Fundraising has a record $450bn in outflows

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Investors have pulled a record $450bn out of actively managed stock funds this year, as a revolution in low-cost index-tracking investments reshapes the asset management industry.

Flows from stockpicking mutual funds eclipsed last year’s $413bn, according to data from EPFR, and highlights how just investing and exchange-traded funds are sweeping the once-dominant market for mutual funds.

Custom fundraising they have struggled to justify their relatively high fees in recent years, and their performance has lagged behind the gains of Wall Street indices driven by the technology giants.

The move away from active strategies has accelerated as mature investors, who often prefer to withdraw and hold small amounts of money, turn to low-cost strategies.

“People need to invest for retirement and sometimes they have to withdraw,” said Adam Sabban, senior research analyst at Morningstar. “The investor base for active equity funds is aging. New dollars are more likely to go into an index ETF than an active mutual fund.

Shares in asset managers with large portfolio companies, such as US groups Franklin Resources and T Rowe Price, and Schroders and Abrdn in the UK, have lagged far behind the world’s largest asset manager. BlackRockwhich has a large ETF and index fund business. They have lost more ground than other groups such as Blackstone, KKR and Apollo, which invest in unlisted assets such as private equity, private debt and real estate.

T Rowe Price, Franklin Templeton, Schroders and the $2.7tn asset manager Capital Group, which is privately held and has a large fund business, were among the groups that exited in droves. in 2024according to Morningstar Direct data. All declined to comment.

The dominance of large US stocks has made it more difficult for active managers, who often invest less than benchmark indices in such companies.

Wall Street’s so-called Magnificent Seven – Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta and Tesla – have driven most of the US stock market’s gains this year.

“If you’re an institutional investor, you’re assigning a very expensive talent pool that Microsoft and Apple won’t have because it’s hard for them to have real insight into a company that’s studied by someone. to each and everyone,” said Stan Miranda. , founder of Partners Capital, which provides the services of a chief investment officer.

“So they generally look at smaller, less well-followed companies, and guess what, they were all below the Magnificent Seven.”

The average strategy of the largest US actively managed company has returned 20 percent in one year and 13 percent annually over the past five years, after accounting for fees, according to data from Morningstar. The same mutual funds gave returns of 23 percent and 14 percent respectively.

The average annual cost of such active funds of 0.45 percent was nine times higher than the 0.05 percent equivalent of benchmark funds.

The outflows from stockpicking mutual funds also highlight the growing dominance of ETFsThe funds themselves are listed on a stock exchange and offer US tax advantages and greater flexibility for most investors.

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

The rapid flow reflects the growing use of the ETF structure, which provides the ability to buy and sell fund shares throughout the trading day, for a variety of different strategies than track index.

Many traditional mutual fund houses, including Capital, T Rowe Price and Fidelity, are looking to attract the next generation of customers by retooling their strategies as active ETFs, with some success.