ISS Market Intelligence (ISS MI), a leading global provider of data, analytics, insights, media, and events solutions to the global financial services industry, announced the release of its State of the Market: The Future of Retail Products 2023 report covering the 2024-2028 outlook for long-term funds in the U.S.

The report projects that long-term assets under management (AUM) will climb approximately $12 trillion from 2024 to 2028, to an estimated $37.4 trillion by the end of 2028. Further, the report finds that net flows into long-term funds will total $2.7 trillion over the period, easily surpassing the expected $1.3 trillion for the prior five years. Following another year of anticipated sluggish sales in 2024, the report predicts sales will accelerate in 2025. With flows reverting to historical trend, ISS MI projects them to grow at a 2.1 percent annualized rate, versus an estimated 1.5 percent for the previous half decade. Taxable bond funds are expected to grow AUM faster than any other asset class, with a projected annualized growth rate of 10.8 percent.

“Fund managers will face familiar challenges over the next five years, ranging from continued pressure from passives to aging demographics,” said Christopher Davis, lead author and Head of U.S. Fund Research at ISS MI. “However, as the shock from high inflation and the rapid rise in interest rates wears off, investor demand for long-term assets should rebound to historically normal levels. Index funds will continue to win market share, but significant changes in the industry’s asset class and product makeup provide opportunities for active managers to succeed.”

The report suggests that higher yields should attract dollars back to bonds as aging demographics boosts demand. Meanwhile, after a period of rapid AUM growth, U.S. equity funds are poised for more modest gains. With investors’ exposure to the asset class relatively high, the report forecasts equity funds as a prime source of capital for portfolio rebalancing and reallocation to bonds. All told, taxable bond funds are predicted to outsell U.S. equity funds by $2.3 trillion over the period.

After suffering heavy redemptions in recent years, ISS MI expects active fund outflows to slow over the next half decade. Index funds will continue to outsell active ones by a wide margin, however. Passive strategies are projected to net $3 trillion in new sales from 2024-2028, as active funds shed almost $300 billion over the period. In its 2022 report, ISS MI predicted index funds would have majority share of long-term assets by 2027, but thanks to index funds’ sharp market share gains in 2022, ISS MI now expects they will cross the 50 percent mark a year earlier in 2026.

Source: ISS Market Intelligence