As fund flows rebound, long-term U.S. investment fund assets under management (AUM) are projected to surge to US$37.4 trillion over the next five years, according to ISS Market Intelligence (ISS MI).
In a new report, the firm forecasted that U.S. industry AUM will climb by US$12 trillion between 2024 and 2028, to hit a new high.
In the coming five-year period, net flows are projected to double the US$1.3 trillion they hit in previous five-year period.
“Following another year of anticipated sluggish sales in 2024, the report predicts sales will accelerate in 2025,” ISS MI said.
The firm projects that growth in net flows will revert to historical trend, rising at a 2.1% annualized rate, compared with just 1.5% over the past five years.
“Fund managers will face familiar challenges over the next five years, ranging from continued pressure from passives to aging demographics,” said Christopher Davis, lead author and head of U.S. fund research at ISS MI, in a release.
“However, as the shock from high inflation and the rapid rise in interest rates wears off, investor demand for long-term assets should rebound to historically normal levels.”
“Index funds will continue to win market share, but significant changes in the industry’s asset class and product makeup provide opportunities for active managers to succeed,” Davis added.
Among other things, the report predicted that higher yields will lure investors back to bond funds, with population aging boosting demand too.
In particular, it suggested that taxable bond funds are expected to grow AUM faster than any other asset class, with a projected annualized growth rate of 10.8%.
Conversely, U.S. equity funds are “poised for more modest gains,” it said, adding that equity funds will likely serve as a prime source of capital for portfolio rebalancing and reallocations to bonds.
ISS MI also expects the hefty redemptions from active funds to slow in the years ahead.
“Index funds will continue to outsell active ones by a wide margin, however,” it said, projecting that passive strategies will generate US$3 trillion in new sales over the coming five years, while active fund redemptions will reach almost US$300 billion over the period.
In its previous forecast, ISS MI predicted that index funds would represent the majority of long-term assets by 2027. It now expects the passive industry to pass the 50% mark in 2026.