Although conventional wisdom predicts that passive investing will dominate the future, analysis of key trends indicates that active management will become more prevalent.
Report Overview
The common narrative that passive investing will overtake active management suggests a primarily passive future for investors. However, an analysis of fund AUM data across time and regions offers a starkly different perspective on the future of investment management.
Contrary to popular belief, active management assets under management (AUM) continues to far exceed those of passive index funds. Even though index fund AUM has seen a 1,500-fold increase from 1989, it still only represented 32% of all fund AUM by the end 2021. Assertions about passive investing overtaking active management are largely based upon a few exceptions – most notably for equity funds in the US Large Cap Blend category, where index funds contain three times as much AUM as their active counterparts. In other regions and across asset classes, index funds are not nearly as prevalent. Generalizations based on US Large Cap Blend equity funds are misleading.
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Looking forward, advances in technology will allow for comprehensive customization of portfolios curated to meet the specific needs and preferences of investors. Both active and passive pooled funds will be disintermediated by “hyper-managed” solutions that maximize net economic benefits and satisfy client objectives. Active funds are less likely to be unbundled but will need to clearly demonstrate an investment edge to thrive. We see the active versus passive debate becoming increasingly less relevant as hyper-managed accounts, that can incorporate the best of both active and passive elements, will generally overtake the use of standalone pooled investment products.
Leading asset managers will evolve from offering portfolio products to offering portfolio services that develop and implement low-cost, highly customized total portfolio solutions. Successful deployment of hyper-managed accounts by firms will require extensive investment expertise, deep technology resources, and the ability to effectively collaborate with investors. We expect that both active and passive pooled investing products will be subsumed by highly customized hyper-managed solutions.