The majority of asset managers are trailing the S&P 500 thus far in 2016. A big reason for that underperformance is the emergence of passively managed, or index, funds. Sam Yildirim, PwC U.S. asset management M&A leader, explains.

'The shifting of assets in the industry presents question marks as to which firms differentiate themselves and which firms won't keep up with the changes in the market shift from active to passive,' said Yildirim.

The S&P 500 is up around 5% year to date, ahead of asset managers including T. Rowe Price (TROW - Get Report) , down 6%, Franklin Resources (BEN - Get Report) , down 4% and Legg Mason (LM - Get Report) , down 15%. State Street (STT - Get Report) , up 2%, is also trailing the index, yet has fared better this year due to strong inflows into its SPDR brand of exchange traded funds. Blackrock (BLK - Get Report) , which owns the iShares brand of ETFs, is up 8% so far in 2016.

Yildirim added that she does not expect actively managed fund execs to go away anytime soon. That said, she believes the steady fund flows into passively managed products will drive mergers and acquisitions in the industry going forward.

'Traditional managers, private equity and foreign buyers will be buying index players -- underperforming managers or those who can provide consistent alpha and differentiate themselves,' said Yildirim.

Disclosed deal value in the asset-management space was up by 528% in the first half of 2016 at $5.8 billion vs. $0.9 billion the prior year. That said, announced deal volume and multiples were down 11% and 19.1%, respectively, according to PwC.

Asset and wealth management IPO activity stalled in the first half with no announced IPOs, while alternative deals grew by 78%. Total announced mutual fund deals dipped by nearly 40% from this period last year.

As for cross border deals, foreign interest in the U.S. remained steady in the first half of 2016 with 11% of deals involving Asian and European buyers compared to 10% in the same period in 2015. However, Brexit may keep European buyers on the sidelines in the second half of 2016, according to Yildirim.

Private equity buyers acquired six alternative asset managers and only a single wealth manager in the first half of 2016, reversing the trend from last year where the majority of acquisitions were wealth managers.

Finally, total deals in the alternative space grew by 78% in the first half of 2016. Yildirim said the liquid alternative space will have moderate growth going forward because 'complexity will limit its growth compared to the passive industry'.