Stockpicking funds suffer record $450bn of outflows

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Investors have pulled a record $450 billion from actively managed stock funds this year, as a shift to cheaper index-tracking investments reshapes the wealth management industry.

Outflows from stockpicking mutual funds surpassed last year’s previous high of $413 billion, according to data from EPFR, and underlined how passive investment And exchange traded funds are hollowing out the once-dominant market for active mutual funds.

traditional Stockpicking funds In recent years have struggled to justify their relatively high fees, with their performance lagging Wall Street indices driven by large tech stocks.

Older investors generally support them, cashing out, and younger savers move away from active strategies instead of cheaper passive strategies.

“People have to invest for retirement and at some point they have to withdraw,” said Adam Sabban, a senior research analyst at Morningstar. “The investor base for active equity funds is outdated. New dollars are much more likely to make their way into an index ETF than an active mutual fund.”

Asset managers with large stockpicking businesses such as US groups Franklin Resources and T Rowe Price and the UK’s Schroders and Aberdeen lag far behind the world’s biggest asset managers. Blackrockwhich has a large ETF and index fund business They lost by an even wider margin to alternative groups such as Blackstone, KKR and Apollo, which invest in unlisted assets such as private equity, private credit and real estate.

T Rowe Price, Franklin Templeton, Schroders and the $2.7tn asset manager Capital Group, which is privately owned and has a large mutual fund business, were among the groups that suffered the most outflows. In 2024According to Morningstar Direct data. All declined to comment.

The dominance of US big tech stocks makes it more difficult for active managers, who typically invest less in such companies than the benchmark index.

Wall Street’s so-called Magnificent Seven — Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta and Tesla — have driven the bulk of the U.S. market’s gains this year.

“If you’re an institutional investor, you allocate really expensive talent teams that don’t own Microsoft and Apple because it’s hard for them to get real insight into a company that’s studied by everybody and owned by everybody,” said Stan Miranda, founder of Partners Capital. which provides outsourced Chief Investment Officer services.

“So they usually look at smaller, less-followed companies and assume that they all weighed less than the Magnificent Seven.”

The average actively managed core U.S. large-cap strategy has returned 20 percent in one year and 13 percent annually over the past five years, according to Morningstar data. Similar passive funds offered returns of 23 percent and 14 percent, respectively.

This type of active fund’s annual expense ratio of 0.45 percentage points is nine times higher than the benchmark-tracking fund’s equivalent of 0.05 percentage points.

Outflows from stockpicking mutual funds also highlight its growing dominance ETFFunds that are themselves listed on a stock exchange offer US tax benefits and greater flexibility for many investors.

Investors poured $1.7tn into ETFs this year, pushing the industry’s total assets up 30 per cent to $15tn, according to data from research group ETFGI.

Flow Crowd shows the growing use of ETF structures, which provide the ability to trade and value fund shares throughout the trading day for a wide variety of strategies beyond passive index-tracking.

Many traditional mutual fund houses, including Capital, T Row Price and Fidelity, are seeking to attract the next generation of clients by repackaging their active strategies as ETFs, with some success.