After a slump in 2022 due to intensified market volatility, asset growth in the U.S. fund business is expected to climb back to its historical rate, according to a new report from ISS Market Intelligence.
In its report, the research arm of the proxy advisory firm Institutional Shareholder Services (ISS) projects that long-term funds in the U.S. will return to an average annual growth rate of 7.1% over the coming five years (from 2023 to 2027).
“With 2022’s down markets cutting valuations to size, most capital market forecasts anticipate improved returns across asset classes, boosting long-term AUM growth,” it said.
With growth resuming, the report projects that long-term assets will rise to US$29.8 trillion by 2027, with net sales totalling an estimated US$2.7 trillion over the next five years.
The return to historic growth rates is expected to start slowly, however, with poor market performance and inflation continuing to weigh on investors’ appetite and capacity to save and invest in 2023, it noted.
“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,” said Christopher Davis, head of U.S. fund research at ISS MI.
“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,” it said.
For instance, the report said that bond fund sales are expected to outpace equity fund sales in the coming years — forecasting that bond funds will account for about 80% of long-term net sales over the period to 2027.
“While inflation and higher interest rates are likely to dampen interest in fixed income in the near term, an aging population should sustain relatively high demand for bond funds over the longer term,” it said.
Additionally, the report projects that the market share for active funds will fall from 53% to 44% over the next five years.
“This shift will boost index ETFs most, with the vehicle expected to net US$2 trillion in new sales,” it said.
Conversely, the outlook for active equity mutual funds is weakest, the report noted, “with an estimated US$1.4 trillion in net redemptions over the next half decade.”
Despite the gloomy prospects for active equity funds, the report indicated that asset growth is expected to boost active fixed income and alternative asset managers.
“As alternatives’ market share grows from approximately 1.4% to 2.1% over the next five years, the asset class is projected to grow AUM by approximately 15% per year — the highest projected growth for any asset class over the period,” it said.
Active ETFs are also expected to attract a growing share of assets. The report projected that active ETF market share will rise from 1.4% to 2.3% over the next five years, which represents 17.4% in annualized AUM growth and over US$280 billion in new flows.