Listless inflows dim hopes of revival for long-suffering active funds

US active asset managers are getting left behind as investors tiptoe back into the markets via index tracking funds.

Active mutual funds experienced outflows of more than $50bn in the first three months of the year, according to Morningstar Direct, hurting large asset managers such as Capital Group, T Rowe Price and Franklin Templeton. Instead, investors are focusing on strategies that track an index over those that select stocks, particularly exchange traded funds.

Even for top active managers, “the flows are not great, and while the management teams are all trying to lay out a brighter side, it is hard to see a credible path to meaningful improvement in the short term”, said Brennan Hawken, a UBS research analyst who covers the sector.

Flows into active managers have been lethargic for so long that “it’s more extraordinary to talk about periods where flows haven’t been weak in recent years”, Hawken said.

Continued outflows have dimmed hopes that two years of market volatility would lead to a renaissance for stock and bond pickers in 2024, even though the money flowing out of active mutual funds is the lowest quarterly total since late 2021. Active mutual funds have posted negative overall monthly flows for 30 consecutive months, losing nearly $1.7tn to investor withdrawals in that time, according to data from Morningstar.

Despite active management’s continued pain, investment managers were keen to present a brighter picture for their businesses as they reported first-quarter earnings over the past few weeks, pointing to bright spots for flows such as alternative strategies and ETFs.

The tepid run for active managers comes as they have been overtaken by passive mutual funds and ETFs for the first time. US mutual funds and ETFs brought in more than $188bn in the first three months of 2024, the most since August 2021, according to data from Morningstar.

“You can be in passive, you can be in ETFs, and you can be in both,” said Ryan Jackson, a manager research analyst with Morningstar. “You don’t have to sell both, but you can’t sell neither.”

While some passive investment groups have fared better — Vanguard had $70bn in net inflows in the year’s first quarter, more than double the year before, per Morningstar — others have struggled to sustain flows. BlackRock’s $76bn in net long-term flows for the first quarter of 2024 was its weakest result since early 2020 when the Covid-19 pandemic prompted massive withdrawals across the industry, and State Street Global Advisors had nearly $9bn in outflows over the same period, according to their most recent earnings reports.

Asset managers are also battling investor reticence to move out of cash products while interest rates remain high. Record inflows to money market funds have driven their combined assets to about $6tn as of April 24, according to the Investment Company Institute.

“With the monies that have moved into cash, there is a high probability that some of that will stay in cash for much longer than it should,” said Sinead Colton Grant, chief investment officer of BNY Mellon Wealth Management, at a recent roundtable discussion. While BNY Mellon had total net inflows of $17bn for the quarter, they were countered by $20bn outflows from active equities and index funds.

After active manager T Rowe Price had the worst year for flows in its history in 2023, with more than $80bn in net outflows, the $1.4tn manager said this negative momentum was slowing down, with $8bn in first quarter outflows. T Rowe now expects flows to turn positive in 2024.

“We have higher conviction now that our outflows this year will be substantially lower than they were last year,” said chief executive Rob Sharps.

Active house Franklin Templeton, with $1.4tn under management, experienced net outflows in equities of $5.3bn for the quarter, while net inflows across asset classes were just $6.9bn.

Analysts said the tepid flows reported by top managers were all the more concerning, given that the first quarter of the year usually marks the strongest for flows in the entire year, as the contribution limits reset for US retirement plans such as a 401(k).

Franklin Templeton is pinning much of its hopes for future new money on its alternatives business targeting high-net-worth investors. It has grown its assets through acquisitions in recent years.

“We think [alternatives] are not going away,” said Franklin Templeton chief executive Jenny Johnson on an earnings call on Monday. She also noted international markets were making up for some of the firm’s lacklustre US flows, particularly into its active ETFs, as well as the retirement channel. The group noted steady improvement in its “outflow rate and decay rate”.

Active ETFs — on which many active managers have pinned hopes for attracting new capital — have grown in popularity. These types of funds pulled in about 22 per cent of net ETF flows in March despite accounting for less than 7 per cent of the $8.9tn industry. Still, their recent inflows have been overshadowed by outflows from active mutual funds.

In the UK, asset managers also continue to report outflows from their actively managed funds, as investors turn to cheaper index trackers. Jupiter, a FTSE 250 fund manager, said net customer withdrawals in the first three months of the year amounted to £1.6bn — nearly 80 per cent more than the same period a year ago. The outflows partly stemmed from the company’s value equity funds, as one of its key managers prepares to depart.

Abrdn, another active fund manager in the UK that was ejected from the FTSE 100 last year, said net outflows from its equity funds amounted to £2.3bn in the first quarter, while its fixed income funds received modest inflows.

Man Group, the world’s largest listed hedge fund, experienced net outflows of $1.6bn in the first quarter, sending its share price down roughly 5 per cent on the day of its results last month.

At Amundi, Europe’s largest asset manager, its overall assets
under management grew 9.4 per cent year-on-year in the first quarter
to a record €2.1tn, boosted by about €17bn in net inflows across both
active and passive strategies. Janus Henderson reported $3bn in net first quarter outflows but managed to beat profit expectations.

Additional reporting by Brooke Masters, Costas Mourselas and Harriet Agnew

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