Passive Trend Less Pronounced in Bonds

Tim Strauts: In today's charts, we're going to look at active versus passive fund flows for U.S. stock and taxable-bond funds over the last two years. In the first chart, looking at U.S. stock funds using a three-month moving average, you can see that passive funds have had strong inflows over every monthly period over the last two years and active funds have had flat to negative flows over the same period. In the last six months, flows have been declining at a faster rate. With poor performance of active funds over the last several years, investors have clearly decided that index funds offer the better value with their lower costs and consistent performance.

Moving over to taxable bonds, passive funds have had relatively consistent inflows over the last two years. But active bond funds have had highly volatile flows--with strong flows between January and May 2013, outflows between June and January 2014, moderate inflows between February and July 2014, and then over the last three months, strong outflows, which is primarily due to outflows from PIMCO Total Return (PTTRX). The best active bond managers have shown an ability to outperform their passive benchmarks, so they're still receiving the lion's share of the flows.

As an investor, you don't need to be 100% active or 100% passive with your allocation. But what this data does show is that, in the U.S. equity space, investors are clearly choosing passive investments. But for fixed income, people are still finding value in active management.