by Paul Lucas
Clients are turning their backs on actively managed funds as they refuse to pay inflated prices for services that don’t meet their expectations.
That’s the verdict of Randy Cass, CEO of Nest Wealth, reacting to statistics revealed by the Wall Street Journal
which highlighted the vast migration towards market-cloning funds during 2015.
According to Morningstar data, US$413.8billion entered index funds last year while investors simultaneously withdrew US$207.3billion away from US mutual funds and a further US$169billion was taken from funds that focus on individual stocks.
Overall, this represented the biggest ever outflow away from US equity funds – and Cass believes that the Canadian industry needs to take note of the changes.
“These are all strong and positive indications of investors taking a stand and expressing they are no longer willing to pay high fees for sub-par performance,” he said.
“Canadians need to stand up and take notice of these trends because there is likely no investor in the world that continues to pay more for less than the endangered Canadian saver.”
Nader Hamid meanwhile, portfolio manager for HollisWealth, ScotiaCapital, believes that the statistics may prove to be a positive for the industry.
“Today, clients are much more sophisticated and are more aware of their options,” he said. “This is a great thing for the industry as it will put pressure on the fund companies to reduce their fees (a big reason why many underperformed) as well as eliminate passive managers that are disguised as active managers.”
The exodus in the US occurred during a year in which actively managed open-end funds slipped by 2.2 per cent. Close to half of all actively managed funds actually out performed benchmarks (46.7 per cent) – that’s compared to just 26.9 per cent in the previous year.
However, according to Brad Jardine, president and senior financial advisor at the CIC Financial Group, the statistics may not be truly representative of the situation.
“These stats aren’t very helpful without factoring many aspects of client’s portfolios and real-life situations including ALL costs,” he said. “There will always be a flight to cost-savings and DIY investors even more so during volatile markets. Investors normally have a herd mentality and many are too emotional about their accounts.”
Many money managers in the USA – including the likes of MFS Investment Management, Franklin Resources and AllianceBernstein – are now attempting to regain market share with reports highlighting the advantages offered by bond selection and active stock.