Stockpicking funds suffer record $450 billion in outflows

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Investors have 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.

Flows from mutual fund raising eclipsed last year’s peak of $413 billion, according to data from the EPFR, and underscore how passive investment and exchange-traded funds are carving out the once-dominant market for active mutual funds.

Traditional collection funds have struggled to justify their relatively high fees in recent years, with their performance lagging behind gains for Wall Street indexes fueled by big tech stocks.

The exodus from active strategies has gathered pace as older investors, who typically favor them, cash out and younger savers turn instead to cheaper passive strategies.

“People need to invest for retirement and at some point they have to give it up,” said Adam Sabban, a senior research analyst at Morningstar. “The investor base for active funds skews older. New dollars are much more likely to find their way into an index ETF than an active mutual fund.”

Shares in asset managers with big stockpicking firms, such as US groups Franklin Resources and T Rowe Price, and Schroders and Abrdn in the UK, have been heavily lagged by the world’s largest asset manager . BlackRockwhich has a large ETF and index fund business. They 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 $2.7tn asset manager Capital Group, which is privately owned and has a large mutual fund business, were among the groups that suffered the biggest outflows. in 2024according to Morningstar Direct data. All declined to comment.

The dominance of large US tech stocks has made it even tougher for active managers, who typically invest less than the benchmark index in such companies.

Wall Street’s so-called Magnificent Seven – Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta and Tesla – have driven most of the US stock market’s gains this year.

“If you’re an institutional investor, you allocate to really expensive talent teams that don’t own Microsoft and Apple because it’s hard for them to get real insight into a company that’s studied by everybody and owned by everybody,” he said. Stan Miranda. , founder of Partners Capital, which provides outsourced investment manager services.

“So they generally look at smaller, less followed companies and guess what, they were all under the Magnificent Seven.”

The average strategy of the largest actively managed U.S. core company has returned 20 percent over a 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 such active funds of 0.45 percentage points was nine times higher than the equivalent of 0.05 percentage points for benchmark tracking funds.

Outflows from stockpicking mutual funds also highlight the growing dominance of ETFsfunds that are themselves listed on a stock exchange and offer US tax advantages and more flexibility for many investors.

Investors poured $1.7 billion into ETFs this year, pushing total industry assets up 30 percent to $15 billion, according to data from research group ETFGI.

The rush of inflows shows the growing use of the ETF structure, which offers the ability to trade and price fund shares throughout the trading day, for a wider variety of strategies beyond passive indices. .

Many traditional mutual fund houses, including Capital, T Rowe Price and Fidelity, are trying to reach the next generation of customers by repackaging their active strategies as ETFs, with some success.