Mutual Funds Can’t Turn The Tide Vs EFTs


Mutual funds had another rough month. Contrary to the during November, actively managed funds saw outflows of $34.9 billion combined. According to a montly update by research firm Morningstar, funds dedicated to US Equity had an especially rough month. This asset class witnessed outflows of $19.7 billion, bringing the total decline of assets for 2015 to a staggering $163.1 billion. Part of this went to passive instruments, but the $106.8 billion inflows there are not covering the full amount.

Where did the rest of the money go? Part of it may have went to International Equity. Despite a somewhat sluggish November with outflows of $4.2 billion, the category is up $33.4 billion for the year. A similar development is witnessed in passive instruments with inflows of $174.8 billion in 2015. The strong numbers may be the result of the stimulus measures announced by the European Central Bank earlier this year. As a result of diverging paths in monetary policy, with the US Federal Reserve looking for normalization and ECB for more stimulus, asset managers are switching their bets across the ocean in favor of Europe. Also Japan is witnessing more inflows.

A distinct switch is underway in bonds. Mutual funds suffered from outflows of $59.9 billion this year, where passive instruments welcomed $101.2 billion of new investors’ money. Still, there’s more than three times as much invested in mutual funds focused on bonds than in ETFs: $ 2.8 trillion vs $774 billion. But one subcategory is suffering in active as well as passive strategies: high-yield. In the early weeks of December, in the run up for the FOMC lift-off, the market was surprised by the announcement of Third Avenue Management that it will liquidate its high-yield bond fund. Investors are not allowed to redeem their shares currently. The actively managed fund holds assets of $942 million as at November 30. But also the popular high-yield ETFs SPDR Barclays High Yield Bond ETF (JNK) and iShares iBoxx $ High Yield Corporate Bond ETF (HYG) saw outflows, next to a sharp decline. Currently, JNK stands at a 2015 yield of -6.9% and HYG at -5.3%. If a broader asset category is no longer preferable or even in trouble, active and passive instruments suffer.

A category in mutual funds that is in favor, are socially responsible funds. Although being relatively small, this category, often referred to as ESG-investing, has managed to increase its net assets on a 12-month rolling basis. Morningstar has 75 funds categorized under this category, compared to 2,210. To be sure, not all of these are traded over an exchange. There are a couple of ESG ETFs on the market. But surprisingly, these ETFs perform worse than their passive counterparts.

Measured in AUM invested in mutual funds, American Funds is the largest manager with $1,198 billion of AUM. However, the firm doesn’t offer passive instruments and therefore Vanguard and Fidelity Investments are the largest in the industry. Fidelity is second in mutual funds with AUM of $1,074 billion, down $8.4 billion this year. Vanguard is third with $790 billion AUM. However, Vanguard is still market leader in passive instruments with $2.1 trillion AUM. A remarkable loser in the mutual fund industry is PIMCO. The former employer of star fixed income-manager Bill Gross saw an outflow of $105.4 billion in 2015. Are there winners this year, with the industry losing $175 billion? Yes, and JP Morgan is the top gainer with inflows of $18.0. But nevertheless, active management took a hard blow and the momentum lies in passive management.