Even as passive funds continue to dominate net flows, there's another asset shift going on in mutual funds, one that has implications across the industry.

Maciej Kowara, senior analyst in fixed income manager research at Morningstar and former asset allocation fund PM, digs into an intra-active fund trend of the past 20 years: a drop in asset concentration. In other words, even as more investor dollars are shifting to passive than to active, the dollars within active are spreading out across more funds and more firms (at least within active U.S. equity funds).

MFWire won't get into the technical details here — M* uses something called the Herfindahl-Hirschman Index for market concentration, also used by the U.S. Department of Justice when evaluating mergers — but suffice it to say that the investment research titan finds a dramatic drop in U.S. equity fund asset concentration (both by fund and by firm) over the past 20 years. (Though judging by their charts, the past three to five years have seen a slight reversal of that long-term downward trend.) Fundsters interested in the technical details should read the full article and perhaps even reach out to M*'s Kowara to find out more.

M* offers several theories as to what's driving this de-concentration of mutual fund assets. First, there are two and a half times as many active U.S. equity funds now as there were 20 years ago, and there are about twice as many fund firms, so investors have more options to spread out among. Second, investors are trying to get more categories covered (as opposed to the old days when large cap dominated all). And third, M* wonders if the active-to-passive shift has drawn disproportionately from the largest funds, leaving the active assets that remain disproportionately in smaller funds.

This mutual fund assets de-concentration trend is a good thing in M*'s eyes, as it means more efficient markets. Yet the trend also has implications for fundsters, too. It may provide hope for all those boutiques trying to compete in a passive-dominated world. And it may provide a glimpse of a possible industry future, where passive, low-cost and predictable strategies are dominated by a few large titans with well-known brands and massive scale and distribution, while everything else is spread out among specialty boutiques. 

Edited by: Neil Anderson, Managing Editor


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