A confluence of factors including technology, regulation, investor skepticism of manager skill, and fee-consciousness, has favored the rise of index investing. The pace of growth and complexity of change make it difficult for investors and managers to stay informed about these critical trends. In this report, we provide an overview of the rise of indexing, as well as its impact, both realized and potential, on the asset management industry.
The first half of the paper outlines the key trends in indexing and fund management, specifically:
1. Fees are under pressure. Changes in technology and economies of scale have helped commoditize beta;
2. Product scope is continually broadening, with index-based investing making inroads into active management. Smart beta and the growing interest in hedge fund beta paves the way for further growth of passive index funds at the expense of active management; and
3. Technology advances allow for mass customization and an increased focus on outcomes. The outcomes required by individual and institutional market participants are becoming critical—index funds may benefit due to their low cost and heightened transparency.