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Investors pulled a record $450 billion from actively managed equity funds this year, as a shift to cheaper index-tracking investments reshaped the asset management industry.
Outflows from stock-picking mutual funds beat last year's record high of $413 billion, according to data from EPFR, and underscore how… Passive investing Exchange-traded funds are hollowing out the once-dominant market for active mutual funds.
traditional Stock picking funds The companies have struggled to justify their relatively high fees in recent years, with their performance lagging gains in Wall Street indexes backed by big technology stocks.
The pace of exit from active strategies has accelerated as older investors, who typically favor them, withdraw their money and younger savers turn instead to cheaper passive strategies.
“People need to invest until they retire, and at some point they have to pull back,” said Adam Saban, a senior research analyst at Morningstar. “The investor base for active equity funds is trending older. New dollars are more likely to make their way into an index ETF than active mutual funds.
Shares in big-cap stock-picking asset managers, such as US groups Franklin Resources and T Rowe Price, and Schroders and Abrdn in the UK, have lagged behind the world's largest asset manager. Black Rockwhich has a large business in ETFs and index funds. They lost out by a wider margin to alternatives groups such as Blackstone, KKR and Apollo, which invest in unlisted assets such as private equity, private credit and real estate.
T. Rowe Price, Franklin Templeton, Schroders and $2.7 trillion asset manager Capital Group, which is privately held and has a large mutual fund business, were among the groups that suffered the largest outflows. In 2024According to Morningstar Direct data. Everyone refused to comment.
The dominance of big tech stocks in the US has made it more difficult for active managers, who typically invest less than benchmark indexes in such companies.
Wall Street's so-called Magnificent Seven — Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta and Tesla — have led the bulk of the US market's gains this year.
“If you're an institutional investor, you're allocating really expensive, talented teams that won't own Microsoft and Apple because it's hard for them to have a real vision for a company that everyone is studying and everyone owns,” Stan Miranda said. , founder of Partners Capital, which provides outsourced chief investment officer services.
“So they generally look at the smaller, less followed companies, and guess that they were all underweight the great seven.”
The average actively managed core U.S. large-cap strategy returned 20 percent over one year and 13 percent annually over the past five years, after taking fees into account, according to Morningstar data. Similar passive funds offered returns of 23 percent and 14 percent, respectively.
The annual expense ratio of these active funds of 0.45 percentage points was nine times higher than the equivalent of 0.05 percentage points for the benchmark tracker funds.
The outflows from stock-picking mutual funds also highlight the growing dominance of mutual funds ETFsThey are publicly traded funds and offer US tax advantages and greater flexibility for many investors.
Investors have poured $1.7 trillion into ETFs this year, raising the industry's total assets by 30 percent to $15 trillion, according to data from research group ETFGI.
The rush of inflows demonstrates the growing use of the ETF structure, which provides the ability to trade and price fund shares throughout the trading day, for a wide range of strategies beyond passive index tracking.
Several traditional mutual fund houses, including Capital, T Rowe Price and Fidelity, are seeking to attract the next generation of clients by recasting their active strategies as ETFs, with some success.
