Stockpicking funds suffer record $450 billion of outflows

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Investors pulled a record $450 billion from actively managed equity funds this year, as the shift to cheaper index-tracking investments reshapes the asset management industry.

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Outflows from stock-picking mutual funds exceed the previous record high of $413 billion reached last year, according to data from fund tracker EPFR Global, and underscore how passive investing and exchange-traded funds (ETFs) are hollowing out a market that had been Previously dominated by active funds. Mutual funds.

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Traditional stock-picking funds have struggled to justify their relatively high fees in recent years, with their performance lagging gains in Wall Street indexes backed by big technology stocks.

The pace of exit from active strategies has accelerated as older investors, who typically favor them, withdraw their money and younger savers turn instead to cheaper passive strategies.

“People need to invest until they retire, and at some point they have to pull back,” said Adam Saban, a senior research analyst at Morningstar Inc. “The investor base in active equity funds is trending older. New dollars are more likely to make their way into the ETF.” of active mutual funds.

Shares in asset management companies with large stock-picking companies, such as US groups Franklin Resources Inc. And T. Rowe Price Group Inc. and Schroder Investment Management Ltd. and Abrdn Plc. In the U.K., it has lagged far behind the world’s largest asset manager, BlackRock Inc., which has a large ETF and index fund business. They lost out by a wider margin to alternatives groups such as Blackstone, KKR & Co and Apollo Global Management, which invest in unlisted assets such as private equity, private credit and real estate.

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T Rowe Price, Franklin Templeton, Schroders and $2.7 trillion asset manager Capital Group Companies Inc, which is privately held and has a large mutual fund business, were among the groups that suffered the largest outflows in 2024, according to Morningstar Direct data. Everyone refused to comment.

The dominance of big tech stocks in the US has made it more difficult for active managers, who typically invest less than benchmark indexes in such companies.

The so-called “Great Seven” of Wall Street — Nvidia Corp., Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., and Tesla Inc. — It has led the bulk of the US market’s gains this year.

“If you’re an institutional investor, you’re allocating really expensive, talented teams that won’t own Microsoft and Apple because it’s hard for them to have a real vision for a company that everyone is studying and everyone owns,” Stan Miranda said. , founder of Partners Capital Investment Group LLP, which provides outside investment manager services.

“So they generally look at the smaller, less followed companies, and guess that they were all underweight the great seven.”

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The average actively managed core U.S. large-cap strategy returned 20 percent over one 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 these active funds of 0.45 percentage points was nine times higher than the equivalent of 0.05 percentage points for the benchmark tracker funds.

The outflows from stock-picking mutual funds also highlight the growing dominance of ETFs, which are publicly listed funds in their own right and offer US tax advantages and greater flexibility to many investors.

Investors have poured US$1.7 trillion into ETFs this year, pushing the industry’s total assets up 30 percent to US$15 trillion, according to data from research group ETFGI LLP.

The rush of inflows demonstrates the growing use of the ETF structure, which provides the ability to trade and price fund shares throughout the trading day, for a wide range of strategies beyond passive index tracking.

Several traditional mutual fund houses, including Capital, T Rowe Price, and Fidelity Management & Research Co., are seeking… LLC, has sought to attract the next generation of clients by reframing their active strategies as ETFs, with some success.

© 2024 Financial Times Limited

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