper faster, making it even harder for active managers to compete.
From 2010 to 2015, the asset-weighted average advisory plus administrative fee for active funds dropped 2 basis points to 54 basis points, while passive funds fell 4 basis points to 16 basis points, according to Strategic Insight data cited by McKinsey & Co.
"Much of index fund outperformance can be attributed to the cost differential," said Vanguard Chief Executive William McNabb at last year's Evidence Based Investing Conference in New York. "One third of the assets we manage are in active mandates, but we're low-cost first."
The 20 largest active fund managers have seen $360 billion in outflows against $6.8 trillion in assets through Aug. 31, with $236 billion in outflows from Pacific Investment Management Co., according to Morningstar Direct. And it takes the top 10 active managers to achieve the market share of passive's top three.
Active managers are facing "an existential crisis," wrote McKinsey in the report, "Thriving in a New Abnormal."