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Investors withdrew a record $450 billion from actively managed stock funds this year, as a shift toward cheaper index-based investments reshapes the asset management industry.
Outflows from stock-picking mutual funds eclipse last year’s previous high of $413 billion, according to EPFR data, and underscore how passive investing and exchange-traded funds are hollowing out the once-dominant mutual fund market. assets.
Traditional stock-picking funds have struggled to justify their relatively high fees in recent years, and their performance has lagged gains in Wall Street indexes driven by big tech stocks.
The exodus from active strategies has accelerated as older investors, who typically prefer them, withdraw money and younger savers turn to cheaper passive strategies.
“People need to invest to retire and at some point they have to retire,” said Adam Sabban, senior research analyst at Morningstar. “The investor base of active equity funds tends to be larger. “The new dollars are much more likely to come to an indexed ETF than to an active mutual fund.”
Shares of asset managers with large stock-picking businesses, such as US groups Franklin Resources and T Rowe Price, and Schroders and Abrdn in the UK, have lagged far behind the world’s largest asset manager, BlackRock, which has a large ETF and index fund business. They have lost by an even larger margin to alternative 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 biggest capital outflows in 2024. , according to data from Morningstar Direct. All declined to comment.
The dominance of big US technology stocks has made things even more difficult for active managers, who typically underinvest in such companies than benchmarks.
Wall Street’s so-called Magnificent Seven (Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta and Tesla) have driven most of the US market’s gains this year.
“If you’re an institutional investor, you allocate really expensive talented teams that aren’t going to own Microsoft and Apple because it’s hard for them to get a real view of a company that’s studied by everyone and owned by everyone,” Stan Miranda said. , founder of Partners Capital, which offers outsourced investment director services.
“So they generally look at smaller, less followed companies and, guess what, they were all underweight in the Magnificent Seven.”
The average actively managed large U.S. strategy has returned 20 percent one year and 13 percent annually over the past five years, after accounting for fees, according to Morningstar data. Similar passive funds have offered returns of 23 per cent and 14 per cent respectively.
Those active funds’ annual expense ratio of 0.45 percentage points was nine times higher than the equivalent of 0.05 percentage points for benchmark tracking funds.
The outflows from stock-picking mutual funds also highlight the growing dominance of ETFs, funds that are themselves listed on a stock exchange and offer U.S. tax advantages and greater flexibility for many investors.
Investors have poured $1.7 trillion into ETFs this year, pushing the industry’s total assets up 30 percent to $15 trillion, according to data from research group ETFGI.
The rush of inflows shows growing use of the ETF structure, which offers the ability to trade and quote fund shares throughout the trading day, for a broader range of strategies beyond passive index tracking.
Many traditional mutual fund houses, including Capital, T Rowe Price and Fidelity, are trying to attract the next generation of clients by repackaging their active strategies as ETFs, with some success.
