A new asset management record for Vanguard is another reminder to the mutual fund industry that cost is fast becoming the determining factor to an offering’s success.

“The traditional long-only active manager is at a crossroad,” says Pamela DeBolt, an associate director at research firm Cerulli Associates. “In order to remain relevant, many of these firms need to ... figure out how they can prove alpha.”

Vanguard reports it added $148 billion in new client money this year, besting its previous first-half record of $140 billion, amid the continuing shift from active to passive.

DeBolt notes active mutual funds and ETFs’ marketshare eroded nearly 8% from 2011 to the end of 2015 (from 76.9% to 69%).

“Outflows for active equity funds continue to be a huge challenge,” says Russ Kinnel, director of manager research for Morningstar. “I expect more consolidation.”

Market volatility has also pushed investors out of funds. In the wake of the British vote to leave the European Union, U.K. property funds with roughly $23.4 billion in assets froze withdrawals to stem outflows.

“There’s clearly a defensive theme across the board,” Kinnel notes. “So given Brexit and other threats to economic growth it isn’t a surprise, but no one expected Brexit or Trump a year ago. It certainly illustrates that old fashioned diversification works pretty well.”

Another factor weighing on mutual fund performance is the expected effect of new regulations both in the U.S., with the DoL fiduciary rule and the SEC’s liquidity and risk management rule, and in Europe with the second iteration of the Markets in Financial Instruments Directive.

BlackRock CEO Laurence D. Fink predicted another “massive” shift toward index investing, Bloomberg reports, as new rules force advisers to act as fiduciaries.

The depth and breadth of management and operational changes mutual funds will be required to make in implementing all of these rules in a relatively short time period will be challenging and will impose new costs on funds and their shareholders, says the Investment Company Institute’s General Counsel David Blass.

“Regardless of the outcome of the SEC’s rulemakings, the mutual fund industry will continue to pursue operational efficiencies that can minimize costs for funds and shareholders.”

Despite these challenges, the mutual fund industry is in no danger of disappearing, Blass adds. “As of the end of May, U.S.-based mutual funds held $15.9 trillion in assets — more than double the $7.0 trillion they held at the end of 2000.”

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