Investment Funds Reach Record $119 Trillion in 2023: The Rise of Passive Investing and Its Impacts on Active Management

The global investment market performed above average in the past year. The total amount of money under the management of investment funds, banks, insurance companies and other managers was the highest in history, rising 12 percent to nearly $119 trillion. It follows from a regular inspection consulting firm Boston Consulting Group (BCG).

However, 2023 was also a year in which the popularity of passive funds increased significantly among investors at the expense of actively managed funds. A passive fund is an investment fund that tries to copy the performance of a particular market or index. One of the most common types of funds are exchange traded funds known as ETFs.

On the other hand, an actively managed fund is a fund where portfolio managers select and manage individual investments with the goal of outperforming the market or a specific index. This includes, for example, mutual funds.

While 57 percent of new funds went to passive funds between 2019 and 2022, in the past year it was already at 70 percent, or about $920 billion, according to BCG research.

Meanwhile, in addition to the attractiveness of actively managed funds, fund managers also faced rising costs and continued pressure on margins. As a result, their profits fell eight percent year on year, according to BCG.

“Asset managers today are challenged to reduce their costs while offering attractive and viable products to customers with high added value and returns. This is because they can achieve higher margins and improve their revenue structure,” explains Vít Pumprla, a partner in BCG’s Prague office.

The average profit margin has fallen by almost a sixth over the past 13 years. Although it reached 0.26 percent in 2010, in the past year it was only 0.22 percent. Therefore, fund managers were largely responsible for the overall growth of the market. Although their income has doubled since 2005, 90 percent of this growth was caused by market growth and the associated increase in the amount of assets under management.

Among other challenges facing the industry are rising costs. These have increased by an average of five percent a year since 2010, according to BCG, which means that they have increased by 80 percent in total. Asset managers are also unable to find new innovative products that would be able to survive on the market in the long term.

“While 60 percent of mutual funds were launched in 2010 a decade earlier, in 2023 only 37 percent of mutual funds launched in 2013 were on the market as – already,” said Pumprla.

If asset managers want to maintain the economic sustainability of their operations, they need to work on three main areas, according to BCG. These are productivity, personalization and a greater share of products aimed at the private market, ie the purchase of shares of promising companies that are not publicly traded.

Private equity funds generate the highest returns for investors. Currently, they make up less than ten percent of the money invested, but almost 30 percent of all income.

This difference will continue to grow. According to BCG, in 2028 private equity funds will account for approximately 11 percent of global investment assets under management, but will generate 36 percent of all returns for asset managers.

According to Pumprla, similar trends that we see around the world are gradually starting to appear in the Czech Republic as well.

“The only question is still the speed of these changes, which may be different here. The amount of funds that go to passive funds and other investments such as private equity or real estate funds will grow faster in the long term than the amount of money that goes to actively managed funds,” he told SZ Byznys.

However, Jana Brodani, executive director of the Capital Market Association of the Czech Republic (AKAT), points out that in the Czech context the increase in the popularity of passive money is not as important as on a global level.

“Passive money is very popular in the Czech Republic, but alongside active money rather than at their expense. It is also related to the question of how people start investing. “Czechs either want to buy a certain currency themselves or they need a professional to set up a portfolio,” explained pro SZ Byznys.

According to Brodani, passive funds make up about five to ten percent of the total amount of assets invested on the Czech market. Part of these investments is included in the AKAT data, while another part is represented by investments through various foreign platforms.

Due to the size and liquidity of the market in the Czech Republic, we cannot find an ETF that would cover, for example, Czech bonds, let alone those with the option to choose between state and corporate bonds or according to the maturity The executive director of AKAT also reminds that the offer of ETF funds in foreign currencies, mostly in dollars or euros, is not very attractive to the average Czech investor.

“In the Czech environment, mixed funds are the best solution for the client, but they are almost exclusively available in an actively managed form. “Most ETFs are only offered as pure bonds and pure stocks,” he said.

According to her, active managers in the Czech Republic must continue to innovate and adapt to the changing investment environment in order to maintain their appeal. As Brodani says, in times of economic cycles, when almost everything grows, the public is more likely to rule passively.

“However, as the investment environment changes, this trend may be turning back to active management, especially as there is a need for cash hedges provided by active managers,” he argues. When asked what steps active asset managers in the Czech Republic are taking to increase the attractiveness of their products, Brodani replied that the move is to reduce fees.

“The pressure from large American or global funds, which have many times the amount of assets under management than any European fund, and therefore a much greater opportunity to use economies of scale, contributed to this. The cost of active and passive funds will gradually become more similar,” he said.