unstable

Yet Another Sign that the Tipping Point Has Arrived

unstable

We have spoken several times (see here and here) about the tipping point in the long-term migration from active to passive management. While perusing InvestmentNews, we encountered this article about investors shunning stock pickers in favor of index funds which have been dominating fund flows for the past twelve months. In fact, of the top 25 funds ranked by Morningstar (based on 12-month fund flows through 2/28/2015), not one is an active U.S. equity fund. The only active equity fund to make the list is an international fund. The other six active funds are bond funds, some of which appear to have benefitted from the severe outflows suffered by Pimco Total Return, which were further exacerbated by the departure of Bill Gross. The fund that Gross now manages at Janus, however, is not one of them. In fact, that fund just had its first monthly outflow since Gross took up management less than six months ago. While patience may be a virtue, it is apparently not one possessed by manager pickers. In the chart below, we summarize the top ten funds by fund flows. You will notice it is dominated by the Vanguard Group which recently topped $3 trillion in assets. Although Vanguard is still the fastest growing mutual fund family in dollar terms, the fastest growing in percentage terms is Dimensional Fund Advisors, as we pointed out in this article.

The InvestmentNews article states that over the past six years, actively managed stock funds have suffered withdrawals of $120 billion while investors have poured $219 billion into comparable index funds. Adding insult to injury, all but two of the bottom 25 funds (which were not shown in the article) are actively managed.  The only categories where active has attracted more funds than passive are alternative investments, municipal bonds, and target-date funds. In all three categories, there are relatively few index fund offerings.

At Index Fund Advisors, we will continue to keep an eye on this important trend in the investment world, and we will continue to do our part to educate investors to choose wisely among the myriad of investment options.