Stock-picking funds suffer record $450 billion in outflows

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This year, investors have pulled a record $450 billion out of actively managed stock funds and into cheaper index-tracking investments, reshaping the asset management industry.
Outflows from stock-picking mutual funds surpassed last year’s record high of $413 billion, data from EPFR showed, and underscored how passive investments and exchange-traded funds are hollowing out the once-dominated active mutual fund market.
Traditional stock-picking funds have struggled to justify their relatively high fees in recent years, lagging gains in Wall Street indexes driven by big tech stocks.
Exits from active strategies have accelerated as older investors who typically favor active strategies cash out and younger savers turn to cheaper passive strategies.
“People need investments to retire, but at some point they have to get out,” said Adam Saban, senior research analyst at Morningstar. “Active stock funds have an older investor base. Compared with active mutual funds, they have a younger investor base.” The U.S. dollar is more likely to find its way into index ETFs.
Asset managers with large stock-picking operations, such as U.S. groups Franklin Resources and T Rowe Price, as well as Britain’s Schroders and Abrdn, have seen their share prices lag far behind BlackRock, the world’s largest asset manager with a huge ETF and index fund business. (BlackRock). They lost by a wider margin to alternative investment 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, a privately held company with a massive mutual fund business, are among the 2024 investors, according to Morningstar Direct. Among the groups that suffered the largest capital outflows in 2018. All declined to comment.
The dominance of large U.S. technology stocks makes things even more difficult for active fund managers, whose investments in such companies often undercut benchmark indexes.
Wall Street’s so-called “Big Seven” — Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta and Tesla — have driven much of the U.S. market’s gains this year.
Stan Miranda said: “If you are an institutional investor, you will be assigned to really expensive talent teams, and these teams will not own Microsoft and Apple, because it is difficult for them to truly gain insight into a company that everyone researches and everyone owns. .
“So they tend to look at smaller, less-discussed companies, and guess what, they all underweight the Big Seven.”
After accounting for fees, core actively managed strategies at major U.S. companies have returned an average of 20% in one year and 13% annually over the past five years, according to Morningstar. Similar passive funds returned 23% and 14%, respectively.
The annual expense ratio for active funds is 0.45 percentage points, nine times the 0.05 percentage points for benchmark-tracking funds.
Outflows from stock-picking mutual funds also underscore the growing dominance of ETFs, which themselves are listed on stock exchanges and offer many investors U.S. tax benefits and greater flexibility.
Investors have poured $1.7 trillion into ETFs this year, driving total assets in the industry to grow 30% to $15 trillion, according to research group ETFGI.
The surge in inflows points to the growing use of ETF structures, which offer the ability to trade and price fund shares throughout the trading day, for a broader range of strategies beyond passive index tracking.
Many traditional mutual fund companies, including Capital, T Rowe Price and Fidelity, are looking to attract the next generation of clients by repackaging their active strategies as ETFs, with some success.