Case Study: Why Are Fund Lineups So Top-Heavy?

Pimco and T. Rowe Price are two large, well-known, and respected firms. From there, they have little else in common—the firms have different ages, investment focuses, and active/passive distributions.

But new Morningstar research uncovers another commonality they share with the world’s largest 100 fund companies.

Investment firms in this top echelon have top-heavy asset distributions across their fund lineups. Many see a sharp drop-off in assets after a few popular funds, and a long tail of small funds contributing to overall assets under management.

A top-heavy distribution of assets ties a company’s fortunes to only a handful of funds. What causes this pattern, and is there anything asset managers can do to challenge it?

For the full study methodology, download the asset distribution report.

Concentration in one or a handful of funds creates business risks, placing too many of a firm’s revenue and resources eggs in too few fund baskets. If one fund falters or one famous portfolio manager leaves, the fund complex may face disadvantages.

Pimco recently endured this challenge.

In August 2014, Pimco’s flagship Total Return fund stood at $220 billion AUM, 6 times larger than the second-largest fund. Then Pimco founder and Total Return star portfolio manager Bill Gross abruptly left the firm in September 2014. One year after his departure, the fund’s assets had dropped to $98 billion as many clients left the fund or reduced their investments.

From an investor’s point of view, skewed distribution can also have consequences.

Younger, smaller firms may be more likely to close and merge with other funds or liquidate. This is likely for economic reasons—the fee revenue generated by their management might not cover the costs of running the portfolio.

Fund closures can disrupt investor strategies and force them to find alternative funds that meet their goals. Closures also eat into returns. Liquidation’s transaction costs and potential capital gains taxes can reduce overall investment performance.

This skewed pattern is nothing new. Throughout history, the shape of AUM distribution looks substantially similar, with some variations.

Using the Gini coefficient, strategist Maciej Kowara compared the active fund lineups of the 100 firms with the most active assets under management. He found virtually no change in the distribution of funds in 2023 compared to 15 years ago.

In 2008, at the average investment firm, 25% of funds held 80% of its active assets. In 2023, 24% of the average firm’s funds held 80% of its active assets.

In contrast, the passive side of the business has seen a dramatic increase in top-heaviness. Kowara studied the 100 firms with the most passive assets under management. In 2008, at the average firm, the top 45% of funds held 80% of passive assets. By the end of 2023, that number dropped: on average, the top 27% of funds held 80% of assets.

The average large firm’s fund asset distribution now looks similar whether considering active or passive AUM.

The answer isn’t immediately clear.

This highly unequal pattern, called a power law distribution, isn’t confined to the financial services industry. Power law distributions show up often: in internet traffic, scientific citations, and even in earthquake magnitudes, where a few earthquakes release most total seismic energy.

Many factors don’t seem to affect the smoothness or evenness of asset distribution.

• Age of funds in the lineup. BlackRock’s average fund age is younger than Pimco’s or T. Rowe Price’s, and its assets are several times larger. But its distribution of fund assets looks similar.
• Overall size of the firm. ProShares is a newer market entrant, but it shows one of the most unevenly distributed fund assets.
• Investment focus. Today T. Rowe Price is mostly an equity firm, while Pimco is predominantly fixed-income-oriented. But their distributions still mirror each other.
• Sales channels. T. Rowe Price pioneered no-load investing. Pimco sells its funds in multiple, varied sales channels.
• Active/passive split. Vanguard holds 10 times the assets of Pimco and T. Rowe Price, mostly in passive investing vehicles, but Vanguard’s asset-size distribution looks similar.
• Global reach. T. Rowe Price primarily focuses in the United States, with some exceptions. Pimco is much more global.

Industry-specific factors could affect the distribution of assets across a company’s funds. We hope new research explores the impact of factors like the following on distribution:

• Sales or institutional inertia.
• Performance-chasing.
• Investment fads.
• Marketing power.
• Star manager power.