Trends in global asset management: the rise of index investing

The asset management industry is experiencing significant change across multiple dimensions: (i) extensive financial regulatory reform; (ii) increasing focus on environmental, social and governance (ESG) factors; and (iii) emerging use cases for financial technology (FinTech). Financial regulatory reform has led to new regulations for transparency and increased focus on fees, which in turn have increased the need for scale. Financial technology has emerged as a solution for regulatory reporting as well as for new ways to deliver products to investors and to identify investment opportunities. At the same time, clients and policymakers have increased their scrutiny of the role of investment stewardship and corporate engagement in the investment process. These trends come together in index investing. This is a scale business that incorporates both financial technology and investment stewardship. Led initially by institutional investors, index investing has become more sought after by individual investors and their advisors, with index funds in essence democratising investing by offering low cost access to diversified investments. While a key driver of this trend is the growing awareness of the value proposition that index investment strategies offer, an increased focus on fees by regulators and investors and the shift in financial advice and distribution models towards advisers as portfolio managers are also key contributors to this trend. In this article, we discuss the growth of index funds, the role of index funds in the capital markets, and the importance of corporate engagement by index fund managers.