The news keeps getting worse for active U.S. equity mutual funds. According to a recent Morningstar report, the last 12-month period saw the worst outflows of any such period since 1993.
At the end of July, outflows over the last year neared $160 billion for U.S. equities; passive funds enjoyed inflows of more than $140 billion over the same period. Outflows totaled $14.3 billion in July, a 60% increase from the previous month.
What’s driving this trend? Certainly, the beat goes on for cheaper passive funds — Vanguard had inflows last month of $16 billion for passive strategies and lost $1.3 billion from their active funds. But in addition, many investors are wondering when the current U.S. bull market will end, and thinking that international equities, which experienced $218 billion in positive flows over the last 12 months, are a better buy than U.S. equities. To date, the S&P 500 is up just 3.4%, while the MSCI international index is up 7.7%.
Active fund families which did well over the last 12 months included JP Morgan and American Funds, which saw positive flows of $21 billion and $11 billion respectively. Probably not coincidentally, both firms have healthy TDFs.
While many money managers are eager to participate in the $25 trillion U.S. retirement market — especially the nearly $15 trillion in DC plans and IRAs — it’s getting tougher for active managers without a viable TDF strategy. Those with deep distribution and established relationships with advisors, record keepers and broker dealers, especially those with large retail sales forces, will maintain if not grow their DC presence. But others are sitting behind closed doors with their consultants, trying to figure out how to stop the bleeding. Any ideas?
