Morningstar - Summer 2019 - 45

23
15

Passive

20
0

EXHIBIT 4

Big Shift Investors are increasingly choosing low-cost passive investments instead of actively managed funds.
U.S. Funds Overall

Equities-U.S., Sector, and International

Fixed Income-Taxable and Municipal

100%

Index

ETFs

Active

ETFs

Active

60
PROJECTION

1998

2008

2019E 2027E

PROJECTION

1998

2008

2019E 2027E

PROJECTION

1998

2008

2019E 2027E

Source: Morningstar Direct-U.S. Open-End Fund (excluding Money Market and Fund of Funds), ETF, Separate Account and CIT Historical Data.

Starting in 2011, the first of the U.S. baby boomer
generation started to reach a retirement age
of 65. The movement of capital out of 401(k) and
other defined-contribution plans is expected
to be high in the coming decade as more and more
baby boomers retire and take their annual
withdrawals or roll over their portfolios into IRAs.
The headwinds created by these baby boomer
withdrawals and rollovers-as well as competition
from lower-cost passive target-date offerings-
will put pressure on what had been a strong
organic growth vehicle for active asset managers.
These headwinds, however, should start
to abate by around 2025, when members of the
millennials generation-which is larger than
the baby boomer generation-start to reach their
peak earnings years.
Eventual End of Bull Market
The current economic expansion, which started
in June 2009, has already run for an aboveaverage 117 months as of March and is on track
to be the longest in U.S. post-World War II
history by this summer. Some economists are
speculating that the U.S. expansion will

likely peak sometime mid- to late-2019 as the
effects of the late 2017 tax cuts and the
tailwinds created by 10 years of fiscal stimulus
(via historically low interest rates) start
to wane. Add to that economic uncertainty
created by tariffs and trade clashes initiated
by the Trump administration, and slower
economic growth is looking more likely than not
in the near term.
While the S&P 500 index technically went into
bear-market territory (defined as a 20% or
more decline from a market's 52-week high) on the
day after Christmas, the market has rallied off
that low. With the S&P 500 Index up close
to 20% from its Christmastime lows as of March,
we've moved solidly away from bear-market
territory. That said, most of the asset managers
in our coverage universe relied heavily on market
gains to generate AUM growth during the
past decade, as organic growth has proved elusive
(especially for firms running large active equity
platforms). A sustained bear market would
put pressure on both revenue and margins. (During
the 2008−09 financial crisis, most asset managers

lost at least half of their AUM to market declines
and outflows.) Market corrections of 10% or more
cannot be ignored, either, as we have seen 10
during the past two decades (two of which turned
into bear markets) and 25 during the past four
decades (five of which registered as bear markets).
The Shift From Active to Passive
With $3.4 trillion in ETF assets under management
at the end of 2018 and another $3.3 trillion
in index-fund AUM, the passive market has
become a force to be reckoned with as more and
more investors seek out low-cost alternatives
to active funds ( EXHIB IT 4 ). The movement
by brokers and advisors away from transactionor commission-based fee structures to ones
that are based on AUM has also spurred growth
of passive strategies.
The ETF industry accounts for around 9% of U.S.
investment company assets, holding close
to $4.8 trillion in AUM worldwide. Although the
growth of the ETF industry was aided in great part
by the poor relative investment performance
and higher fees charged by active equity managers,

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Morningstar - Summer 2019

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