Investors pulled nearly $100 billion from index-beaters recently.
There’s been some chatter lately that even "winning" active funds—that is, those that have beaten their benchmarks recently—are getting hit with outflows. That would be remarkable given investors’ propensity to chase performance. In general, if a fund has beaten its bogy, it has usually been able to rake in assets. So, if we saw investors pulling money from winning funds, it would indicate a dramatic reversal. In this piece, we’ll take a closer look at the data to see if investors are, indeed, pulling their assets from winning funds and offer a few thoughts on trends that might be driving this behavior.
I defined winning funds as those which generated positive excess returns versus their category-assigned benchmark over the trailing one and three years ended Jan. 31, 2017. For example, if a fund in the large-value Morningstar Category beat the Russell 1000 Value Index—the index assigned to the large-value category—over the past year, it’s a winner. If it lags that index, it’s a loser.
Then I tallied the estimated net flows to these funds over the corresponding one- and three-year periods. Morningstar makes these estimates based on each fund’s reported net assets, performance, and any distributions (estimated flows are the “plug” in the formula). From there, I simply aggregated the flow data for all winning and losing funds.
I found that investors have indeed pulled assets from winning active funds over the past year, but not the past three years. All told, investors pulled a net $99 billion from active funds and $214 billion from losing funds, in the 12 months ended Jan. 31, 2017.
The outflows from winning funds are concentrated mainly in U.S. equity funds, especially large-growth, though some international equity and allocation funds also got hit. On the other hand, winning active bond funds took in cash.
The picture normalizes when we look over the past three years, though. As shown, winning funds took in about $425 billion in net assets over that span, though it’s worth noting that more than half of that went to bond funds. Also striking: Investors pulled more than $1 trillion from lagging active funds in the past three years.