Active fund managers in the United States could lose about US$12 billion annually in potential management fees because of the growth in index-based products like exchange traded funds (ETFs), according to a research report.
The TABB Group report—Performance Anxiety: A Buy-Side Study of Benchmarks and the Investment Process— finds that investment-performance measurement has undergone a major transformation. Instead of comparing a manager’s returns against a broader market index, the benchmark process has become granular and precise.
“The appetite for index-based funds is nearly insatiable, with index-based assets under management increasing by 2,610% since 1993,” says the firm’s research director, Adam Sussman. “When you look at the different categories used to create equity indices, there are 48,256 possible indices, just a smidgeon more indices than the 40,365 publicly traded companies.”
Over the last five years, independent index providers have seen service revenue increase at a compound annual growth rate of 22%, he adds. By next year, TABB Group expects they will take in more than $1 billion a year in revenue.
At the same time, nearly 70% of all pension plans representing $40 trillion of assets under management will be using customized benchmarks, which will create more sophisticated investments as pension plans are exploring different views on asset allocation and portfolio construction, examining risk-adjusted returns, complex correlations and liability matching.
“Pension plans need better ways to measure the performance of alternative asset managers,” Sussman says. “ETFs, exchange traded notes and other index-based managers will need more products in the pipeline. There’s no slowing down the tide of indexing.”
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