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Shift to Passive Mutual Funds Continued in 2015: PwC

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A report on developments in the mutual fund industry in 2015 from PwC finds that assets nearly doubled since the financial crisis, and strong demand is enriching the coffers of exchange-traded funds.

According to the report, investors have continued to shift assets to passively managed mutual fund products, increasing from 9% in 2005 to 23% as of September 2015. Over the past decade, passively managed funds have attracted $2.2 trillion in net new flows, compared with $1.5 trillion for active funds.

Last year alone through September, passive funds garnered $301 billion, while active registered funds recorded net outflows of $128 billion.

At the fund level, 52% of total U.S. mutual fund assets were invested in equities, 22% in bond funds and 17% in money market funds.

ETF assets have grown rapidly, standing at $2.1 trillion by late 2015, up from $1 trillion five years ago.

PwC said that in a recent survey of asset managers, 75% had predicted that global ETF assets would increase to $5 trillion by 2020, thanks to greater penetration of global markets, growing acceptance by more types of investors and the emergence of a wider variety of investment strategies.

Alternative mutual funds, which combine mutual funds’ trading flexibility with hedge funds’ investment style, have increasingly appealed to investors, enabling them to gain exposure to such investments as derivatives and distressed bonds.

Between 2007and the end of 2014, alternative funds attracted $124 billion in net new cash and reinvested dividends, and at the end of that period had total assets of $334 billion across 569 funds.

On the regulatory front last year, the report said the Securities and Exchange Commission sought to address certain risks in the asset management industry, starting with proposals related to derivatives, data reporting by investment companies and advisors and liquidity risk disclosure.

Compliance also influenced activity in money market funds as advisors either exited the business or revised product lineups to prepare for mandatory floating net asset value. Other areas of SEC focus included cybersecurity, anti-money laundering, social media and transfer agents.

According to the report, mutual funds faced challenges from various sources in the international tax environment, including the European Union’s updating of withholding tax reclaims for U.S. funds.

In addition, the Organization for Economic Cooperation and Development released recommendations on base erosion and profit shifting, which, the report said, will change the tax regime for mutual funds and their advisors, and the IRS released its final asset diversification test regulations.

The Year Ahead

Looking ahead, PwC said the mutual fund industry would continue to adapt and evolve to meet downward pressure on fees, changing investor preferences and tightening regulatory requirements.

It expected mergers and acquisitions to continue within the larger asset management industry, with mutual fund providers active in the space as they look for smaller shops and fund houses with specialized capabilities to bolster their product offerings.

The report said automated advice platforms would drive a push by the industry to leverage the power of digital technology. Asset managers will drive the best value in investment decisions and client relationships, likely lower costs and generate value from operations.

PwC said alternative mutual funds would continue to gain acceptance and asset flows because of increasing integration between alternative and traditional asset management, growing access to traditional capital sources for product innovation and more opportunities to include alternative strategies in defined contribution plans.

— Check out Morningstar’s Lonely Hearts Club for Mutual Funds Flirts With Contrarians on ThinkAdvisor.


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