Passive mutual and exchange-traded funds will top their active counterparts by early next year, but the full picture of the investing marketplace displays much more subtlety, a new study said.
After amassing 49% of the total assets in ETFs and mutual funds in the second quarter, the passive products' holdings will jump those of their actively managed peers "at some point in late 2023 or early 2024,'' according to
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None of that means that active management will go the way of the VCR, according to Cerulli. When including the full range of products with collective investment trusts, money markets, separately managed accounts and alternative classes, active vehicles still commanded a 70% share of the market at the end of last year. Outflows are tapering off in recent years as well.
The emergence of more tax-focused management strategies, ESG-tied products and faith-based investing vehicles display how "passive is reaching its natural limits," according to Brad McMillan, the chief investment officer of Commonwealth Financial Network.
"The case for active management is that managers have some kind of inside knowledge that isn't reflected in the market. That's not necessarily proven in highly liquid asset classes like U.S. equities and fixed income," McMillan said in an interview. "Active managers are getting better at defining the areas in which they can compete and actually adding value in those areas. It's a limit on the utility of the passive model."
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Money markets, alternative investments and SMAs are picking up "some of the market share fleeing from actively managed pooled products, making the fate of actively managed mutual funds look not quite so dire," the Cerulli report stated. Concerns about a potential recession or scenarios like last year's slumping stock and bonds could help make the case as well, although "conflicting patterns have been seen during the beginning of the current decade," Cerulli said.
The investing world might someday find "the critical point" in which "passive investing becomes a risk, where the mechanism of blindly buying securities based on their prices rather than their cash flow could blow back," Matt Apkarian, an associate director in
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"Expansion of strategies and allocations outside of the largest U.S.-based asset classes can stand to give support to active management, as assets appear to be on a path to continue moving into passively managed products within the portfolio core of U.S. equity and fixed income," Apkarian said. "Asset managers must adapt to changing demand from financial advisors and end-investors to remain relevant in the industry. Increased focus on defined outcome products with better downside capture can serve to be the tool that meets advisor needs when attempting to provide their clients with a smooth ride toward their financial goals."
