Horse Racing

Out of the Shadows: Passive Assets Catch Active

Horse Racing

For years, IFA.com has been chronicling the rise of index investing. In the past, we've relayed data showing that by late 2018 investment assets in U.S. passively managed large-cap stock funds had surpassed those held by active competitors. 

But an even bigger milestone has taken place. Heading into May 2019, according to independent funds research firm Morningstar, for the first time passive domestic fund assets across all equity categories had pulled virtually even with actively managed fund assets.

By its analysis, actively managed U.S. stock funds -- i.e., open-end mutual funds and exchange-traded funds -- ended April with a market share of 50.04%. At the same time, passively managed domestic-focused stock funds finished at 49.96%. In dollar terms, the count had active stock funds with $4.311 trillion in assets and passive domestic funds at $4.305 trillion. 

Such a negligible difference (0.08 of a percentage point) rounds to a statistical tie in a multi-trillion dollar marketplace. "Passive U.S. equity fund assets essentially reached parity with active U.S. equity funds at $4.3 trillion each," Morningstar's researchers wrote about such a seachange. They added: "The May numbers will almost certainly show passive U.S. equity funds' total assets eclipsing active funds." 

 

This development "isn't a surprise given the overwhelming outflows from active U.S. equity funds to passive options over the past 10 years," the report pointed out. Its authors noted that active fund managers controlled about 75% of the market a decade ago.

"And at that point we were just entering one of the longest bull markets in U.S. history," Morningstar's analysts observed. "If you had known this, would you have guessed that active U.S. equity funds were on track to lose $1.26 trillion in outflows?"

Every month, Morningstar collects data on how much in assets each U.S.-based fund takes in. It also analyzes money leaving each fund during these periods. That net amount – how much "inflow" or "outflow" occurs – is recorded and then broken down according to asset classification.

For example, a fund might be categorized as mainly buying small-cap stocks while another lands in the large-cap group. In fixed-income, this data also separates fund investment styles by asset classes such as municipal and taxable bond funds.

In the graphic below, we've dug into Morningstar's database to chart percentage changes in flows during the last full calendar year leading up to this historic period. Besides looking at broad and distinct categories of open-end mutual funds, we've also separated flow numbers between actively managed and passively run funds.

While this movement into indexing is long-term in nature, our idea here is to illustrate how much of an annual percentage change took place by investors favoring one type of fund over the other by the end of 2018 (as compared to a year earlier).

Percentage Change in Net Asset Flow by Broad Asset Class

Investors who've been working with IFA's advisors know our investment committee detests following short-term trends. Indeed, Mark Hebner started this fee-only wealth management firm long before indexing became so popular.

From day one, everyone who works at IFA has been required to act as a fiduciary. That means we must put client interests first, not what might make the most money for our independent RIA. In 1999, when we first opened our doors, that primary sense of purpose led Hebner to conclude that investing in low-cost and passively managed funds gave our clients the best opportunity to reach their financial goals.

At IFA.com, we've built a robust and free online resource of education-minded articles, videos and graphics. These are all offered without any paywall to help highlight leading research and statistically advanced evidence about passively managed fund investing.