Active Equity Fund Outflows Pick Up,Leave Asset Managers Vulnerable To Downturn


Tuesday, August 07, 2018 /10:50AM / Moody’s Investors Service

Outflows of dollars invested in US active equity mutual funds have accelerated in 2018 and are now at their highest year-to-date rate. According to ICI data on long-term domestic equity funds, which we use as a proxy for active mutual funds, outflows from active equity funds totaled $129.11 billion as of 31 July, up from $99.88 billion a year earlier and $110.62 billion for the similar 2016 period (see Exhibit 1). This deterioration in market flows is credit negative for active US equity managers such as GAMCO Investors, Inc. (Ba1 stable), BrightSphere Investment Group plc (Baa2 stable) and Janus Henderson Group Plc (Baa2 positive).

 Proshare Nigeria Pvt. Ltd.

Rising equity markets have masked the underlying weakness of many traditional asset manager business models, which have come to rely on asset market appreciation in recent years as flows into higher-fee funds remain elusive. As equity market values have risen over the past decade, asset managers have experienced stable cash flow generation. However the lack of organic AUM growth at a time when asset markets are at historical highs is a cause for concern.

Additionally, the continued decline in fee trends is worrisome for asset managers. The average active equity fee net expense ratio has declined below 60 basis points, as calculated by ICI, and active bond funds' expense ratios have declined below 50 basis points.

Because investors’ shift toward passive products and the continued net expense ratio deterioration of high-fee products are trends that appear to be accelerating, asset managers are more susceptible to equity market volatility and elevated valuations.

Proshare Nigeria Pvt. Ltd.

The forces causing the shift of assets from higher-fee active products to lower-fee passive products persist. We view the movement of assets into lower-fee passive products as a low-tech form of technology adoption. That is, the underlying causes of this shift are independent of macroeconomic or financial market trends. Instead, this dynamic is largely attributable to shifting consumer preferences for transparent, efficient and lower-cost products, similar to the way a particular technology or innovation diffuses within a marketplace.

Although some market participants have argued that equity volatility would provide the need for investors to hold active funds, active managers did not generally outperform during the equity market volatility of first-quarter 2018. Instead, the performance of active funds was in line with historical behavior. In the first half of 2018, following the market turbulence in the first quarter, JPMorgan estimated that only 41% of active fund managers surpassed their benchmark year to date, compared with 52% a year earlier.




Related News


1.       FOMC Meeting of July 31 and August 1, 2018: Federal Reserve Issues Statement

2.      Bank of England’s Monetary Policy Committee Voted Unanimously to Raise Bank Rate to 0.75%

3.      Run-Up to U.S. Recession Is Good Time for Emerging Markets

4.      Trade War Escalation Would Knock 0.4% off World Growth

5.      Barclays Africa Group Limited Changes Name to Absa Group Limited

6.      Tariff Risk to US, Chinese Corporates Limited But Rising

7.      The Future Relationship Between The United Kingdom And The EU

8.     Financial Stability Board Issues Statement on Reforms to Interest Rate Benchmarks

9.      Ethiopia: How to Dent Poverty

10.  The Fed States How It Will No Longer Subject Smaller, Less Complex Banking Firms To Certain Regulati

11.   Could A Trade War Derail Global Growth?

12.  From Protectionism To Prosperity

13.  Risks to Global Growth Rise as Trade Tensions Escalate

14.  The End Of Global Britain

15.   Too Soon to Call China''s RRR Cut a Clear Sign of Easing

16.  The UK Financial Conduct Authority's Role In Preparing For Brexit

17.   Bank of Japan Asset Purchases Continue to Slow Sharply

18.  MSCI Includes Saudi Arabia Index in MSCI Emerging Market Index and Reclassifies Argentina

19.  How Qatar Weathered The Gulf Crisis

Related News