Outflows add to the challenges facing active stock fund managers.
A version of this article was published in the March 2016 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.
PIMCO Total Return PTTRX has seen a remarkable $35 billion in outflows through the 12 months ended February 2016. Yet in percentage terms, PIMCO Total Return's outflow places it just 49th on the list of 12-month outflows within the Morningstar 500.
Something big is happening.
A striking 18 Morningstar 500 funds suffered outflows of at least 40% of assets under management in the trailing 12 months ended February 2016, 61 shed 25% or more, and 168 had outflows of 10% or more.
Also, in January we saw something we rarely see: a firm that subadvises a fund we covered was liquidating. It isn't just that Aston/TAMRO Small Cap ATASX was merging into another fund but that TAMRO was closing up shop. Two years ago, the firm was running $1.3 billion. One year ago, it was running $800 million, but at year-end 2015, it was down to $150 million.
If we had just endured a brutal bear market, then the wave of redemptions would be par for the course. But this comes after a tremendous equity rally and therefore is unprecedented. True, we began 2016 with a sharp sell-off, but the outflow trend was well-established before that.
The simple answer to this riddle is competition from exchange-traded funds. ETFs have gained the upper hand in the active/passive debate, even over open-end index funds, which generally offer comparable cost benefits. More advisors are switching to ETF-focused strategies, and, when they get a new client, they quickly sell the weakest-performing active funds--possibly all the actively managed funds--in the client's current portfolio. Self-guided investors are moving to ETFs, too.
Although you can find an ETF for just about any category or asset class, the outflow trend has largely been centered on domestic-equity funds. Actively managed bond funds still pull in nearly all the new flows in that asset class, and active foreign-equity funds still have positive inflows. The argument for passive investing applies similarly to all asset classes, but that isn't how it has worked in the investing marketplace. That said, there are some quirks to bond indexes, such as a heavy government weighting in the Barclays Aggregate and challenges in tracking high-yield and muni indexes that do limit appeal on the fixed-income side.