2019 may be the tipping point for the investing industry

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.

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

BlackRock

Fidelity

American Funds