Passive investment funds are stealing market share from actively managed funds at a rapid pace in Canada and the U.S., according to a new report from Montreal-based PWL Capital Inc.
The report, entitled The Passive vs. Active Fund Monitor, shows that Canadian passive investment funds (including mutual funds and ETFs) have more than doubled their market share since 2007-08, to 11.2% from 5.2%. Passive funds experienced a growth rate of 400% in new assets under management (AUM) during this period, attracting $70 billion in net new money.
This compares with a still healthy 116% growth rate in AUM for actively managed investment funds, which attracted $75 billion during the same time frame.
Passive investment funds in the U.S. have seen even stronger growth in market share, more than doubling to 35% from 16% in 2006-07. U.S. passive investment funds saw net money flow of $3.4 trillion during that period, compared with just $887 billion for active funds.
“Overall, passive funds are gaining ground in both Canada and the U.S. with the help of steady inflows of money,” says the report, which was written by Raymond Kerzérho, research director at PWL. “However, the Canadian passive fund industry remains small relative to the one in the U.S., where passive funds have grown at a frenzied pace.”
Given the relatively lower fees on passive vs active investment funds, the rise of passive investments means Canadian investors are saving $1.3 billion in fees each year while U.S. investors are saving US$63 billion in fees annually.
“These savings naturally represent an equal amount in loss of revenue for the investment funds industry,” the PWL report states.
The research shows that net flows into passive funds in Canada have been stable and positive every year since 2008. In contrast, active fund flows have been volatile, with three years — 2008, 2009 and 2010 — in which active funds saw hefty net withdrawals.
“Since 2007-08, both Canadian and U.S. passive funds attracted positive net new money steadily, whereas the flow of funds toward active management has been extremely volatile,” the report states.
Despite the steady growth of passive funds, the report notes that the research did not include funds of funds, which comprise a large portion of the Canadian mutual fund market. As a result, the report suggests that its estimate of Canadian passive fund market share may be overstated.
“The data suggest that traditional active managers retain the lion’s share of the fund industry,” the report says.