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

After a tumultuous few years of rising interest rates and market volatility, ISS MI sees a return to growth for long-term fund managers, driven in part by bond uptake.

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.

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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.

Best Practices To Vet a Vendor’s Cybersecurity Practices

Experts in Cybersecurity provide tips on how to assess partners' defenses in a recent PLANADVISER Cybersecurity livestream.

How can asset owners, plan sponsors and plan advisers scope out the bona fides of cybersecurity vendors, whose expertise is key to protecting networks and other digital assets from breaches?

A panel at the “Vetting Providers’ Cybersecurity Processes” session of PLANADVISER’s livestream on October 12 offered tips to allocators, investment managers and others who want to protect themselves from the legions of hackers. It was moderated by Glenn Davis, deputy director of the Council of Institutional Investors.

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One vital tool, according to the panelists: audits of third-party providers done under the auspices of the Service Organization Control Type 2 (known as SOC 2) compliance framework, established by the American Institute of Certified Public Accountants, designed to ensure the security of client data handled by third-party service providers.

The framework specifies how organizations should manage customer data. Further, speakers discussed the use of the SOC 2 Type 2 report, which outlines a company’s internal controls and details how well it safeguards customer data, specifically for cloud service providers. Specifically, a third-party audit can show if security protocols are safe and effective.

“This drives confidence and removes speculation” in the screening procedures of providers, advised Jon Atchison, senior lead of governance, risk and compliance at investment adviser firm CAPTRUST, .

As an example of what can go wrong, Atchison, one of the speakers on the livestream, pointed to one of the most recent large cybersecurity failures: the breach of MOVEit file transfer software, which affected sensitive personal data from governments and businesses and involved 3.4 million people. “MOVEit wasn’t the first and won’t be the last,” he said.

One task for providers is to guard against threats from employees and other insiders, said panelist Allison Itami, a principal in the Groom Law Group, whose ERISA practice focuses on data privacy and data security. These in-house folks can pose a risk of theft or fraud, she added. “As long as humans are involved,” cyber vulnerabilities will be around, Itami warned, and a lot is at stake. “If you lose money or have a data breach, trust is eroded.”

What’s vexing is that there is no absolute shield against cyber mischief. “No one can be 100% safe,” said panelist Mario Paez, national cyber risk leader at Marsh McLennan Agency, which sells insurance to organizations to protect against breach liabilities.

Some think that other business insurance, not tailored to digital crime, will be sufficient—and they are wrong, Paez said. Certainly, specialized cybersecurity policies are complex, “and the devil is in the details,” he admonished. For that reason, Paez continued, it pays to get a cybersecurity-savvy insurance broker to advise on what is best for a company’s particular needs.

Insurance must cover a range of necessities that can be created by a breach, he said, including extortion coverage in the case of a ransomware attack; business losses; the costs of notification to people affected by a breach; and forensic probes of how and why an incident occurred.

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