You might have heard that the money management business is changing.
On one hand, passive funds, which track an index and charge minimal fees, have hoovered up assets at a high rate over the past decade. Credit Suisse is forecasting that passive funds could make up 50% of US equity retail assets by 2018. Additionally, Goldman Sachs just launched a “smart-beta” exchange-traded fund, which tracks an equal weight index of roughly 500 large cap stocks, with an expense ratio of just 0.09%. These funds are guaranteed to underperform the market by a small margin, but they provide certainty at a low cost.
On the other hand, money is pouring into less liquid investment strategies, and private equity in particular. These buyout funds raised more than $US210 billion in 2016, according to McKinsey. Infrastructure funds are also booming, with Blackstone launching a $US40 billion infrastructure investment vehicle in conjunction with Saudi Arabia’s Public Investment Fund.
This graphic, from a big Credit Suisse report on the state of the asset management industry, neatly sums up everything that’s going on.
Here’s Credit Suisse:
“The barbell analogy helps explain the gravitation of business in the US from traditional products to both (1) lower fee passive and factor-based strategies and to (2) higher fee alternative and higher active share strategies.”
In other words, money is flowing to low-cost passive funds like ETFs and “smart-beta” funds, and to high-cost, less liquid alternatives like private equity, real estate and infrastructure that offer higher returns. The funds in the middle, such as mutual funds, are getting squeezed.
Credit Suisse said:
“We believe the speed of the US active-to-passive shift will slow in 2018/19 from 2017 (DOL rule accelerated the shift into 2H16/2017), but expect global AuM to continue to follow the barbell pattern as retail investors demand a more institutionalized service and institutional investors attempt to meet their liability hurdles in a world of low rates.”