Total assets run by leading passive money managers grew 9.9% in 2016 to $16.7 trillion, a faster rate than growth across the world's largest 500 money managers, the latest ranking by Willis Towers Watson PLC and Pensions & Investments shows.
The research on the world's 500 largest asset managers showed total assets under management grew 5.8% in the year ended Dec. 31, to $81.2 trillion. In 2015, assets under management fell for the first time since 2011, by 1.7% to $76.7 trillion.
The passive money managers' growth in 2016 compared with a 0.8% decline for 2015. Over 10 years, passive managers have seen their total assets grow at a compound annual growth rate of 9.2%. For the overall 500 firms in the ranking, the 10-year rate was 2.4%. A spokeswoman for Willis Towers Watson said the consultant "created a consistent sample which in our view consists of the most recognizable passive managers with a substantial amount of AUM invested in passively managed assets and which is representative of industry developments." She added that the list is internal.
Overall, however, active strategies continued to take the dominant share of assets under management across the top 500, at $20.5 trillion, down 2.3% from 2015. Total passive assets grew 5.9% over the year to $5.6 trillion.
"Passive has definitely increased much faster than the average," said Luba Nikulina, London-based global head of manager research at Willis Towers Watson.
There are a number of well-known reasons for the growth of passive — such as pressure on fees, the ability to gain exposure in a cheaper way and the underperformance of active strategies — but Ms. Nikulina cited two key additional reasons.
"There has been significant appetite from asset owners to have a bit more control around the sorts of exposures that they have," said Ms. Nikulina. An asset owner looking to incorporate sustainability and environmental, social and governance factors into their exposures can use an ESG-exclusion index, for example.
The second reason is that factor investing and smart beta strategies might also be counted in the passive assets story. The 2016 research showed 5.5% of assets under management of the 500 largest managers was invested in factor-based strategies.
There may also be a relationship between the increase in passive assets and growth in allocations to alternatives. Alternatives assets under management grew 5.1% in 2016 to $2.5 trillion. Equities assets grew 4.1% to $18.5 trillion, and fixed-income assets grew 1.7% to $14.4 trillion.
"What we think is happening is investors are allocating to passive and with this they are lowering the overall fee drag, and they also lower the governance requirements in this area. When they release this fee and governance budget, they reallocate it not to active and traditional asset classes, but rather to more alternatives to make their capital work harder," said Ms. Nikulina.