Long-term asset growth will return to normal levels of approximately 7% a year after the drastic decline realized in 2022, ISS Market Intelligence said.
ISS Market Intelligence reported in its “State of the Market: Future of Retail Products” report that growth in total assets under management will average 7.1 percent annually between now and 2027 to reach a total of $29.8 trillion.
The report noted that fund sales of all types will rebound slowly after 2022’s down market, according to ISS, Market Intelligence, which is a part of Institutional Shareholder Services, a global provider of data and analytics for the financial services industry based in New York City.
“With 2022’s down markets cutting valuations to size, most capital market forecasts anticipate improved returns across asset classes, boosting long-term AUM growth,” ISS said. “With poor fund performance weakening investor appetites and inflation eroding the public’s capacity to save and invest, ISS expects organic growth to revert to historical trend.”
U.S. equities are expected to rebound to a projected $197 billion in annual flows by the end of 2027. At the same time, “inflation and higher interest rates are likely to dampen interest in fixed income in the near term, [but] an aging population should sustain relatively high demand for bond funds over the longer term,” the report said.
“Fund managers will face familiar challenges over the next five years, ranging from continued pressure from passives to aging demographics. Newer concerns such as high inflation also will put managers to the test, at least in the near term,” Christopher Davis, lead author and head of U.S. Fund Research at ISS Market Intelligence, said in a statement. “However, the next five years should provide new ways for managers to package their intellectual capital. Significant changes in the industry’s asset class and product makeup provide opportunities for new winners to emerge.”
Over the next five years, index funds will control more than half of long-term assets, the report said. In addition, an overall growth in assets will boost fixed income and alternative investments.
ISS said it expects a majority of taxable bond fund sales to go to passive fund managers, but active fund managers also get a share of the growth. “Thanks to healthy organic growth, ISS Market Intelligence anticipates active bond funds will grow faster than active stock funds, despite stocks’ better return prospects,” the report noted.
Alternative investments also are expected to draw investors’ attention with the market share growing from approximately 1.4% to 2.1% over the next five years. Financial advisors are concerned by alternatives’ liquidity requirements, greater need for due diligence, and higher fees.
Active ETFs will continue to draw some managers’ attention. “The fund-to-ETF conversion trend boosted active ETF assets considerably in 2022, and ISS expects the active ETF market share to rise further from 1.4% of all assets under management to 2.3% over the next five years,” ISS said.
“The potential for rapid growth in active ETFs has already spurred heavy product development activity, with the number of active ETF launches far outpacing any other product categories in 2021 and 2022,” the report noted. “Further fund-to-ETF conversion activity and the underrated possibility of widespread ETF-as-share class distribution leave room for additional growth.”