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Investors Embraced Passive Funds, Eschewed Active Managers in 2014

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In 2014, passive trumped active investing as measured by inflows and outflows from mutual funds and exchange-traded funds, Morningstar announced Wednesday.

Active U.S. equity funds were the biggest losers for the year, with net inflows of $98.4 billion while passive U.S. equity funds had net inflows of $166.6 billion.

The big outflows from PIMCO’s Total Return bond fund occasioned by, finally, Bill Gross’ departure for Janus Capital heavily influenced the $17.1 billion in 2014 net outflows from Morningstar’s active taxable fixed income category. In December, $23 billion flowed out of that bond fund category; overall in the month, $33.8 billion flowed out of active funds of all kinds, while $72.6 billion flowed into passive funds.

Earlier this month, PIMCO said that in December, $19.4 billion flowed out of PIMCO Total Return Fund (PTTRX), though it said the “average daily pace of outflows remained significantly slower from the peak rate in late September and early October 2014.”

For the year among all funds, passive funds had net inflows of $420 billion, while active funds gained $44 billion. Total assets among all active funds ended the year at $9.75 trillion, while passive funds ended the year at $4.12 trillion. On the passive side of the equation, taxable bond funds saw net inflows of $104.7 billion.

(Morningstar’s definition of ‘net flows’ is the change in assets of a fund not explained by the performance of the fund.)

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In her written commentary on the fund flows, Morningstar’s senior analyst for markets research, Alina Lamy, noted that the 2014 outflows from the active taxable bond funds “may not be representative of the category in general, but they certainly go a long way to show how diminished investor confidence can have far-reaching repercussions.”

Looking at longer-term trends, Lamy pointed out that from 2009 to 2012, fixed income funds attracted the “great majority” of investor funds; only in 2013 did U.S. and international equity fund flows exceed bond fund flows. 

In terms of fund family winners and losers, Morningstar reported that Vanguard funds attracted a total of $219 billion during the year, $200 billion of which went to its signature passive products. PIMCO had total outflows of $150.4 billion, $150 billion of which came from its active products. On the passive side, BlackRock/iShares had net flows of $11.6 billion December, with $10.6 billion going to its passive products: the SPDR S&P 500 ETF SPY received the largest inflow among passive funds for the second month in a row. For the year, BlackRock/iShares trailed only Vanguard in total net flows: $83.9 billion in active funds and $15.8 billion in active funds.

On the active side, J.P. Morgan, with $28 billion in net flows, “attracted the largest flows during the past year through its advisor-sold active funds,” Lamy reported. 

Lamy said that when looking at the longer term, from 2012 through 2014 passive U.S. equity funds had inflows topping all other equity categories, with “active U.S. equity on the decline.” However, Lamy wrote that International equity funds have seen inflows “on both the active and passive side, although passive funds have had higher cumulative flows.”

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Specifically on ETFs, inflows into U.S. exchange-traded funds hit a record $241 billion in 2014 (2012 had held the record, with $190 billion in inflows), according to Michael Rawson of Morningstar. Those inflows and the bull market helped push total U.S. ETF assets to the $2 trillion mark at year, only four years after ETF assets hit $1 trillion.

By contrast, the Investment Company Institute reported that as of Nov. 30, there was a total of $15.964 trillion in all mutual funds — long-term funds and money market funds.

The three ETFs with the largest inflows in 2014 all track the S&P 500 Index, Morningstar reported: SPDR S&P 500 ETF (SPY), which brought in $14 billion in net flows; iShares Core S&P 500 (IVV), which had net flows of $8 billion for the year; and Vanguard S&P 500 ETF (VOO), which brought in $6 billion.

Rawson writes that SPY now holds 69% of the assets invested in S&P 500 Index ETFs, compared with 76% three years ago. VOO, says Rawson, has gained most of SPY’s lost market share. The Vanguard fund, he says, “has done a better job matching the performance of the index and charges a lower expense ratio (0.05%) than SPY (0.09%).”

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