Behind the Numbers with Cerulli Associates:  Portfolio Evolution: Active is Dead?

Behind the Numbers with Cerulli Associates: Portfolio Evolution: Active is Dead?

Recognizing that active managers infrequently provided the outperformance paid for, and most certainly did not protect from risk during the market recession, many advisors have felt free to throw in the towel and move sector exposure to passive investments. Academic and ETF provider research supported the trend, encouraging transition toward lower cost index tracking options. Simultaneously, many advisors have sought to regain control over the destiny of their client portfolios by attempting to capitalize on macro-economic dictated movements, utilizing a manager of manager approach and implementing tactical allocation. ETFs and passive investments, due to their low cost, ease of trading, and liquidity, have meshed well with advisor demand.

This combination of circumstances has driven much of the growth in the ETF segment.  In 2009 ETFS accounted for just 4.6% of assets in retail investor accounts. By 2011 this figure has grown to over 7%, and advisors indicate ETFs are the product they are most likely to add allocations to within client portfolios in the next year. Based on an extensive analysis, Cerulli anticipates that passive allocation, including ETFs and index mutual funds will continue to grow over the near-term. Ultimately, by 2020 Cerulli estimates that passive options will account for 37% of mutual fund and ETF exposure, growing from 23% in 2012.

Mutual funds control the largest percentage (37%) of assets by product with IBDs and registered investment advisors (RIAs) having the highest mutual fund use among the distribution channels.

Key Implication: Historically the bailiwick of RIAs due to their conscientious attitude towards all-in client fees and inclination towards market efficiency, the search for cheap beta has resulted in growth in the use of passive management, and a more competitive market for actively managed funds. 


Advisors expect to increase their allocation to ETFs more so than any other product. Fixed-income mutual funds are expected to see the largest amount of advisors decreasing their allocation.

Key Implication: It is important to note that these expected allocation changes are based off of headcount and not assets held by advisors. Since insurance and independent advisors make up the lion’s share of the overall industry headcount, variable life and variable annuities products may not actually be quite as attractive of an opportunity as it may seem.