Long-Term Investment Fund Assets Set to Rise After 2022 Dip

Long-term investment assets may see a five-year rebound after declining in 2022, according to market analysts at ISS Market Intelligence.

Investments in long-term mutual funds and exchange-traded funds are set to rise each year from 2023 to 2028 to an estimated $37.4 trillion, according to ISS MI, which, like PLANADVISER, is owned by Institutional Shareholder Services Inc.

The data and analytics provider forecasted the growth of these funds after aggressive rate hikes by the Federal Reserve and market volatility led to a drop in long-term fund AUM to $22.4 trillion in 2022 from $27.5 trillion in 2021. The firm estimated a rise to a total of $25.4 trillion by the end of this year.

“For all the turmoil managers have faced in recent years, opportunities to benefit from growth in assets under management (AUM) were surprisingly good,” stated ISS MI’s “State of the Market: The Future of Retail Products 2023.” “Managers who can adapt to the challenges of the next half decade will have an opportunity to capture an additional $12 trillion in asset growth.”

While overall assets are set to rise, the analysts projected another sluggish year for net new flows into long-term funds in 2023 and 2024. After a net outflow last year of $391.2 billion, driven by rising interest rates, ISS MI predicted a rebound to inflows of $15.6 billion in 2023. They then see a steady increase into 2028, when a total of $2.7 trillion will be returned to the market, the firm forecasted.

As investors have become more cost-conscious, the markets have shifted to lowest-cost options, especially index funds, ISS MI noted. Adding to that, two bear markets in this “still-young decade” have sped the shift away from long-term mutual funds.

Bond Surge

Growth should come to higher-yielding bonds over the next five years, particularly in taxable bond funds, according to the analysts. That push will be strengthened by aging demographics as more retirees shift to conservative portfolios.

“Demographics have had—and will continue to have—a massive impact on how the public invests,” says Christopher Davis, head of U.S. fund research at ISS MI. “Nearly $1.6 trillion in net new sales flowed into bond funds over the past five years as the mass of Baby Boomers continued to reach retirement age. We expect the same forces to drive approximately $2.3 trillion into bond funds over the next five years.”

The shift toward bonds will mean “more modest growth” among U.S. equity funds, according to ISS MI. Demand for stocks should shrink because “higher yields allow investors to meet their return requirements by holding bonds or short-term instruments instead of stocks,” according to the report.

Davis also notes that the Baby Boomer cohort will keep DC flows in negative territory as Boomers draw down funds. In the future, however, fund managers should “prepare for a positive demographic story,” he says.

“The oldest Millennials are now in their 40s, and the generation has been forming households at a healthy clip,” Davis says. “That will not be a boon for managers in the near term, but by the end of the decade, the country’s largest generation is likely to be a vital financial force.”

CIT Growth

In defined contribution investing, the shift to lower-cost collective investment trusts—which are only available in DC plans—continues to pressure target-date mutual fund managers, the analysts wrote. In 2022, mutual funds in DC plans saw net outflows of $12.7 billion, while CITs saw inflows of $152.5 billion, according to the report.

While CITs still create opportunity for long-term target-date fund managers, those opportunities may be available only to a smaller group of players, according to the analysts.

Within CITs, “assets are even more concentrated than in the mutual fund arena, likely resulting in a small handful of bigger winners,” ISS MI analysts wrote. “At the end of 2022, the top five CIT target-date fund managers controlled 92% of AUM, with Vanguard alone managing 51% of the total.”

ISS MI’s “State of the Market: Future of Retail Products Report” projects assets and net flows for long-term mutual funds and ETFs from 2024 to 2028.