Are investors sacrificing performance by moving from active to passive funds? Last year, £23bn was pulled from equity mutual funds and ETFs by UK investors—the second highest redemption on record, surpassed only by 2022. This was a tale of two strategies, however, as actively managed equity funds lost £24.13m while index-trackers gained £525m—modest, but positive in the face of huge headwinds. This trend remained in 2024, as active equity funds shed £9bn while their passive peers enjoyed inflows of £8.54bn in the first half of the year. Passives have grown from 7.1% of UK mutual fund and ETF equity assets

When “the last humans are roaming the earth, picking through dystopian urban hellscapes in search of food, they will still manage to argue about the relative merits and demerits of passive investing,” mooted FT journalist Katie Martin, in the paper’s Unhedged blog. It is indeed a perennial favourite bunfight of the fund world. I’ve stumbled across two irate iterations on LinkedIn this morning, and I wasn’t even looking. The argument has generally been fought on the terrain of equities. And, indeed, the shift from active to passive—particularly in the US—has been huge. But there is also a significant and seemingly accelerating

Last year, UK investors redeemed £23bn from equity mutual funds and ETFs—the second highest on record, surpassed only by 2022. However, this doesn’t tell the whole tale, as actively managed funds shed £24.13m while index-tracking funds saw modest inflows of £525m. This reflects the growth in passive assets across the market, which have grown from 7.1% of UK mutual fund and ETF assets in 2004 to 26% in 2023. Has this been the right move? I used Lipper for Investment Management analysis to compare the returns of index tracking and actively managed Equity UK funds between 2014 and 2023 against

I’ve been reading a lot of reports that this is going to be a good period for active fund managers. Many of these reports, you may be surprised to learn, come from active fund managers themselves. Intuitively, you would expect a widening dispersal of security returns to be reflected in a wider range of fund returns for the same period, and research does indeed back this up. That doesn’t necessarily work in favour of active management per se, however. Nevertheless, my innate cynicism aside, volatility can be the stock picker’s friend. Dispersal of returns is supposed to be fertile ground

Fixed income investors have been placing their faith in passive funds for some time, with tracker funds pulling in significant money while their active equivalents are in the red.   Chart 1: UK Asset Class Flows, Passive and Active Mutual Funds and ETFs, 2022 (£bn) Source: Refinitiv Lipper   This is well illustrated by UK net fund flows over 2022. The most obvious thing from even a cursory glance at Chart 1 is that, while it was a bad year for risk assets, passive bond funds have fared rather better. While their active equivalents suffered redemptions of more than £20bn,

Or are they collateral damage in the rush to passive fixed income?   Over the first half of the year, ESG equity, bond, and mixed-assets funds resisted the negative flows that have beset their conventional peers. However, a waning tide will eventually see all boats lower, and that’s what we have seen in Q3, as flows went negative for ESG equities and bonds, with only mixed assets managing to keep a toehold in positive territory. For equities, this seems to be less of a disenchantment with ESG per se, but rather a function of investors withdrawing money from the asset

U.S. investors pushed equity funds to their fourth consecutive quarter of plus-side performance in Q1 2021. Investors embraced the $1.9 trillion stimulus package signed into law by President Joe Biden in late March, the Federal Reserve Board’s commitment to keeping interest rates low through at least 2023, and the rollout and improving distribution of COVID-19 vaccines. All of these factors contributed to relatively strong returns for equity funds and ETFs during the quarter, with the average equity fund posting a 6.31% return, with Lipper’s Sector Equity Funds macro-classification (+8.94%) leading other macro-classifications. However, fixed income investors evaluated what a third

2020 UK Fund Flows Review: Summary   Download the full report, to the right   The UK started 2020 with a shiny new majority government, committed to delivering Brexit. For much of that year, the uncertain implications of this have weighed on financial markets. In any given year, that would be enough. But then, of course, there was—and is—COVID. In March, markets went into freefall, oil prices went negative—even gold sold off—before markets rallied as governments and central banks committed to do whatever it took to prevent economic collapse. This double whammy continued and exacerbated the FTSE’s long run of

Rather than flows between asset classes, the most dramatic moves over the past year have been in how UK investors choose to access them. The shift from active to passive within equity and bond funds has been greater than between asset classes. We’ve looked before at the flows between asset classes over the course of the year, but not how it splits between active and passive. Investors have been using the dislocations in markets this year to increase passive holdings. Chart 1: Active v Passive Fund Flows, £m, Q1-3 2020 Source: Refinitiv Lipper Equity Flows This trend is most pronounced

As I ran the data below for the end of 2019, it was with a certain sense of trepidation. I am on the record as being a vocal advocate of active funds and I knew that despite a rising tide in markets, many of them had struggled against their passive peers. The thesis is that, typically, late-cycle environments precede a rotation out of momentum-biased ETFs and the increasingly expensive large-cap stocks in which they invest, providing fertile ground for active stock pickers. However, despite 2019 being a good year for equities markets generally, as well as a year that recouped

In 2018, the Pan-European mutual fund industry suffered its first annual outflow in six years, haemorrhaging some €129.2 billion. Performance-wise, the story was similarly dire—the Lipper Global Equity U.S. classification returned -6.3%, Lipper Global Equity Europe ex-U.K. returned -13.0%, and Lipper Global Equity U.K. returned -11.0% (all in GBP). Exhibit 1. Pan-European Fund Flows (in € billion) Active fund managers in aggregate did not cover themselves in glory in 2018, with only a small percentage of funds within major Lipper classifications beating the best-performing tracker fund in those respective classifications. Q1 2019 – quicker out of the blocks Lipper data

Since the days of the Delphic Oracle, it is in human nature to try to predict the future. I, for one, concede it is a difficult skill! At the end of 2017, I optimistically predicted that 2018 could be a good year for active funds. It has turned out to be a very testing one indeed—for mutual funds across the board and active funds in particular. The thesis is that, typically, late-cycle environments precede a rotation out of momentum-biased ETFs and the increasingly expensive large-cap stocks in which they invest, providing fertile ground for active stock pickers. However, quantitative easing