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Tough Times Continue for Stock Picking Fund Managers

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In two recent Wall Street Journal articles1, Kirsten Grind detailed the continuing ascent of passive funds over active funds. Her first article began by noting Vanguard’s record in-flows which have brought its assets under management to almost $3 trillion. She partly attributed these in-flows to Warren Buffet’s specific endorsement of Vanguard index funds in his most recent letter to Berkshire Hathaway shareholders. The specific fund mentioned by Mr. Buffett (the S&P 500) garnered $5.5 billion in assets in the subsequent five months, about triple compared to the same period last year. When the Oracle of Omaha talks, people listen. Vanguard’s founder, Jack Bogle, expressed his gratitude by deeming Mr. Buffett “the second best salesman at Vanguard.”

Another milestone recently reached by Vanguard is that its Total Stock Market Index Fund surpassed the PIMCO Total Return Fund to become the largest mutual fund in the world, with just under $300 billion in assets. We recently documented the continued outflows that have plagued Bill Gross’s Total Return Fund here

Regarding the difficult times faced by active managers, Ms. Grind cites Morningstar data showing that in the last seven full calendar years, only 2009 saw higher fund flows to actively managed funds. For 2014 through the end of July, the passive flows have been more than double the active flows.  However, when limited to equity funds, the ratio becomes seven-to-one. Lastly, while active funds had negative flows in two calendar years (2008 and 2011), passive funds had positive flows in all years.

While Vanguard had the highest flows in terms of dollars, the nod for highest percentage growth goes to Dimensional Fund Advisors (DFA), the subject of Ms. Grind’s second article. With $380 billion in assets under management, DFA received $25.9 billion of mutual fund in-flows for the twelve months ending June 2014. The two bar charts below show how DFA stacks up against the nine other largest mutual fund companies:


Since Morningstar technically does not classify the DFA funds as index funds, it was very gratifying for us to see Morningstar consider them as passive. According to Ms. Grind, Morningstar deems them to be “proprietary mutual funds that operate like index funds because they are highly diversified, have low turnover, and are low cost.” Regarding DFA’s recent high growth, Ms. Grind obtained this statement from the co-CEO and co-CIO, Eduardo Repetto: “I think people have been a bit disappointed by stock picking so people are trying to move away from it.”

As we have documented in many articles such as this one, investors have good reason to be disappointed with their stock picking fund managers. If you would like to learn more about how IFA uses index funds for fiduciary wealth management, please give us a call at 888-643-3133.

1”Investors Pour Into Vanguard, Eschewing Stock Pickers” and “Alongside Vanguard, Dimensional Is Getting Inflows Too”, wsj.com, 8/21/2014.