The open-ended investment fund celebrates it's 100th birthday. In his blog post, our Director Lars Hofer explains why the industry is facing enormous challenges – and why AI and quantum computing are already heralding the next major upheaval in fund management!

Exactly 100 years ago, the US American Edward Leffler revolutionized the financial market: the inventor of the open-ended investment fund gave small investors access to diversified investment portfolios. Today, investment funds manage around 63 trillion US dollars worldwide. They are deeply rooted in the investment culture, particularly in the USA, where more than half of all households are invested in those funds.

Will ETFs Push Active Investment Funds Out of the Market?

The industry is now facing a major challenge though: passive ETFs are increasingly competing with actively managed investment funds. Since State Street launched the first ETF on the market in 1993, they have become increasingly popular. In the US, more than two trillion US dollars were invested into ETFs between January 2021 and December 2023, while actively managed funds suffered declines. Recently, ETFs even overtook actively managed investment funds in terms of net inflows for the first time in the US. Compared to active investment funds, passive financial products are often the more attractive option and offer significant advantages: tax efficiency, lower costs and the ability to trade quickly.

In view of this, the Financial Times recently posed a provocative question: Will active investment become obsolete in the future? There are compelling arguments that they will continue to play an important role, despite the growing popularity of ETFs. Their simplicity and accessibility, particularly in areas such as the small cap market and retirement plans, maintain their relevance. Should volatility rise again at any point, active products will also become more attractive again. Moreover, a glance at the German portfolio data for example is enough to be sure that actively managed funds will not become obsolete any time soon.

The Fund Industry Must Adapt

However, the future of investment firms offering actively managed investment funds depends largely on how they adapt to the rapidly changing market conditions and investor expectations. To succeed in an increasingly competitive environment, they must become better, faster and more cost-efficient.

According to Scope data, only 23.2 per cent of active investment funds beat their benchmark in 2023 in terms of costs. A year earlier, the figure was 33 per cent. However, net performance is and remains the key criterion for most investors.

AI and Quantum Computing Will Shake up the Market

The possibilities offered by AI today – in the near future potentially also combined with quantum computing – will create entirely new opportunities to make active investment funds better, faster and cheaper. The real-time analysis of gigantic amounts of data with self-learning algorithms combined with exponentially growing computing power will lead to higher returns and help to reduce risk – and at significantly lower costs in the long term. Active strategies will once again become more attractive for investors, especially in times of higher volatility. Those who are at the forefront here will be able to offer better products and gain market share. 

It will be interesting to see how the market develops over the next few years. But I expect that we will see some of today's rather unknown names among the world's largest asset managers. The successful integration of AI and, at some point, quantum computing will be the key element for active funds and their providers to return to the successes of the past in the future.