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Active managers may continue to lose market share to passive investment vehicles, but they will continue to account for the bulk of industry revenues, according to a new report from ISS Market Intelligence.

Over the next five years, index funds are projected to capture a growing share of U.S. long-term assets under management (AUM), reaching 55.6% of AUM by 2027, the report said.

At the same time, active fund assets are expected to grow only half as quickly, rising at just a 3.5% average annual rate. In particular, active U.S. equity mutual funds are only projected to grow at a 0.8% average annual rate, it noted.

Yet, despite this hefty advantage in asset growth for passive funds over the next few years, active managers will still account for most of the industry’s revenues, ISS said.

“While no longer the industry’s growth engine, active management will still be its biggest money maker,” it said.

The reason for active managers to continue driving revenues is that, on a relative basis, active funds now generate more revenue per dollar of AUM than they did 10 years ago — as passive product prices have dropped by over 33% over that time, whereas active fund fees have declined by only around 10%.

On that basis, the report estimated that active mutual funds will account for almost 80% of industry revenues through 2027, despite their market share declining over the same period.

Indeed, active U.S. equity mutual funds are forecast to generate an estimated 34% of long-term fund revenues over the next five years, despite likely recording minimal growth.

Still, active managers do face a fundamental challenge, the report noted.

“There is no getting around the fact that nearly 40% of the revenue growth generated by long-term funds will end up in passive hands over the next half decade. The lion’s share of these gains will accrue to a relatively small number of giant index fund providers, leaving a much larger number of hungry active managers to fight over the remainder of the pie,” it said.

“Getting a piece requires not just developing a broad set of differentiated capabilities, but also new ways to distribute them,” the report concluded. “Whether through old-fashioned mutual funds, or ETFs, or other venues, tomorrow’s successes will accrue to managers that can ply their crafts across many venues all at once.”