Investors have voted with their wallets and given a big thumbs up to low-cost passive investment funds and a big negative to active investors after the miserable performances seen in 2018 – especially the final quarter.
The data should make Australian investors, regulators and fund managers and administrators think again – but won’t because of the high fees underperforming active managers still get (according to the Productivity Commission’s final report on making super more competitive).
The lure of grabbing some of the $30 billion (and rising) annual Australian fee pot is too much.
But in the US and elsewhere it is a very different story and it is clear that low-cost passive funds and now the default investment model of choice.
According to a report on Friday from Morningstar passive fund giant Vanguard pulled in $US166.4 billion in new money from investors last year. That was however down from around $US200 billion in 2017.
The Morningstar data excludes exchange-traded funds and money market funds. The second biggest inflow was into the iShares passive ETFs (Exchange Traded Funds) owned by Blackrock, the world’s biggest fund manager.
Kevin McDevitt, an analyst at Morningstar, said that 2018 had been a “perfect storm” for active equity funds, with investors growing increasingly disillusioned by the continuing lacklustre performance of active managers and their high fees.
Compounding this was the volatility, which hit active equity managers more than passive equity (which tend to ride out the swings in markets).
Active fixed-income managers were really hit by a surge in investor concerns around credit risk, which was spurred by rising interest rates and higher corporate debt (especially junk bonds and covenant ‘lite’ corporate debt).
December was a case in point for the US funds management industry.
In December, Morningstar data shows that long-term US funds had their greatest monthly outflows since October 2008 at $US83 billion, and inflows for the year were the lowest since 2008.
Money market funds saw inflows of $US57 billion, for their best year since 2008, according to the Morningstar Direct Asset Flows Commentary for December and the year ending December 31, 2018.
While US equity funds had inflows of $US14.1 billion in 2018, investors switched from active funds to passive ones. Investors pulled a record $US143 billion from actively managed funds while moving $US60 billion to passive funds.
iShares dominated December flows with a record $US36.1 billion, more than triple that of runner-up Vanguard’s $US11.4 billion in inflows.
For 2018 as a whole Franklin Templeton and Invesco were ranked as the worst-selling mutual fund managers globally last year as turbulent markets prompted large redemptions from active investors.
A net $US44.5 billion was withdrawn from Franklin’s mutual funds in 2018 while net outflows at Invesco were $US27.1 billion, according to Morningstar.
Franklin’s outflows were the fourth year of redemptions from the US manager, which started leaking money from its flagship fixed-income strategies after the 2013 ‘taper tantrum’ on markets.
The redemptions from Franklin’s funds accelerated last year, following $US24 billion of withdrawals in 2017.
Invesco, meanwhile, saw full-year flows turn negative for the first time since 2016 and the biggest outflows for at least a decade. In 2017 the manager had enjoyed net inflows of $US12.2 billion.
Vanguard was far ahead of the next best-selling manager in 2018. Dimensional Fund Advisors, which ranked second, recorded net inflows of $US26.2 billion.
When ETF inflows are added to the Morningstar data, BlackRock’s iShares division grabbed the second best-selling position, with $US162 billion.
Morningstar’s Mr. McDevitt said investors were moving away from chasing performance and looking at products such as managed portfolios or target-date funds that use index strategies as building blocks.
He said Vanguard and iShares grabbed the biggest gains from this trend because offer of a wide range of “core” index products for investors to choose from and shape their strategies.
Other managers that were casualties of the trend last year of investors abandoning both active stock and bond pickers included US multi-manager Harbor, and fixed income specialists Pimco and Metropolitan West.
Several managers that underwent corporate changes also ranked among the biggest outflows – mostly notably Janus Henderson (which is owned part Australian, part UK and part US) and Standard Life Aberdeen, which both completed mergers in the past two years They lost $US16.2 billion and $US29.1 billion respectively.