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Do Active Funds Have a Future?

The question is serious.

John Rekenthaler, 08/06/2014

Fading Fast
Do active funds have a future? To cut to the chase: apparently not much. 

The post-2008 pursuit of index funds was no mere infatuation. Passive investing is now the mainstream approach. Below are the net sales over the past 12 months for all exchange-traded funds, passive mutual funds, and active mutual funds. The tally: 68% passive, 32% active. 

The story gets worse upon closer examination.

To start, target-date funds account for $30 billion of active funds' inflows; remove that amount, and active management took in barely more than $100 billion. Target-date sales are in a sense accidental, as target-date funds sell into a captive audience that must purchase funds from the target-date family that is placed in front of it. After all, it’s not as if those investors deliberately chose active fund management. And that happy accident is dissipating. After a slow start, passive investing is taking over target-date investing, with Vanguard gaining market share and several other target-date fund managers adding passive options. 

Indeed, aside from alternative investing, there’s no place remaining where active managers are safe from passive competition. 

To be sure, the story looks terrific for international-stock active management. Over the past 12 months, actively run international mutual funds have outsold their passive competitors by a 3:1 margin. (The gap, of course, narrows when ETF sales are considered.) Those assets have been critical for active management. Without international and target-date funds, active funds wouldn’t have picked up a dime of net new money this past year. 

is vice president of research for Morningstar.

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