Stock-pick funds suffer record outflows of $450 billion

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

Outflows from stock-picking mutual funds eclipse last year's high of $413 billion, according to EPFR data, and underscore how passive investing and exchange-traded funds will empty the once-dominant market for active mutual funds.

Traditional stock funds have struggled to justify their relatively high fees in recent years, with their performance lagging behind gains for Wall Street indexes driven by big tech stocks.

The exodus of active strategies has gathered pace as older investors who typically favor them cash out and younger savers turn to cheaper passive strategies instead.

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

Holdings in asset managers with big stock-picking companies such as US groups Franklin Resources and T Rowe Price and Schroders and Abrdn in the UK are well behind the world's biggest asset manager. BlackRockwhich has a big business in ETFs and index funds. They lost even more to alternative groups such as Blackstone, KKR and Apollo, which invest in unlisted assets such as private equity, private credit and real estate.

Among the groups that suffered the biggest outflows were T Rowe Price, Franklin Templeton, Schroders and the $2.7 trillion asset manager Capital Group, which is privately held and has a large mutual fund business. in 2024according to data from Morningstar Direct. All declined to comment.

The dominance of large U.S. tech stocks has made it even more difficult for active managers, who typically invest less in such companies than benchmarks.

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

“If you're an institutional investor, you're assigning yourself to really expensive talent teams that won't own Microsoft and Apple because it's hard for them to have real insight into a company that everybody studies and everybody owns,” Stan Miranda said. , founder of Partners Capital, which provides outsourced investment director services.

“So they generally look at the smaller, less watched companies and guess what, they all had an underweight Magnificent Seven.”

The average actively managed core strategy of major U.S. companies has returned 20 percent in one year and 13 percent annually over the past five years, after accounting for fees, according to Morningstar data. Similar passive funds offered returns of 23 percent and 14 percent.

These active funds' annual expense ratio of 0.45 percentage points was nine times higher than the equivalent of 0.05 percentage points for the benchmark funds.

Outflows from stock-picking mutual funds also underscore the growing dominance ETFsfunds that are themselves listed on an exchange and offer US tax benefits and greater flexibility for many investors.

Investors poured $1.7 trillion into ETFs this year, boosting the industry's total assets by 30 percent to $15 trillion, according to data from research group ETFGI.

The flurry of inflows shows the growing use of the ETF structure, which offers the ability to trade and price fund shares throughout the trading day for a wider range of strategies beyond passive index tracking.

Many traditional mutual funds, including Capital, T Rowe Price and Fidelity, are trying to woo the next generation of customers by repackaging their active strategies as ETFs, with some success.