Actively managed investment funds in the US experienced a record $143bn “exodus” in December, according to data, with many nervous investors flooding into cheaper passive funds.
For long-term US funds, which include a broad range of equity and bond funds, the outflows in December were the heaviest since the depth of the credit crisis, according to Morningstar, a data company. The funds finished the year with their lowest inflows in a decade, taking on less than half the $350bn annual average between 2008 to 2017. During 2018 active funds across all categories suffered outflows of more than $300bn, just shy of the $320bn shed in 2016.
“This was an exodus,” said Kevin McDevitt, analyst at Morningstar. “The movement [in flows] was huge.”
Active US bond funds suffered particularly heavy outflows, according to Morningstar, as investors, who were worried about rising interest rates, moved their allocations into shorter-duration funds — a trend that benefited passive investments.
The total number of outflows from US active funds during 2018
The shift mirrors experiences among UK active funds, which suffered consecutive months of outflows throughout 2018 while passive funds continued to attract assets.
In the US, intermediate-term active bond funds alone suffered $17bn in outflows in December.
“Until the fourth quarter active [bond] funds had been more competitive and had been experiencing inflows, but a lot of those funds invest in things like high-yield bonds and bank loans, for example, and take more credit risk than passive bond funds,” Mr McDevitt said.
In December “investors cut credit risk and sought shelter among high-quality, short-duration vehicles”, he added.
The popularity of passive funds extended far beyond fixed income. In December alone passive funds took on $60bn in assets in the US. Throughout the year they had $458bn in inflows, following a record $663bn in 2017.
Passive assets under management globally have mushroomed since the financial crisis as investors embrace lower-cost options such as exchange traded funds, often at the expense of pricier active investments.
ETF provider iShares generated a company record of $36.1bn in inflows in the US in December, more than triple that of Vanguard ($11.4bn), the runner-up by inflows. Across the year Vanguard, which owns 5 per cent of 491 stocks in the S&P 500, generated $161bn in inflows.
The volume of assets in ETFs soared to more than $4.6tn at the end of 2018, according to data from the consultancy ETFGI, up from less than $100bn at the turn of the century.
The surge has coincided with a period of underperformance by active managers and downward pressure on fund fees.
Morningstar data released in September revealed active fund managers in Europe had beaten their passive peers in only two out of 49 fund categories, in analysis covering a 10-year period to June 2018.
“There is a perception that most active managers charge a relatively high fee for such a variable return in aggregate,” said Ben Seager-Scott, chief investment strategist at Tilney Group, a financial planner.
Meanwhile, inflows into ETFs continue to grow, with global ETFs attracting the second-highest net inflows on record in December, according to ETFGI, despite the turmoil in developed markets.
At year-end actively managed funds controlled 61.2 per cent of the investment market in the US compared to the UK, where active funds account for 74 per cent of the market, according to the Investment Association.
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