Passive Funds Set a New High-Water Mark in 2016

Investors closed out 2016 by pumping a fresh monthly record of new cash into passively managed U.S. equity funds in December, capping a year that saw a widening gap between the fortunes of actively managed funds and their index-tracking competitors across most major investment categories.

Broadly, investors ended the year favoring stock funds over bond funds, marking a shift from the first 10 months of 2016 where flows had strongly favored bonds over stocks. This changing dynamic came amid growing optimism about the U.S. economy and expectations for continued rising interest rates and inflation.

But this trend toward stocks did little to help the overall fortunes of active managers. Among U.S. equity funds, passively managed funds--led by Vanguard's offerings--took in $50.8 billion during December, which topped the previous monthly record of $41.9 billion set in November.

Meanwhile, investors pulled $23 billion out of actively managed U.S. equity funds, extending the group's streak of outflows to 33 consecutive months.

During 2016, passive fund strategies in the United States took in a record $504.8 billion, far outpacing the previous high-water mark of $422.7 billion set in 2014 and 2015's tally of $418.5 billion. By way of contrast, last year's inflows for passive funds were double the group's take in 2007.

Other notable asset-flow trends include:

• While much of the attention has been on the active/passive divide in flows, the final months of 2016 saw a sharp shift in investor preferences to U.S. stocks and against bonds.
• Meanwhile, even as the number of alternative-investment strategies continues to expand, investors appeared to lose interest in the group during 2016 amid flagging performance and a growing investor preference for lower-fee investments.
• Taking a deeper dive into the Morningstar Category trends for December, bank-loan funds, which can help shield investors against the impact of rising rates, saw inflows of $6.0 billion on the active side and $1.4 billion for passive strategies, continuing a recent trend of rising interest in these funds.

Access the full Morningstar U.S. Asset Flows Update here.