Passive investing picking up again

Inflows are coming back from a slowdown last year, but the benefit from growing assets is shrinking

Passive investing picking up again

In 2018, passive-indexing fund products stumbled from their steady years-long march as net inflows saw a year-on-year slowdown. But they appear to be on the path to recovery in 2019.

Citing data from Morningstar, The Wall Street Journal reported that net inflows into market-tracking funds fell 30% on an annual basis last year. That slowdown proved hard to ignore for analysts watching BlackRock, Vanguard, and other large passive managers going through what looked like their first major challenge. Questions were raised over whether a major growth engine for the firms was losing steam.

But new Morningstar data showed that net inflows into index-tracking US mutual funds and ETFs rose by around 50% in the second quarter this year compared to a year earlier. “For the year ended June 30, passive net inflows increased by about 1% after contracting in the year-ago period,” the Journal said.

Speaking to the news outlet, Morningstar analyst Kevin McDevitt said that quarter-to-quarter inflows have seen some swings, but overall passive flows have been very strong the past three years.

Looking at data for Vanguard shows a fall in the firm’s full-year net inflows between 2018 and 2017. But its overall second-quarter net inflows this year are nearly 40% up from the same period a year ago,  amounting to US$57.3 billion this year; US$54.2 billion in net inflows went into index strategies in the second quarter, 35% more compared to a year earlier.

Net inflows for the year ended June 30 amounted to US$267.3 billion for funds that track U.S. stock-market indexes, up by more than 60% compared to the same time last year. Meanwhile, actively managed U.S. equity funds saw net outflows of more than 3%, continuing a quarterly streak of losses that’s persisted since mid-2014.

“Net outflows from actively managed funds in the second quarter of 2019 roughly doubled from the year-ago period,” the Journal said. “In the year ended in June, their net outflows deepened more than 10-fold.”

One potential challenge for passive managers, which is also putting collateral pressure on active players, is the rise of low-cost investing. Firms in different corners of the industry have been firing shots in an ongoing fee war to attract investors’ business and take market share.

“If flows are good but you’re charging less, that’s a hard thing for asset managers to outrun,” said Edward Jones analyst Kyle Sanders.

To boost profits, active and passive managers alike have been pushing more aggressively into more complex and lucrative strategies. Others have also started to offer more funds that include longer lockup periods for investors’ cash.


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