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Money Still Fleeing Active Funds

Mutual Funds

Despite the S&P 500 gaining 31.5% in 2019, active U.S. equity funds experienced a sixth year of net outflows during the decade-long bull market, a new report notes.

That report comes from Morningstar, Inc., which notes that while those actively managed funds suffered $41.4 billion in outflows, passive U.S. equity funds had $162.8 billion in inflows, finishing the year with 51.2% market share based on total assets. (Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund.)

The report notes that this was the third consecutive yearly decline in passive U.S. equity inflows, reflecting the decreasing demand for U.S. equity funds overall. Meanwhile, active U.S. equity funds had outflows of $204.2 billion in 2019 – but because of 2019’s powerful rally, active U.S. equity assets hit a new record of nearly $4.6 trillion, up from $3.7 trillion at the end of 2018. As the report’s authors explain: “They’re not dead yet.”

In December, investors directed $25.3 billion of inflows to passive U.S. equity funds but $23.5 billion of outflows from actively managed U.S. equity funds. Among the 10 largest U.S. fund families, Vanguard saw its best month of the year in December, with inflows of $22.3 billion. Its $183.3 billion in inflows for 2019 topped 2018’s $162.9 billion, and the firm’s long-term assets grew by $1.1 trillion to $5.3 trillion – a 25.7% market share. But while its $183.3 billion in 2019 inflows was better than its $162.9 billion in 2018, that was still down from its calendar-year inflows from 2014 through 2017.

The report also notes that long-term funds drew in $414.6 billion in 2019, more than double 2018’s $168.3 billion, and money market flows received $547.5 billion in inflows, the group’s best year since 2008’s record $593.6 billion.

The strong long-term inflows in both December and for all of 2019 were due almost entirely to record inflows for both taxable bond and municipal bond funds, which collected $413.9 billion and $105.5 billion respectively for the year, and $50.3 billion and $10.2 billion respectively for December. With greater 2019 flows than their active counterparts, passive taxable-bond funds now have a third of that market.

Vanguard’s Total Bond Market Index II saw the greatest inflows of 2019, with $29.7 billion, although the report notes that this fund is only available to investors through target-date funds. The same dynamic probably propelled the $29.0 billion of inflows into Vanguard’s Total International Bond Index.