Morningstar expects passive fund managers — like Vanguard andBlackRock/iShares, which are the two largest providers of exchange-traded funds — to continue to garnermuch of the attention in the next decade, according to a newresearch report.

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However, the report — by Laura Lutton, director of NorthAmerican manager research, and senior equity analyst GreggoryWarren — finds that there's plenty of room for active asset managers that have scale, establishedbrands, solid long-term performance and reasonable fees.

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Lutton and Warren presented their research during the annualMorningstar Investment Conference in Chicago.

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To be especially successful in the coming decade, though,Morningstar believes that asset managers will be best served by differentiatingthemselves from the competition, offering low-cost funds withrepeatable investment strategies and prudently adapting to thechanging competitive landscape.

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Based on these qualifications, the report finds these nine firmsare deemed as promising partners for the next decade:

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1. Vanguard

According to Morningstar, Vanguard is among the best-positionedindustry leaders because its business model is differentiated andformidable.

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The firm’s mutual ownership allows it to offer investments atcost, and that, along with a robust lineup of straightforwardactive and passive investments, has made it the largest retailmoney manager.

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“With $3.4 trillion of assets under management, though, the lawof large numbers will eventually catch up with Vanguard,” Luttonand Warren write in the report. “Indexing could also suffer duringa major market correction, with the combination of market lossesand outflows reducing the company’s assets under management.”

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Even so, Morningstar has issued forward-looking, qualitativeMorningstar Analyst Ratings to 84 Vanguard funds and ETFs – 79 ofwhich are rated Gold, Silver or Bronze – indicating that it thinksthese funds will outperform their benchmarks and typical peers overa full market cycle.

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2. BlackRock/iShares

One reason BlackRock will have staying power is it’s known forits scale through its passive iShares ETFs, as well as itsinvestment scale among institutional accounts.

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Beyond passive investing, BlackRock also has a strong reputationfor active fixed income investing, with many of its active bondfunds earning medalist ratings.

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Its fixed-income data platform, Aladdin, is anotherdifferentiator that should contribute to this firm’s stayingpower.

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“We also believe that an expansion of BlackRock's Aladdinenterprise investment system into Provider Aladdin (which supportsasset servicers and custodians), Aladdin for Wealth (which shouldallow broker-dealers and advisors to focus on greater levels ofrisk analytics and oversight in a post-Department of Laborfiduciary rule environment), and Aladdin Portfolio Builder (whichhas helped broker-dealers and advisors to manage their clients'portfolios by building a multitude of different portfolioscenarios) should contribute to the firm's staying power andindustry influence in the years to come,” Lutton and Warrenwrite.

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BlackRock’s vulnerabilities include its active equity fund lineup, which is undergoinga makeover, as well as prolonged underperformance of index funds.Even with those risks, Morningstar has issued BlackRock’s(BLK) stock a wide moat rating, indicating its relativecompetitive advantage among publicly traded asset managers.

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3. T. Rowe Price

T. Rowe Price stands out among the large firms for itsconsistent and repeatable investment process, according to thereport.

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“This firm is a leader at succession planning, doing more thanmost competitors to eliminate generational-transfer risk, whichoccurs when one manager retires and hands the reigns to another,”the report says.

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T. Rowe Price also has been mindful on the cost side. More than60% of share classes were below average fee levels for theircategories at the end of last year, according to the report.

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“While many active competitors are now realizing that theirhigher fees have been a disservice, T. Rowe Price has beencost-conscious all along and will be under less pressure to cutfees, making their profit margins and earnings more stable andpredictable going forward,” Lutton and Warren write.

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Like BlackRock, T.Rowe Price's (TROW) stock carries a wide moat rating. AndMorningstar’s manager research analysts are bullish on T. Rowe’sfunds, with 38 of the firm’s funds rated Gold, Silver orBronze.

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4. American Funds

Another strong partner for the next decade is Capital Group’sAmerican Funds, according to the report.

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This firm's funds have suffered redemptions over the previousdecade, largely falling victim to the flight to passive in recentyears. Even so, the firm’s returns are competitive on arisk-adjusted basis, primarily because American Funds’ approach tomanaging assets in sleeves across multiple independent managers hasbeen effective.

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“There’s no succession risk with these funds,” Lutton and Warrensay.

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The firm also has an edge when it comes to low fees. Morningstarrates more than 92% of American Funds’ assets across 23 funds asGold, Silver or Bronze.

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“American Funds does have some vulnerabilities on the fixedincome side as it is working to increase the level ofsophistication of its bond offerings, but overall we think that itsfunds are strong long-term investments,” according to thereport.

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5. Dodge & Cox

Dodge & Cox has a team-based investment process that is“tested, consistent and well-supported,” according to thereport.

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That bodes well for the firm’s six funds going forward — Dodge& Cox Stock, Dodge & Cox International Stock, Dodge &Cox Income, Dodge & Cox Balanced, Dodge & Cox Global Stockand Dodge & Cox Global Bond. Low fees also give the firmanother competitive advantage.

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Morningstar has Gold ratings on five of the firm’s older funds,which accounts for nearly 100% of firmwide assets.

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However, the report does point out that “this traditional activeshop uses a low-turnover value strategy that can run hot — as ithas recently — or cold — as it did during the financialcrisis.”

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6. Primecap Odyssey

Primecap Odyssey is another firm with a “strong, team-basedapproach” to active equity investing, according to the report.

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The firm subadvises two funds for Vanguard and offers just threeactive equity strategies on its own, all rated Gold.

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Performance across the lineup has been strong, which the reportsays is a rarity in active equity. Also, expense ratios on thefunds are low relative to the competition.

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“This firm actively avoids the spotlight and is unlikely topivot if its approach falls out of favor,” the report says. “Thosepotential drawbacks seem relatively slim; we think this firm willbe a good partner for investors and the advisors that serve themgoing forward.”

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7. Parnassus

According to the report, Parnassus is another firm that’s beengrowing quickly with strong-performing, actively managedinvestments.

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It’s also riding another growth wave: ESG investing. The firmuses environmental, social and governance criteria for itsstock-picking, and an increasing number of investors are includingESG funds in their portfolios.

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“We expect ESG investing to grow in popularity over the nextdecade, particularly since wealth is growing among women andmillennials – two demographics of investors who say they seek ESGinvestments,” Lutton and Warren write in the report.

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The pair also think this firm has a sound investment process –three of its six funds are medalists. Although, this firm could behumbled should its funds hit a performance snag that triggersoutflows.

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8. Dimensional Fund Advisors

Over the previous decade, Dimensional Fund Advisors hasdemonstrated the power of asset-gathering that can come fromstrategic-beta strategies, according to the report.

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All of the firm’s strategies are grounded in an “unwaveringbelief” in market efficiency and transaction cost management,according to Lutton and Warren.

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The pair also believe that DFA’s cost advantage comes from itsquantitative, repeatable strategic-beta strategies, and its 10%three-year annualized organic growth has made it a top-10 industryplayer.

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“We think DFA has staying power, with all 21 of the firm's fundswe rate earning medals, which is a strong endorsement of theinvestment process at this firm,” Lutton and Warren write in thereport. “To be sure, the strategic beta landscape gets morecompetitive each day, but DFA's business model and investingapproach give it a sustainable edge, in our view.”

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9. Schwab

Lutton and Warren highlight Schwab for its more recent arrivalto the passive scene.

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“Its launch of plain-vanilla ETFs with very competitive pricesis a strong example of a firm adapting its approach to the changingcompetitive landscape,” the pair write.

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Inflows to the ETFs have boosted Schwab’s market share and haveattracted and kept investors on the firm’s brokerage platform,according to Morningstar.

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“That low-cost approach and access to distribution throughSchwab’s retail and advisory platforms will fuel further growth inthe coming decade,” according to the report.

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On the manager research side, Morningstar has assigned Medalistratings to 18 of this firm’s funds. And on the equity side,Morningstar Research Services assigns a wide Economic Moat Ratingto Charles Schwab (SCHW), indicating a strongcompetitive advantage.

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Emily Zulz

Emily joined the ThinkAdvisor team as a reporter in the summer of 2014. She previously worked as a reporter for The Daily Journal in Kankakee, Illinois for a year and as a reporter and editor for The Daily Eastern News in Charleston, Illinois for two and a half years. Prior to joining ThinkAdvisor, Emily worked on Groupon’s editorial team in Chicago as a fact checker for three years. She graduated cum laude with a BA in journalism from Eastern Illinois University, and she has been the recipient of two journalism awards for her news reporting at daily newspapers.