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Passive Investments Drive Record Fund Flows in 2017: Morningstar

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Flows into U.S. mutual funds and ETFs reached a record $684.6 billion in 2017 due to massive inflows into passive funds, according to Morningstar’s annual fund flow report, which covers mutual funds and ETFs.

A total $692 billion flowed into passive funds, led by U.S. equity and international equity funds, while almost $7 billion flowed out of actively managed funds, which was far less than outflows in the previous two years. Still, by year-end the total assets of actively managed funds stood at $11.4 trillion compared with $6.7 trillion for passive funds.

Vanguard accounted for almost half ($328 billion) the inflows into passive funds last year followed by BlackRock, with $213 billion in inflows. Pimco led among actively managed funds, with $33 billion in inflows — almost all of it into the PIMCO Income Fund (PIMIX) — followed by Dimensional Fund Advisors ($31 billion), which distributes its retail funds only through financial advisors. (It also sells to institutional clients.)

The biggest fund family losers were Fidelity Investments, which saw outflows of $40 billion in its actively managed funds — though inflows of $51.3 billion in passive funds — and Franklin Templeton Investments, which saw outflows of $28 billion from its actively managed funds but only $398 million of inflows to passive funds.

Among fund categories, the biggest winners were passive U.S. equity, international equity and taxable bond funds — each having more than $200 billion in inflows. “Indexing is no longer limited to U.S. equity and expanding into other asset classes,” according to the Morningstar report.

The biggest losers were actively managed U.S. equity funds (down $207 billion), led by large growth funds, and allocation funds, which had $27 billion in outflows.

“Investors have been generally maintaining their U.S. equity positions, but switching from high-cost active to low-cost passive,” according to Morningstar. “They just lost interest in overpriced and underperforming U.S. equity funds.

Source: Morningstar Inc.

Among actively managed fund categories, taxable bond funds were the clear winner. They attracted more than $178 billion in inflows — led by intermediate term and ultra short bond funds — while actively managed municipal bond funds had inflows of $28 billion. In between the two were actively managed international equity funds, which saw inflows of $35.6 billion.

The Oakmark International Fund (OAKIX) led inflows among actively managed international stock funds “partly because of excellent showings in 2016 and 2017,” according to Morningstar. Morningstar’s analyst rating for the fund — a more forward-looking rating than the star ratings — is gold, the firm’s highest.

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