The passive wave is forcing firms to cut the fees they charge in order to stay competitive. Meanwhile, their expenses for technology, talent and regulatory compliance are rising, further squeezing profit margins.
Some active managers have suffered relentless outflows as higher operating costs hurt relative performance, and their own stocks have suffered. Bloomberg’s index of large asset managers fell 34% in the five years through Aug. 30, even as the S&P 500 rose 46%.
More Deals?
Pressure on the industry is spurring speculation of more consolidation. PwC forecasts a 14% decline in the number of funds and a 22% drop in expense ratios by 2025.
Michael Burry, hero of Michael Lewis’s book “The Big Short,” warned last week that passive fund inflows are inflating a new stock and bond bubble that is bound to blow up as money linked to fund indexes exceeds amounts traded in individual stocks.
“The theater keeps getting more crowded, but the exit door is the same as it always was,” Burry wrote in an email exchange with Bloomberg. “All this gets worse as you get into even less liquid equity and bond markets globally.”
To be sure, U.S. stocks held in passive and active funds combined represent less than one-third of the total market, with the balance owned by individuals, pensions, insurers and other investors, according to the Investment Company Institute.
Capital Group, founded in 1931, has resisted indexing. The closely held, Los Angeles-based firm says its long-term returns mostly beat passive products, whose lack of agility would be exposed in a bear market. The firm’s $190 billion Growth Fund of America, managed by a 13-person team, returned an annualized 8.1% in the 20 years through August, versus 6.3% for the Vanguard 500 Index Fund.
“Many investors believe they are making the ‘safe’ choice in picking an index fund,” said Steve Deschenes, Capital Group research and development director. “The most popular index funds expose customers to the full brunt of downturns. Strong active managers can provide less volatility and a smoother ride.”
This article was provided by Bloomberg News.