Morningstar: Active Management’s Secular Decline

Passive management is infiltrating untraditional arenas and no active manager is safe, Morningstar has said.
Reported by Featured Author

Active management has become peripheral across various asset classes, trailing behind the popularity of passive indexing, according to a Morningstar columnist and researcher.

John Rekenthaler stated in a post that indices are dominating fund sales. Some 68%—or $284 billion—of net US mutual fund sales for the 2014 fiscal year were exchange-traded funds and passive while only 32% were active funds.

“The post-2008 pursuit of index funds was no mere infatuation,” Rekenthaler wrote. “Passive investing is now the mainstream approach.” 

The report argued that target-date funds made up a significant portion of active funds’ inflows, but managers could expect sales to slip as plan sponsors explore passive options to retirement planning.

“Target-date sales are in a sense accidental, as target-date funds sell into a captive audience that must purchase funds from the target-date family that is placed in front of it,” Rekenthaler said. “After all, it’s not as if those investors deliberately chose active fund management.” 

“The post-2008 pursuit of index funds was no mere infatuation. Passive investing is now the mainstream approach.”    –Morningstar’s John Rekenthaler.

Non-US equities strategies also contributed to active funds’ inflows, the author found, outselling its passive counterparts by almost three times.

However, while asset flows have been propped by the traditional notion that international exposures should be active, indices’ outperformance could challenge managers.

According to Morningstar, the Vanguard Total International Stock Index and Emerging Markets Stock Index were in the top 20% of their groups so far in 2014, “comfortably ahead of most surviving international-stock funds over the trailing 10 years.”

The bad news continues for active managers, Rekenthaler said, as investors are continually turning to passive management beyond individual asset classes. The Vanguard Balanced Index performed in the top quartile of its category for the decade, opening up indices as an attractive option in areas that were not traditionally indexed.

Even alternative active management could be throated, according to the columnist. Only long-short equity funds have posted favorable returns at 8.1% annualized over the last five years.

“Alternatives may be the new kids on the investment block, but they are decidedly old school in their marketing: active management, high fees, and the argument that investors get what they pay for,” Rekenthaler wrote. “Except that they haven’t.” 

Related Content: How to Capture Alpha through Beta, Which Active Managers Actually Outperform Benchmarks?