Outlining the difficulties ahead as the trends seem to be strongly in place
The trend toward passive investment strategies, and away from active asset management, will accelerate, according to Moody’s.
As fewer fund managers beat benchmarks, including investment costs, more investors are gravitating toward less-expensive investment vehicles, such as exchange-traded funds, that "mimic the performance of a market at the cheapest possible cost,” Moody’s wrote in a report that published in the Financial Times on July 25, 2016.
“The barriers to get into wealth management drop every month,” Josh Brown said on CNBC’s Fast Money: Halftime Report on August 16, 2016. Brown is in the wealth management business at New York City-based financial advisor Ritholtz Wealth Management.
“Large traditional asset managers that lack a core competency in passive investing, or that are unable to deliver outperformance to justify their fees, are at risk of seeing their business profiles weaken further, increasing the likelihood of ratings deterioration,” Moody's wrote in a July report.
In the report, the rating agency explains the overall size of the industry is the primary cause and "fundamental driver of the poor performance of active asset managers.” The trend toward passive investing is particularly powerful in the U.S., according to Moody’s. This overcapacity —more than 9,000 mutual funds and 10,000 hedge funds in the U.S. — has led to "investment mediocrity,” the report said, strongly suggesting that the active asset management industry needs to “shrink substantially” in order to improve performance.
To underline this trend, the Moody’s report said $21.7 billion moved from U.S. equity funds in June 2016 that were actively managed — the worst monthly figure since the financial crisis —while passive funds had inflows of $8.7 billion in the same month.
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