A new review of investment flow data has found positive flows for more than 220 active fund families over the past two calendar years
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Given all the criticisms and black marks against active management as a whole, it’s easy to forget that not all active funds are underperformers and asset bleeders. In fact, a new review of investment flow data from Morningstar has found positive flows for more than 220 active fund families over the past two calendar years.
So how does that jive with reports of US$586 billion in cumulative net outflows experienced by active funds in 2015 and 2016? It all comes down to costs. Low-cost active funds — those in the lowest quintile of expense ratios for each respective mutual fund and ETF category — actually attracted US$41 billion of net inflow, reported Financial Advisor IQ.
Vanguard’s 96 actively managed funds, for instance, attracted US$286.9 billion in positive flows with their average asset-weighted expense ratio of 0.2%. That’s compared to 0.75% for the average active fund in the industry, according to Morningstar data. Other winning active fund providers include Edward Jones, AQR, DoubleLine, Metropolitan West, and Baird.
“Investors aren’t dumping active funds wholesale – they’re just being very picky,” said Morningstar analyst Patricia Oey. She further suggested that the preference for lower costs isn’t just a fad. “[P]assives have been in a secular growth pattern over the past 10 years that has included both bull and bear market conditions.”
The portfolio management team at US independent advisory firm Grimes & Co. —which manages almost US$2 billion — mixes both passive and active funds into client allocations, according to Chief Investment Officer Kevin Grimes. He told Financial Advisor IQ that they use an “expense budget” research process to pick funds, carefully scrutinizing funds to find the ones with active management worth paying more for.
Alternative investments, according to Grimes, are generally worth heftier fees, though his firm won’t pay more than 2% in expense ratios. As for bond funds, he’s inclined to tap active managers for high-yield debt, bank loans, and wide-ranging strategic income funds, for which his advisors won’t recommend any manager that charges more than 0.9%.
“[L]ow-cost managers who can drive consistent alpha over time and whose strategies aren’t easily replicated by a computer are going to have real staying power,” he said.
Jason Gunkel, an advisor at Syverson Strege and Co. — another US firm, which manages US$425 million — agrees. “As fees keep dropping we’re looking at the market opportunistically,” he said. “We’re being even more aggressive about weeding out high-priced active funds and emphasizing low-cost managers.”
According to Gunkel, he and his colleagues are finding the best value-for-expense from managers picking bonds and alternative assets, particularly low-cost active managers in long-short and broad-based asset allocation funds.
“In equities, the rise of fundamental indexing and low volatility passive funds makes it hard for us to justify to our clients paying up for active managers,” he said. “So we see the biggest advantage for using active funds over the next several years coming in the fixed-income arena.”
For more of Wealth Professional's latest industry news, click here.
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Investors call for hedge-fund fee rethink
Passive funds lay siege to last active-management stronghold
So how does that jive with reports of US$586 billion in cumulative net outflows experienced by active funds in 2015 and 2016? It all comes down to costs. Low-cost active funds — those in the lowest quintile of expense ratios for each respective mutual fund and ETF category — actually attracted US$41 billion of net inflow, reported Financial Advisor IQ.
Vanguard’s 96 actively managed funds, for instance, attracted US$286.9 billion in positive flows with their average asset-weighted expense ratio of 0.2%. That’s compared to 0.75% for the average active fund in the industry, according to Morningstar data. Other winning active fund providers include Edward Jones, AQR, DoubleLine, Metropolitan West, and Baird.
“Investors aren’t dumping active funds wholesale – they’re just being very picky,” said Morningstar analyst Patricia Oey. She further suggested that the preference for lower costs isn’t just a fad. “[P]assives have been in a secular growth pattern over the past 10 years that has included both bull and bear market conditions.”
The portfolio management team at US independent advisory firm Grimes & Co. —which manages almost US$2 billion — mixes both passive and active funds into client allocations, according to Chief Investment Officer Kevin Grimes. He told Financial Advisor IQ that they use an “expense budget” research process to pick funds, carefully scrutinizing funds to find the ones with active management worth paying more for.
Alternative investments, according to Grimes, are generally worth heftier fees, though his firm won’t pay more than 2% in expense ratios. As for bond funds, he’s inclined to tap active managers for high-yield debt, bank loans, and wide-ranging strategic income funds, for which his advisors won’t recommend any manager that charges more than 0.9%.
“[L]ow-cost managers who can drive consistent alpha over time and whose strategies aren’t easily replicated by a computer are going to have real staying power,” he said.
Jason Gunkel, an advisor at Syverson Strege and Co. — another US firm, which manages US$425 million — agrees. “As fees keep dropping we’re looking at the market opportunistically,” he said. “We’re being even more aggressive about weeding out high-priced active funds and emphasizing low-cost managers.”
According to Gunkel, he and his colleagues are finding the best value-for-expense from managers picking bonds and alternative assets, particularly low-cost active managers in long-short and broad-based asset allocation funds.
“In equities, the rise of fundamental indexing and low volatility passive funds makes it hard for us to justify to our clients paying up for active managers,” he said. “So we see the biggest advantage for using active funds over the next several years coming in the fixed-income arena.”
For more of Wealth Professional's latest industry news, click here.
Related stories:
Investors call for hedge-fund fee rethink
Passive funds lay siege to last active-management stronghold
