Morningstar chief sees bigger piece of pie for passive

04 August 2014   Category: News, Global, USA   By Daniel Shane

The market share enjoyed by passive investment funds will likely keep increasing and erode at that of actively managed investment products, according to the founder and chief executive officer of Morningstar.

Speaking to Asia Asset Management in Hong Kong, Joe Mansueto estimated that actively managed funds currently constituted around 25% of the US market, with the potential to increase significantly.

“In the US, depending on how you measure it, passive investing might be about a quarter of the industry. The big debate is whether this is cyclical or secular. I think it’s some of both. Could that 25% get to 35% or 40%? Yes it could. Will it go to 90%? I don’t think so,” he said.

Mr. Mansueto estimated that about one-fifth of this chunk of passive investing was taken up by so-called smart beta strategies, which he refers to as “strategic beta” and “semi active” investing. He said that these products accounted for about 30% of all fund flows last year, with year-on-year growth of about 50%.

Mr. Mansueto added that he viewed the rise of passive investing as the result of both cyclical and secular trends in the fund management industry. “It’s cyclical in the sense that I think the period from 2000 to 2010 was the so-called lost decade of equities. So when equity returns are nil, costs make a big difference. So when you have that kind of a period when costs make a huge difference, it’s going to drive more people to passive,” he explained.

“Over the past three years though, the equity markets have done much better, so I think as you get into a stronger market, costs make up a smaller percentage, so that takes some of the pressure off of active management.”

He continued that other new investment products had to a degree removed the spotlight from fund managers themselves, but he does not believe that managers would ultimately be marginalised by these trends. “It used to be that there were always these big, ‘star’ managers, who were very high-profile: people like Peter Lynch, or Bill Gross, but it seems like there’s fewer of those, as passive has got more popular,” Mr. Mansueto said. “Also, outcome-based investing is another trend that I think diminishes the star manager, as well as target-date investing, where you’re promising an outcome and there’s ingredients that are built into that, and the manager is maybe less of a key component.”

Morningstar was founded 30 years ago by Mr. Mansueto in his Chicago apartment. It is now one of the world’s largest independent fund research and analysis companies.