NEW YORK (December 17, 2021) – ISS Market Intelligence (ISS MI), a unit of Institutional Shareholder Services providing critical data and insight to global asset managers, insurance companies, and distributors to help them make informed and strategic decisions to manage and grow their business, today announced the release of its State of the Market: Future of Retail Products report covering the 2022-2026 outlook for long-term funds.
The report suggests long-term assets under management (AUM) will reach $39.8 trillion by the end of 2026 and that, after a half-decade of well above average asset increases, slower growth lies ahead. ISS MI projects long-term fund AUM to rise by an estimated $11.7 trillion with forecasted 7.4 percent annual growth falling well short of the estimated 13.1 percent average annual gain for the 2017-2021 period.
In addition, the report forecasts AUM growth to slow across most asset classes. Historically, capital appreciation has been the biggest driver of asset growth. With stock and bond returns unlikely to match recent gains, tomorrow’s growth engine will run with less gas in the tank, the report argues, and that despite a weaker forecast for fixed income returns, bond funds will grow AUM more quickly than stock funds thanks to anticipated sharp inflows.
Opportunities remain, however, despite the pace of growth moderating.
“Fund managers should not confuse a slower-growing asset base with a stagnant one; far from it,” said Christopher Davis, lead author and Head of U.S Fund Research at ISS Market Intelligence. “Technological innovation and a generational changing of the guard leaves much of the industry’s AUM in flux, creating opportunities for new winners to emerge.”
Meanwhile, the report estimates that U.S. equity fund flows will rebound but bond funds will still outsell stock funds by an estimated $640 billion over the next five years as the long-cresting wave of retiring baby boomers intensifies, spurring additional demand for bond funds. Bond funds ae expected to gain about a percentage point in market share over the next five years, the report projects, reaching 26 percent of long-term U.S. assets in 2026.
The report also highlights a number of key industry themes, including:
- Index funds will control more than half of long-term assets by 2026: With index fund share projected to rise from 44 percent to 53 percent over the next five years, ISS MI anticipates that index funds will soak up more than 90 percent of net long-term sales and all of the net $2.3 trillion in expected equity fund intake on a total basis that factors in both inflows and outflows. Through 2026, active equity AUM is expected to increase by an average 2.6% annually, though active international equity assets will grow at a faster 4.6% annualized pace.
- Outside of equities, a growing pie will boost active managers: Although passive fund managers will soak up a majority of the $2.6 trillion in taxable bond fund flows, active funds should get a large slice of the fast-expanding pie—an estimated $1.0 trillion in net flows. Niche areas like alternatives—which we expect will see AUM growth accelerate—offer active managers new avenues for growth.
- Zero-commission trading will charge already-strong demand for ETFs, including for active ETFs: With market share expected to rise from 26 percent to 33 percent over five years, ETFs will grow AUM at more than twice the rate of mutual funds. Rapid growth will spur new product development, though only a small percentage will ever reach meaningful scale. After a slow initial climb, active equity ETFs will gain traction, contributing $325 billion to $590 billion in overall active ETF flows over five years.
- New technology platforms are disrupting the investment landscape: Digital middlemen are expanding private markets and hedge funds to larger audiences. Meanwhile, zero-commission and fractional trading has laid the groundwork for mass customization of investment portfolios (“custom indexing”), paving the way for a future in which asset managers market the “software” that makes portfolios work without the “hardware” of the mutual fund or ETF.
“Without fast-rising markets, managers will depend more on flows for growth,” predicts Davis. “While potential trouble for firms struggling to grow organically, those with the right product and distribution mix should not be starved for opportunity.”
About ISS Market Intelligence
ISS Market Intelligence (MI) division provides critical data and insight to global asset managers, insurance companies and distributors to help them make informed, strategic decisions to manage and grow their business. Through its industry-leading combination of proprietary and integrated datasets, in-depth global research and reliable executive engagement, ISS MI delivers solutions for market sizing, competitor benchmarking, product strategy and opportunity identification across a wide range of financial products including funds, annuities, insurance, mortgages, and other instruments. The ISS MI group includes the industry-leading data platforms Simfund, BrightScope, Local Market Share, and Financial Clarity, as well a full collection of global research and analytic services including Investor Economics, Market Metrics, and Plan for Life.
Founded in 1985, Institutional Shareholder Services group of companies (ISS) empowers investors and companies to build for long-term and sustainable growth by providing high-quality data, analytics and insight. ISS, which is majority owned by Deutsche Bourse Group, along with Genstar Capital and ISS management, is a leading provider of corporate governance and responsible investment solutions, market intelligence, fund services, and events and editorial content for institutional investors and corporations, globally. ISS operates on an arm’s-length basis and Deutsche Bourse has adopted Principles protecting the independence and integrity of ISS’ research offerings. ISS’ 2,000 employees operate worldwide across more than 30 global offices in 15 countries. Its more than 4,000 clients include many of the world’s leading institutional investors who rely on ISS’ objective and impartial ESG and governance research, market intelligence and fund services and data and analytics, as well as public companies focused on ESG and governance risk mitigation as a shareholder value enhancing measure. Clients rely on ISS’ expertise to help them make informed investment decisions.