Last year active managers were met with outflows. In fact, in January 2019, Kevin McDevitt, a senior analyst at Morningstar, told ThinkAdvisor, “Money flowing out of active funds is not new, but the massive outflow in December is striking. $143 billion is a huge number, largest we’ve seen.”
But that was January. Today, “We believe it’s a great time to be an active manager,” stated Russel Kinnel, director of mutual fund research for Morningstar Research Services, in his piece, “What Trends Actively Managed Fund Flows Reveal.” He adds that today there is $11.7 trillion in actively managed funds, “a huge increase from the first quarter of 2009.”
Still, “there may be a reckoning,” he says, stating that in the trailing 12 months that ended in September, 66% of actively managed U.S. equity funds posted outflows. “That’s remarkable considering the tremendous bull market,” he wrote.
Another trouble sign for active managers: The move to passive from active “has been contained within domestic equity,” but in the third quarter of 2018, passive international-equity funds saw $19 billion in net inflows while the active side lost $15 billion in net outflows.
Kinnel adds that the new passive launches by Vanguard and Fidelity of zero-fee index funds might further hit active funds. “It could be a blip or a start of a trend,” Kinnel says.
So why is Morningstar so upbeat on active managers?
- Morningstar Medalist small-cap funds remain open. Typically, according to Kinnel, at this point in a bull market, these actively managed small-cap funds would be closed to prevent overfunding that makes it difficult for the manager to execute the strategy.
- Bloated large-cap funds are getting less bloated. The 20 largest actively managed funds across all asset classes together have dropped about 20% of AUM over the past three years, Kinnel notes.
Then again, other problems could surface. Fees could rise, especially as outflows can lead to higher expense ratios. Redemptions can hurt performance. And asset-manager mergers will accelerate, especially if managers find themselves with “excess capacity and reduced profitability.”
Perhaps the key reason why Morningstar is upbeat on active managers is the growing threat of a bear market. Kinnel notes that “flows will be a huge part of the story.”
Envestnet, too, saw active manager outflows in 2018, although when the markets got volatile in the fourth quarter, those managers performed well. “And they’ve continued to perform pretty well into 2019,” Tim Clift, chief investment strategist told ThinkAdvisor. “When markets get volatile like we’ve seen … active management shines.”
— Check out Is Factor Investing Interest Hitting a Peak? on ThinkAdvisor.