Despite the U.S. seeing a period of relatively strong economic growth in 2018, net outflows from long-term U.S. active mutual funds reached record levels during the year, exceeding even those of 2008, said a report Thursday from Moody's Investors Service.
Citing data from the Investment Company Institute, Moody's report (registration required) said an estimated $369 billion flowed out of long-term U.S. active mutual funds in 2018, vs. net inflows of $72 billion in 2017. By comparison, outflows were a little more than $200 billion in 2008.
Stephen Tu, vice president and senior credit officer at Moody's, said in a phone interview that passive fund flows had been expected to suffer when the market went down, but that's not what happened. When the market experienced a downturn in February, it should have provided significant opportunities for active managers to outperform passive. However, the opposite happened.
"It was a record year of outflows happening within a relatively strong economic environment, which is rare," he said.
Mr. Tu said this indicated that passive offerings are proving themselves to be more efficient investment vehicles for asset owners, and that this is a "credit-negative development" for "the large majority of traditional asset managers." He added that this leads him to expect passive management to continue to grow in popularity among investors and consolidation within the industry to continue.
That, and there being generally "more awareness of (passive investing) steadily increasing within the marketplace, and we have Jack Bogle to thank for that," Mr. Tu added. Mr. Bogle, founder of The Vanguard Group, died Wednesday.
The report also pointed out a flaw in the argument that active managers have often used against passive investing: that the perks of investing in passive funds "only apply to highly liquid and competitive markets, notably the U.S. equity market." But due to outperformance within active management being a zero-sum game, "the greater efficiency of lower-cost passive funds applies to all public markets, regardless of liquidity, trading volumes or asset class," the report said. "Flow dynamics in 2018 could be a sign that the passive technological trend is now also spreading into fixed income."
