For years a profound shift has been taking place in the financial community as individual investors have increasingly favored a passive, low-cost approach over the traditional actively traded assets. Last year, that shift reached a significant milestone as the value of assets under passive management surpassed the value of active investing assets.
For perspective, consider that in 2004, passive investing represented only $725 billion of assets under management, while active assets was $3.2 trillion; by 2018, passive versus active reached a nearly even split, at $4.8 trillion and $4.7 trillion, respectively, according to Bloomberg.
Passive investment managers limit the amount of buying and selling within their portfolios, making this a very cost-effective way to invest. The strategy requires a buy-and-hold mentality. These managers focus on automating business processes to prioritize sales and customer experience, while reducing the cost of back-office operations. Providing market intelligence is also important in driving new assets. Those flocking to passive strategies typically cite low fees, transparency and efficiency in taxes as the primary reasons for interest, while those who favor active strategies argue that passive investing limits the upside on returns.
A cheaper fee is the main reason for the change in investor preference from active to passive. The largest managers may have performed advisory services for 100 basis points or less, and some of the best alternative managers earned as much as 200 basis points. Today, passive management fees for large retirement plans range from no fee, and up to $100, regardless of the asset size for that investor. Managers cover lost revenues with lost fees. Firms seek complementary revenues such as personal advice or products with higher fees to make up their budgets. Margins have compressed as technology, talent and regulatory costs are rising. The ability of managers to drive value creation through new technologies may separate the winners from the losers.