Market pressures add to US active mutual fund woes

Sales of active US mutual funds suffered in 2022, as investors continued to demand cheaper products while inflation soared and the Federal Reserve continued to raise rates.

Investors pulled $879bn out of active mutual funds during the first 11 months of 2022, according to data from Morningstar Direct. Assets in these funds plummeted 18 per cent from a year ago, to $12.2tn as of November 30, the database shows, due to =investor redemptions and market depreciation.

Passive mutual funds, meanwhile, recorded $51.6bn in net inflows during the same period, according to the data provider. The funds had $4.9tn in assets, down 10 per cent year on year.

Investors looked for safe havens during the volatile market, including cash and money market funds, said Brendan Powers, associate director at Cerulli Associates. They also sought cheaper vehicles, such as passive ETFs, he said.

Investors piled $24.8bn into money funds during the third quarter, and another $69.9bn in October and November, according to Morningstar’s database. They also put $468.6bn into passive ETFs during the first 11 months of 2022.

Active mutual funds have posted consecutive monthly net outflows since October 2021, according to Morningstar data. Passive mutual funds, meanwhile, collected net inflows during all but five of those months.

Typically, when equities suffer in a downturn, investors get conservative and move their money into fixed income, said Jeff Tjornehoj, senior director of fund insights at Broadridge. But last year, fixed-income strategies faced strong headwinds because of inflation and high interest rates, he added.

“Investors [last] year were hit by a double whammy of declining equity markets and poor performance of fixed income, which led to massive outflows from bond funds,” Tjornehoj said.

Bond mutual funds had net outflows of $483.3bn in the first 11 months of 2022, according to Morningstar, and equity funds bled $294.3bn.

Alternative strategies, meanwhile, collected net inflows of $16bn during the period — the most out of all categories, the database shows. The funds had $142.2bn in assets as of the end of November.

Many firms have been focusing their efforts on building out their ETF lines in order to meet demand for such products, Tjornehoj said. Active strategies are expected to grow at a similar pace in 2023, or even pick up speed, he said.

Providers launched more than 400 ETFs in 2022, according to ETF.com data, including at least 255 active ones.

Some firms, such as AllianceBernstein and Matthews Asia, entered the ETF space last year by launching new products.

Others, such as JPMorgan Asset Management, converted existing mutual funds into ETFs.

Mutual fund converts are often able to offer the same strategy at lower costs, said Neena Mishra, director of ETFs for Zacks Investment Research.

Some investors are moving their assets from active mutual funds into ETFs because they are disappointed about last year’s capital gains distributions, Mishra said.

Many actively managed mutual funds distributed capital gains in 2022, even though they were down significantly, and some investors are selling those mutual funds and buying similar ETFs, she said.

Vehicle proliferation is at play, too. Firms are making the same strategies available across a wider spectrum of vehicles, Cerulli’s Powers said. “So, while the client moves from the mutual fund to another vehicle, they may still be using the same strategy,” he said. “But it will just look like bigger outflows from the mutual fund.”

In addition, many investors are building portfolios that no longer rely on only active strategies, Powers said. Advisers, for example, are leveraging index ETFs to help keep their overall portfolio costs low.

Investors are not abandoning active management altogether, Powers noted. Rather, they are using it in areas or asset classes where they feel there is an advantage or there’s less information available, including taxable bonds, he said.