The business of picking stocks and bonds for clients is getting smaller by the day.
Seven top asset managers this week reported a total of $50 billion in third-quarter net redemptions, most of it from active funds, company filings show. The biggest losers: Franklin Resources Inc. with $22.1 billion, AllianceBernstein with $15.3 billion and Waddell & Reed Financial Inc. at $4.9 billion.
In the second quarter, that group of seven saw $34 billion in outflows. The tally is further evidence that investors, frustrated with high fees and mediocre performance of actively managed funds, are increasingly casting them off for low-cost passive investments.
In the 12 months ended Sept. 30, active funds had redemptions of $295 billion while passive took in $454 billion, according to data from Morningstar Inc.
“The shift from active to passive is an accelerating secular trend,” said Benjamin Phillips, a principal with the consulting firm Casey Quirk by Deloitte. “It is not going away.”
Clear evidence of that: The publicly traded firm that lured the most cash in the third quarter, BlackRock Inc., with $55 billion, drew more than 90 percent of it in funds that track indexes. Vanguard Group, known for its low-cost index funds and ETFs, also attracted $78 billion in deposits in that period.
The asset management unit of Ameriprise Financial Inc. reported redemptions of $4.3 billion from active funds in the third quarter compared to $7.4 billion a year ago. T. Rowe Price had $200 million. On Friday, Legg Mason Inc. reported fiscal second quarter net outflows of $300 million including alternatives outflows of $1.6 billion and equity outflows of $1.5 billion, which were partially offset by fixed income inflows of $2.8 billion.
At Waddell & Reed, the third quarter marked the ninth consecutive quarter that the firm experienced outflows. On an Oct. 25 conference call with investors, CEO Philip Sanders said there was lower demand for the company’s actively managed products. He also pointed to “significant regulatory change” and fee pressure as driving the shift.
“Our industry is undergoing a period of transformational change,” Sanders said.
Janus Capital Group Inc. reported $2.4 billion in third-quarter net redemptions, the most in a year. The Denver-based firm saw outflows in its growth, global equity and fixed-income funds and those from the Intech unit, which uses mathematical strategies.
Earlier this month, Janus announced plans to merge with Britain’s Henderson Group Plc in a bid to get the scale it needs to stay competitive. Henderson also reported this week that it saw net outflows in the third quarter.
Franklin CEO Gregory Johnson suspects there will be more tie-ups in the industry. Asset management is a “slower growth, more mature business,” he said on a Oct. 26 conference call. “One way to gain efficiencies is through consolidation. Companies will be more open to that avenue to create value.”
Franklin, which specializes in actively run global stock and bond funds, had $86.5 billion in net redemptions for the fiscal year ended Sept. 30, Its best known fund, Michael Hasenstab’s $42 billion Templeton Global Bond Fund, had $16 billion in withdrawals in the past 12 months, second-most among all U.S. mutual funds, according to data compiled by Bloomberg.
The performance of stock pickers hasn’t helped the cause of active management. Fewer than 15 percent of active large-cap stock funds beat the S&P 500 Index in the 10 years ended June 30, data from S&P Global show.
Franklin’s Johnson disputed the idea that passive funds would continue to outperform. “I think in the next decade active will do very well,” he said on the conference call.
Invesco Ltd. was among firms that showed stock pickers can still attract investors. The firm saw $8.3 billion move into active vehicles in the third quarter. The $18.6 billion Invesco Diversified Dividend Fund attracted $5.3 billion this year, the most of any actively managed stock fund, according to Morningstar.
In a low interest rate environment, many investors buy dividend paying stocks as a substitute for bonds. The fund is up 7.8 percent this year, better than 79 percent of peers.
“The extended period of the active-passive movement” has probably “gone too far,” Invesco CEO Martin Flanagan said on an earnings call on Oct. 27. “It is not going back to where it was, but it will moderate. There will be a very strong place for active capabilities too.”
But there may be an industry shakeout along the way, said Phillips, of Casey Quirk.
“In an oversupplied market not all of them will make it out alive,” he said. “The competition will be Darwinian.”