“Crisis tends to accelerate trends already in motion,” said Christopher Davis, lead author and Head of U.S Fund Research at ISS Market Intelligence.

March 30, 2020

U.S. Fund Assets Expected to Hit $26.4 Trillion as Annualized Growth Slows

Photo by Ryoji Iwata

Growth Represents a 6.5 Percent Annualized Increase From 2019 Levels Yet Trails Increases In 2015-2019

ISS Market Intelligence, 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 the Asset Management Industry Market Sizing Report. The annual report enables asset managers to identify opportunities across the investment fund landscape and benchmark expectations for their businesses over the next five years.

This 83-page report explores the longer-term forces that will shape the asset management business long after today’s market turmoil dissipates. “Crisis tends to accelerate trends already in motion,” said Christopher Davis, lead author and Head of U.S Fund Research at ISS Market Intelligence. “The 2008 financial crisis, for example, accelerated flows into index funds and an aging society’s move into bond funds. This report outlines the industry, demographic, and household wealth trends that the current market environment may hasten into reality.”

The report, which estimates five-year growth rates across asset classes, product types, and distribution channels, anticipated subdued asset growth relative to the recent past even before the Covid-19 pandemic rocked markets. Prior to the market plunge over the last few weeks, the report forecasted 6.5% annualized growth for long-term fund assets, well below the 8.8 percent annualized pace from 2015-2019.  The report estimated assets would grow at a slower 5.2% clip if a recession occurred early in the five-year period, though Davis notes the extreme measures now being taken to fight the global pandemic make the future highly uncertain.

While markets are unpredictable, Davis argues the structural factors asset managers will face are more certain. “This report discusses strategies asset managers can employ as market and regulatory forces continue to drive investors away from traditional actively-managed mutual funds,” Davis said. “Factors like demographics, socioeconomic challenges like student loan debt, and a growing need for customized portfolio solutions will influence the future of the asset management business long after the pandemic is past.”

In addition to a modest slowdown in asset growth, the report notes five key findings, including:

  • Investors Prefer Bonds. As the population has aged, its asset mix has become, predictably, more conservative. Flows into bond funds were more than five times higher than flows into stock funds over the past decade. With the population continuing to age, the investor migration from equities to fixed income should continue apace.
  • Portfolio Building Drives Flows. Products like target-date funds and model portfolios help explain why flows have migrated from U.S. stock to international stock funds in recent years, despite the dramatic outperformance of U.S. markets over the period. From 2015-2019, net flows into international equity categories outpaced flows into U.S. equity categories by $700 billion.

  • Passives Cruise to Majority Share Status. We expect passive funds to grow assets more quickly than active funds, so much so that we project that index funds will hold more than 50% of long-term assets by 2024. The forces driving retail investors to passive strategies, including demands from fund buyers and regulators for transparency, aligned interests, and lower costs, are here to stay.
  • Mutual Funds Will Shrink, But Still Dominate. You may have heard predictions to the contrary, but the while the mutual fund is on the decline it is far from dead. We expect they will still comprise 72% of all long-term fund assets in 2024—an admittedly uncomfortable decline from 79% in 2019. But with $1 trillion in projected outflows from 2020-2024, it would be difficult to paint a rosy picture for the future of the active mutual fund.
  • Distribution Outlook: Changing Centers of Gravity. In recent years, several large asset managers have created web-based platforms that undercut intermediary models old (traditional advice) and new (robo-advice). Efforts like these have helped reawaken the once-dormant direct-to-investor market: Assets in this sector grew an estimated 13.6 percent from 2015-2019.

For more on the Asset Management Industry Market Sizing Report, please click here.

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