Cerulli: ‘Investors Are Questioning Active’s Value’

Active mutual fund and exchange-traded-fund (ETF) market share continued to erode in 2015, dropping from 77% in 2011 to 69% in 2015, according to new research from global analytics firm Cerulli Associates.

Cerulli’s latest report, U.S. Products and Strategies 2016: Identifying Opportunities for Active Management, finds that almost one-third (31%) of mutual fund and ETF assets were invested in passive strategies in 2015, up from 23% in 2011.

“Investors are questioning active’s value and fee pressure from intermediaries remains prevalent,” Pamela DeBolt, associate director at Cerulli, said in a statement. “Active managers find themselves at a crossroads. They need to determine how to provide alpha in an environment in which the simplicity and low cost of passive appeals to investors and advisors.”

Asset managers report their institutional and retail clients allocate between 10% and 30% of their portfolios to passive investments today.

Looking out three years, they expect institutional investors to invest roughly 20%–50% in passive and retail investors to have a narrower but higher band allocated to passive investments (30%–50%).

This trend toward more passive investing may be due to both fee and regulatory pressures, according to the report.

Accoding to Cerulli, almost half of asset managers (48%) report that regulatory changes and their effect on potential products is a large constraint on their innovation plans in 2016. This is a significant increase from the 23% who said the same in 2015.

“Active managers … are in a position where they may need to reinvent themselves,” the Cerulli report stresses. “It is important for them to take an introspective look at their capabilities and figure out how to be innovative.”

Two ways active managers are already starting to be innovative are through strategic beta products and environmental, social, governance (ESG) or socially responsible investing (SRI) strategies.