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Active vs. Passive Fund Assets – Where Are We Going?

Posted July 16, 2015 by Denis Smirnov

Continuing where we left off last time, this post looks at what areas of the market are attracting new assets (Exhibit 1).  The table includes U.S. open-end mutual funds and ETFs.

Exhibit 1 – Asset Flows by Category ($ billions, May 2015)

33-1

Here are my observations about overall trends and each category:

  • Over the past year, U.S. mutual funds and ETFs had total inflows of $445 bn or 3.1% of their starting size. Actively-managed funds actually had net outflows which was offset by the increasing popularity of passive strategies. Are investors actually getting smarter or is it just a fad driven by really lousy performance of active managers?

  • U.S. Equity category overall barely budged, but there was a pronounced flight from active to passive strategies. Active managers lost 4% of their assets, while index ones gathered 7%.

  • Sector Equity gathered $59 bn or 13% of all net inflows over the past year. This seems quite high for a relatively small category. Digging deeper I see that $27 bn of it went into Healthcare funds – a splendid example of investors chasing performance. Although energy and MLP funds also had strong inflows of $21 bn – possibly as investors went bargain-hunting after a big drop in those areas.

  • International Equity was the star performer at $208 bn (capturing 47% of all inflows). Passive options attracted 78% of new assets – this was partly driven by huge interest in currency-hedged ETFs. We shall see how sticky this money is, it might come right out should the dollar strength reverse.

  • There is not much to say about Allocation category. As I explained in the last post, the mechanics of fund-of-funds make meaningful analysis difficult.

  • Taxable Bond attracted $93 bn in new money good for a second place. Similar to domestic equities, we saw a migration from active to passive strategies here. A word of caution – this trend was strongly influenced by massive outflows from PIMCO Total Return fund following Bill Gross’ departure. A lot of that money found its way to Vanguard Total Bond Market Index.

  • Munis saw decent inflows – about $33 bn or 6% of assets. Lion’s share of that went into active strategies as investors still prefer selection process driven by human managers. In this particular case I agree with that conclusion – it’s not a homogeneous market by any stretch. Furthermore, index based on the amount of debt outstanding might lead to large exposure to some struggling entities (recently illustrated by Puerto Rico’s troubles).

  • Surprisingly, Alternatives pulled in “only” $12 bn, but it’s still a small category. Passive is not so popular here either.

  • Last (and least in my opinion), Commodities had moderately positive flows. And about half of those purchasers were content with passive exposure.

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