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.

“Creating products that compete with low-cost passive offerings, such as strategic beta, a hybrid investment approach between active and passive, appeals to active managers that struggle philosophically with managing both active and pure passive,” DeBolt said in a statement.

Meanwhile, the report finds that more asset managers are receiving requests from institutional clients for socially responsible strategies. The percentage of asset managers receiving these requests has increased from 35% in 2015 to 52% in 2016, according to the report. And, the report finds that the fraction of managers receiving at least one request is up from 68% to 90% over the same time period.

With broker-dealers using fewer firms and products, asset managers need to work toward the “right mix of fewer products capable of achieving scale,” according to the report.

Cerulli predicts that a few core low-cost share classes will eventually prevail.

Looking ahead to 2017, asset managers expect to see the biggest increase in the use of I-shares, R6 shares and a platform/wrap share class, according to the report.

“It is critical to have the right share classes in a firm’s arsenal to compete in certain markets,” the report states.

The report also finds that financial advisors plan to increase their use of platform and institutional share classes even though A-shares made up the largest percentage of their advisory practice sales in 2015.

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