Asset Managers Use of Mutual Funds to Decline

ETFs and institutional separate accounts are gaining popularity with financial professionals, according to a new survey.

The great pivot continues. 

Assets managers are moving away from investing in mutual funds in a quest to offer broader options to investors, according to a report from consulting company Cerulli Associates, a trend that bodes well for exchange-traded funds. 

The poll revealed that ETFs offer a solid investment opportunity for 79% of asset managers, 54% of whom use them. A quarter reported that even though they don’t invest in them now, they will start within the next 12 months, while 33% said they had no plans to do so.  

As for the development of ETFs, the asset managers were split on whether to build out new products or replicate existing on. 

One financial advisor who favors ETFs does so because he likes their cost and tax-efficiency. “Compare the Vanguard Total World Stock ETF (VT) to its mutual fund counterpart, VTWAX. The expense ratio for the ETF is lower,” said Brandon Gibson, a wealth manager with Gibson Wealth Management in Dallas. 

“In a mutual fund, other investors' liquidations can cause capital gains to be distributed to all investors,” he added. “In ETFs, only rebalancing really impacts all investors' taxes. Since most ETFs are index funds, there tends to be very little turnover.” 

That point certainly factored into the asset managers’ reported move away from mutual funds.  

Some 69% of the asset managers said a top priority is building out new investment vehicles, while 62% aim to build out or deliver on illiquid alternatives, and 46% favor building or delivery customization at scale. That number points to building out or acquiring direct indexing as a main goal, too, according to the research. 

Coming on the heels of ETFs and institutional separate accounts in popularity are open-end mutual funds, collective investment trusts and model-delivered separate accounts, which Cerulli noted are viewed as positive by more than half of those polled.  

Cerulli associate director Matt Apkarian said in a press release that CITs are taking market share from mutual funds because of demand for structure from retirement plan sponsors.  

It’s not all doom and gloom for mutual funds, though.  

“Even in the face of consistent outflows from active mutual funds, asset managers still believe there’s opportunity to fill gaps in product lineups and improve on products they (or their competitors) already offer,” added Apkarian. 

Follow Michelle Lodge on Twitter @lodgemich