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Investors pulled a record $450 billion from actively managed stock funds this year, as a shift to cheaper index-tracking investments reshapes the asset management industry.
Mutual fund outflows eclipse last year’s previous high of $413 billion, according to data from EPFR, and underscore how passive investing and exchange-traded funds are hollowing out the once-dominant market for active mutual funds.
Traditional hedge funds have struggled to justify their relatively high fees in recent years, with their performance lagging behind gains for Wall Street indexes powered by big tech stocks.
The exodus from active strategies has picked up pace as older investors, who typically favor them, cash out and younger savers turn to cheaper passive strategies.
“People have to invest for retirement and at some point they have to withdraw,” said Adam Sabban, a senior research analyst at Morningstar. “The investor base for active equity funds skews older. Young dollars are much more likely to go into an index ETF than an active mutual fund.”
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Shares in asset managers with large aggregator 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 biggest asset manager BlackRock, which has a large ETF business and index funds. They have lost by an even wider 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 outflows in 2024. according to data from Morningstar Direct. All declined to comment.
The dominance of large US tech stocks has made it even tougher for active managers, who typically invest less than benchmark indexes in such companies.
Wall Street’s so-called Big 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 hire really expensive talent teams that won’t own Microsoft and Apple because it’s hard for them to get real insight into a company that’s widely studied and owned by everyone,” said Stan Miranda. , founder of Partners Capital, which provides outsourced investment chief services.
“So they generally look at smaller, less followed companies and guess what, they were all underweight the Magnificent Seven.”
According to Morningstar data, the average actively managed core strategy of large U.S. companies has returned 20 percent over a year and 13 percent annually over the past five years, after taking fees into account. Similar passive funds have 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 benchmark funds.
The exits from the mutual fund crowd also underscore the growing dominance of ETFs, funds that are themselves listed on an exchange and offer U.S. tax advantages and greater flexibility for many investors.
Investors have poured $1.7 trillion into ETFs this year, boosting the industry’s total assets by 30 percent to $15 trillion, according to data from research group ETFGI.
The increase in inflows indicates the growing use of the ETF structure, which offers the opportunity to trade and price fund shares throughout the trading day, for a wider variety of strategies beyond passive index tracking.
Many traditional mutual fund houses, 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.
