We have been commenting in recent quarters on the continuing strong growth in the U.S. market in passive products and alternatives through the extended post-crisis period. Newly reported data from BCG documents similar trends, on the global scale, and puts these into the context of overall portfolio distribution.
The chart above shows how active core investments have been shrinking as a percentage of global AUM while virtually all other investment categories have been increasing. Since 2003, active core’s share has dropped by a third while each of the shares of passive and alternative investments have nearly doubled. Solutions based investments have also grown somewhat dramatically in the period driven in part by the use of target date products.
Clearly the perception that alpha is becoming harder to capture in active core holdings has taken hold. Investors are replacing active core with cheaper passive investments or with prebuilt balanced portfolios and opting for active only in asset classes where skill appears to actually deliver better than market returns.
We expect these trends to continue particularly in light of continued evidence that active core investments are failing on average to beat their benchmarks. Risk management through asset class diversification will also continue to play an important role as the popularity of a more robust core satellite portfolio structure.