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Passive Funds Continue To Steal Spotlight from Active Funds. Can Active Management Make a Comeback?

Feb 28, 2019

Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions
Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions

 

  • Assets under management (AUM) of passively managed large-cap equity funds, which includes passive mutual funds, exchange-traded funds (ETFs), and smart beta funds, surpassed the AUM of actively managed large-cap equity funds in 2018 for the first time in history, according to data from Morningstar.
     
  • As can be seen in the chart below, passive large-cap equity funds ended 2018 with USD$2.93tn of AUM while actively large-cap equity funds ended 2018 with USD$2.84tn AUM. This growth was driven largely by fund outflows from actively managed large-cap equity funds during 2018, as can be seen in the drop-off in active large-cap equity fund AUM from 2017’s all-time high.

 

Source: Morningstar Inc. 

 

  • Investors hold more money in passive large-cap equity funds compared to their actively managed counterpart and it is indicative of the shift to lower fee passive funds. With the popularization of passive investment vehicles like ETFs, investors are beginning to question the value added by stock pickers in actively managed funds.
     
  • Based on current fund flow trends in 2019 to date, passively managed US stock funds are on pace to surpass their actively managed rivals in terms of AUM by year-end 2019, according to Bloomberg. Actively managed US equity funds, however, have defied historical performance trends so far in 2019, potentially making a case for their higher management fees.
     
  • As of data through February 19th, 2019, over 50% of actively managed mutual funds are outperforming their respective benchmark. If this pace continues for the entirety of 2019, it would mark the first time in a decade that more than half of actively managed mutual funds outperformed their benchmark in a given year, as can be seen in the chart below.

 

 

  • Investors appear to be taking note of outperformance by actively managed mutual funds in 2019. As of February 26th, 2019, actively managed US equity-focused mutual funds have attracted USD$4bn of inflows since January while passive US equity-focused ETFs have observed outflows of USD$10bn, according to data compiled by Investment Company Institute and Bloomberg. 
     
  • Whether or not actively managed US equity funds will outperform passively managed counterparts in 2019 is anybody’s guess. While future performance is unclear, a look into current levels of correlation and dispersion of US equities may provide investors with insight. High levels of dispersion paired with low levels of correlation in stocks should work to benefit active management styles. Low levels of dispersion paired with high levels of correlation, meanwhile, would effectively favor passive management styles. 

 

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Global Top Stock IdeasTOP LONG & TOP SHORT STOCK IDEAS FOR GLOBAL MARKETSMONTHLY TOP IDEAS FROM OUR MULTI-FACTOR QUANTITATIVE MODELS