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2019 may be the tipping point for the investing industry

Funds that passively track indexes will outnumber active managers

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In 2018, BlackRock saw passive inflows of US$108 billion till November, with the pace picking up that month when it attracted more than US$25 billion to its US ETFs - a record monthly haul for it.

Boston

A LINE between active and passive funds is set to cross this year.

When it comes to mutual funds and exchange-traded funds (ETFs) that buy US stocks, those that passively track indexes now hold 48 per cent of assets, according to estimates from Morningstar Inc. They will top 50 per cent in 2019 if the current trend holds.

That would mark a tipping point for the investing industry, which for decades built its stature on the prowess of stock-and-bond pickers seeking to beat the markets.

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In recent years, investors have ditched those active managers in favour of ETFs and other index funds, which typically offer a way to get market exposure at far lower fees.

The shift continued in 2018 even as the benchmarks the passive funds follow wobbled and fell.

"I'd expect the trend from active to passive to continue," said Benjamin Phillips, a consultant with Casey Quirk. "It's not simply investors grabbing the tail of the bull - it's a secular shift in how advisers are building portfolios."

Passively managed US stock funds increased their market share to 48.1 per cent as at Nov 30 from 45.7 per cent a year earlier, Morningstar data show.

Beyond US equities, the power balance tilted broadly to index funds in 2018.

The move was less pronounced in bonds, where money managers have more consistently outperformed their benchmarks.

Investors pulled an estimated US$150 billion in the first 11 months of 2018 from actively run funds across asset classes, excluding money markets. In contrast, they added US$395 billion to passive funds, according to Morningstar.

The divide was especially dramatic in November as market volatility picked up. Active funds lost more than US$50 billion to redemptions while index funds took in a similar amount.

Mutual fund outflows could accelerate if investors cashing out amid recent volatility choose to use ETFs when they reinvest.

"Active mutual fund investors have a history of panicking when things get tough," said Eric Balchunas, senior analyst with Bloomberg Intelligence. "You tend to see passive gain market share in difficult environments."

It was not all positive for passive funds in 2018. While they added market share, their flows will fall well short of 2017's record of almost US$700 billion in contributions.

Here is a look at how the biggest fund companies are faring:

Vanguard Group

  • The company, which started the first index mutual fund for individual investors in 1976, brought in an estimated US$168 billion till November in passive funds, Morningstar estimates show. That compares with US$329 billion for all of 2017.
  • The Valley Forge, Pennsylvania-based firm is feeling the impact of diminished flows to ETFs, which are on pace to attract just over US$300 billion industrywide, versus US$467 billion in 2017.
  • Still, Vanguard is likely to post higher 2018 inflows than any of its rivals.

BlackRock

  • The New York-based firm saw passive inflows of US$108 billion through November, according to Morningstar's estimate. In 2017, they were US$213 billion. The pace picked up in November when the firm attracted more than US$25 billion to its US ETFs - a record monthly haul for the company.
  • The world's largest ETF provider has seen the steepest drop in some of its heavily traded funds that are most sensitive to stock movements.

Fidelity

  • The firm saw an increase to its passive products in 2018, gathering US$64 billion till November, as estimated by Morningstar, compared with US$52 billion for 2017.
  • In August, the Boston-based fund giant introduced the industry's first zero-fee index mutual funds and cut prices across much of its passive line-up. Explaining her firm's newfound commitment to passive products, chief executive officer Abigail Johnson said in an October interview: "If we decide to do something, I want to be really good at it."
  • On the active side, the firm saw US$17 billion in outflows, Morningstar estimated. Yet that is good news since altogether Fidelity's stock and bond pickers could end up with the smallest annual outflow since 2014.

American Funds

  • The Los Angeles company continues to buck the trend by attracting money to its active funds. It added US$21.4 billion till November, ahead of last year's total of US$16.6 billion, according to Morningstar.
  • Most of the money has flowed to the company's target-date retirement funds, which have been gaining market share in recent years. BLOOMBERG