January 24, 2020

U.S. Passively Managed Funds Outdraw Actively Managed Funds in 2019

by Tom Roseen.

In 2019, U.S. fund investors continued to prefer passively managed funds over actively managed funds. Long-term actively managed funds (excluding money market funds) witnessed net outflows of $83.7 billion for 2019, while their passively managed counterparts took in some $472.1 billion.

However, assets under management for long-term funds remain tilted toward actively managed products. At the end of 2019, actively-managed funds accounted for $13.9 trillion under management in the U.S., while their passively managed fund brethren made up $8.4 trillion. Money market funds—$3.5 trillion—comprised the remainder of assets under management in the U.S. fund industry—$25.9 trillion.

I know, the headlines in the mainstream media have stated that assets in passively managed funds surpassed those in actively managed funds and this is true for domestic equity funds (comprised of U.S diversified equity funds, sector equity funds, commodity funds, and alternatives funds), but not on the world equity funds, mixed-assets funds, taxable fixed income funds, or municipal bond funds side of the universe. On December 31, 2019, total net assets (TNA) under management in passively managed domestic equity funds were $5.4 trillion, while their actively managed counterparts were $5.2 trillion. However, in the remaining macro-groups in the table below, actively managed funds’ TNA still handily outpaced their passively managed funds cousins’ TNA.

Despite the stellar returns of equity funds for 2019—with the average equity fund posting a decade’s best 24.04% one-year return—investors turned a cold shoulder to equity funds (excluding mixed-assets funds), withdrawing a net $123.8 billion for the year, with actively managed equity funds handing back a net $355.6 billion. Meanwhile, passively managed equity funds took in $231.8 billion. There was not a one-for-one move from actively managed funds to passively managed equity funds/ETFs.

Investors appeared to have been ducking for cover during much of 2019. For example, Lipper’s Large-Cap Growth Funds classification (despite returning a whopping 29.80% one-year return for 2019, its best since 2013) witnessed the largest net redemptions for 2019 (-$45.1 billion) of all the classifications in the open-end fund universe (including passively and actively managed funds). Meanwhile, the Institutional U.S. Government Money Market Funds (+$198.0 billion) classification took in the largest net inflows for the year.  Much of the estimated net flows for this past year either ended up sitting on the sidelines or were moved to fixed income funds.

For 2019, investors injected a net $549.2 billion into money market funds and $499.4 billion into fixed income funds. And while TNAs in actively managed fixed income funds (+$3.7 trillion) overshadowed those of passively managed fixed income funds (+$1.5 trillion), estimated net flows into the two groups approached parity, with actively managed fixed income funds taking in some $260.6 billion and passively managed fixed income funds attracting $238.7 billion.

The old cry by financial planners of investors chasing performance is nowhere in sight. Warnings of a nearing recession and related market downturn cited by many pundits over the last two-plus years appear to have many investors either sitting on the sidelines or looking for yield. However, the question at hand is whether investors who missed out on this extended market rally will jump back in at a market high. There is a lot of money sitting on the sidelines and the stock market appears to have some legs, at least in the short run.

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