Grim forecast for active managers

Mike Taylor

Managing Editor/Publisher, Financial Newswire

19 January 2023

At the same time as some of Australia’s best-known active managers struggle to attract inflows, new analysis is suggesting that index funds will dominate for at least another two years.

The new analysis from ISS Market Intelligence in the US, is predicting that index funds will control more than half of long-term assets by 2027.

It is projecting that active fund share will fall from 53% to 44% over the next five years.

“This shift will boost index exchange traded funds (ETFs) most, with the vehicle expected to net $2 trillion in new sales.  On a net basis, the rebound in equity fund flows is expected to leave active managers empty handed,” it said.

“The prospects for active equity mutual funds are weakest, with an estimated $1.4 trillion in net redemptions over the next half decade,” it said.

However, the analysis was not all grim for active managers, with the ISS report suggesting that, “outside of equities, a growing pie will boost active fixed income, alternatives managers”.

The analysis report said that while it expected a majority of taxable bond fund sales to accrue to passive fund managers, active funds should get a large slice of the fast-expanding pie—an estimated $570 billion in net flows.

“Thanks to healthy organic growth, ISS MI anticipates active bond funds will grow AUM faster than active stock funds, despite stocks’ better return prospects,” it said.

The report also suggested that active managers might find new avenues for growth through niche areas such as alternatives as the alternatives market share grows from approximately 1.4% to 2.1% over the next five years.