The traditional equity fund space is saturated, and the only way for asset managers to grow is to include alternative investment products, like exchange traded funds, McKinsey & Co. says.
According to a report, mutual fund assets are currently robust because of rising stock markets and not because the firms have found innovative ways to attract new assets, reports Ross Kerber for Reuters. [Actively Managed Funds Losing Out to ETFs]
“Market appreciation is now the lifeblood of the industry – an unstable foundation on which to move forward,” the report said.
In 2011, the sector’s profit margin was 28% on average. While this is an impressive figure, it fell behind the 33% for 2007. Additionally, the report pointed out that the gap between successful and unsuccessful firms is growing.
Retail investors have been moving out of equity funds and into index funds and bond products as the recent bouts of market volatility sent investors to less risky options. [ETF Performance Beats Active Management]
Salim Ramji, one of the report’s lead authors, believes that the better-positioned firms are those that have added alternative funds, retirement products or ETFs.
“What the industry needs to do is find those sources of new flows,” Ramji said in the article. “The sources of flows are very different than what they have been in the past.”
The McKinsey & Co. report discovered that passive products, “solutions” products like retirement funds and alternative funds attracted $1.3 trillion in new assets from 2008 to mid-2012.
For more information on the fund industry, visit our mutual funds category.
Max Chen contributed to this article.