The world’s hottest investment product is heading for a record-breaking year

pulse

May 4, 2017 7:53 PM

Passive investment vehicles are accounting for an increasing amount of equity market share due to lower fees. 2017 will be a record-setting year for inflows.

According to the Terminator movie franchise, the battle between humans and machines isn't supposed to start in earnest for at least another decade.

Someone forgot to tell the stock market.

By all indications, the machines are winning. Passive investments that don't rely on active management by humans are expected to account for half of the US equity market in the next 24 months, according to Credit Suisse.

For those paying attention, the writing has been on the wall for some time now. according to Citigroup

characterization of the current environment than 'active-to-passive.'"

Of course, it doesn't help matters for active managers that they've been underperforming their benchmark since 2013, according to Credit Suisse. While it's certainly a tall task to beat an index like the S&P 500, which is in the eighth year of a bull market and continues to hit new highs, the futility has been prolonged enough to make investors question what exactly they're paying for.

BlackRock, the world's largest investor with $5.1 trillion under management, has taken notice. The firm announced in late March that it will slash fees on some funds and increasingly turn to computing power to drive investing decisions. That included a $30 million fee cut for some of its actively managed funds.

But don't throw in the towel on active management quite yet. Just adjust expectations as it shrinks in size.

"While asset management may no longer be a great business, it's still a good business with low capital intensity, high margins, and positive revenue growth," said Credit Suisse. "As the fragmented industry continues to consolidate, economies of scale will be awarded to the winners."

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