Overview
Since 2007, there has been a sea change in allocations between active and passive strategies among U.S. institutional tax-exempt investors. In 2007, active strategies accounted for 75.6% of assets under management. In 2023, active strategies represented only 56.2% of the total.
The decline was particularly significant for equities where active's share of AUM fell to 43.2% from 70.5%. Active fixed-income strategies lost only 10.8 percentage points of market share, falling to 75.8% from 86.6%.
Total U.S. and non-U.S. equity AUM grew at an annualized 1.8% to $7.2 trillion over the period. Fixed-income assets grew at an annualized rate of 4.7% to $4.8 trillion.
U.S. equity
There was a total of $3.6 trillion in U.S. equity AUM for U.S. institutional tax-exempt clients in 2007. This included $2 trillion in active strategies, $1.2 trillion in passive strategies and $354 billion in enhanced strategies. AUM growth managed only around 3% annually through December 2023.
The slow growth can be attributed in part to defined benefit plans substantial reallocation to alternative investments and some internalization of the asset management function at defined benefit plans. The lack of growth from defined benefit plans was offset by strong defined contribution inflows and market gains.
Overall active U.S. equity was virtually flat with $2.1 trillion in AUM. Passive assets grew at a relatively quick annualized pace of 7.4% to $3.7 trillion from $791 billion.
In 2007, money managers had $1.3 trillion in active large-cap U.S. equity AUM from their U.S. institutional tax-exempt clients. This was almost twice the amount of passive, which was $719.3 billion. On the active side, AUM was evenly spread among growth, value and core. On the passive side, 90.9% of assets were in core strategies.
Some 91.3% of all large-cap/all-cap core U.S. equity strategy AUM was in passive strategies at the end of 2023, up from 72.8% in 2007. Passive core strategies accounted for an astounding $3.3 trillion in AUM or 57.1% of all U.S. equity AUM.
Active large-cap value strategies lost $198 billion over the same period, dropping to $302.4 billion from $509 billion in AUM.
Assets in growth strategies almost doubled to $1.1 trillion from $587.3 billion. Both active and passive growth strategies had more assets, but passive grew more quickly.
Non-U.S. equity
Non-U.S. equity assets were $1.6 trillion in 2023, down from $1.8 trillion in 2007, driven by declines in active and enhanced strategies. Active assets fell almost half a trillion dollars to $968.6 billion from $1.4 trillion. Enhanced non-U.S. equity AUM stood at only $9.1 billion, down from $85.3 billion in 2007. Passive assets did increase, roughly doubling to $652.6 billion.
Fixed income
In a bright spot for active managers, active U.S. fixed-income strategies roughly doubled their AUM to $3.4 trillion in 2023 from $1.8 trillion in 2007.
A critical driver of asset growth over the period was a multitrillion-dollar increase in liability-driven investing strategies, mostly by corporate defined benefit funds. P&I started to ask about LDI AUM in 2011. The first year assets were $1.1 trillion. At the end of 2023, assets stood at $2.9 trillion.
Passive U.S. fixed-income strategies grew at a rapid rate of 9.1% annually to $1.1 trillion in 2023, from $278.2 billion in 2007. This incredible growth was driven in large part by defined contribution plans. At the end of 2023, passive U.S. fixed-income assets from U.S. defined contribution clients stood at $680.4 billion, up from $69.7 billion in 2007.
Driven by Baird Advisors' $73.7 billion in AUM growth, enhanced U.S. fixed-income assets increased to $91.1 billion from $85.3 billion in 2007.
Some 92.4% of non-U.S./global fixed-income assets was in active strategies. This was up from 88.6% in 2007. Assets increased to $217.2 billion from $166.2 billion in 2007. There was only $18 billion in passive strategies in 2023, down from $21.5 billion in 2007.
Conclusion
Structurally, passive managers should continue to see larger growth, driven by asset inflows from defined contribution plans and flows into exchange-traded funds.
Active managers could win back market share if they simply outperformed passive strategies, which according to S&P SPIVA data has been all but impossible.