Many studies have shown that it's difficult for active managers to consistently outperform their benchmark indexes. Recent data from Morningstar seems to show that investors are beginning to get that message.
At the end of August, long-term U.S. funds and exchange-traded funds held $13.85 trillion in assets.
Although slightly more than 71% of those assets were in portfolios using active management, Morningstar notes that growth of fund flows to actively managed assets was a mere 2% over the past year vs. 11% organic growth in flows to passive investment portfolios.
In two smaller fund categories, sector equity and commodities, passive assets have come close to or eclipsed active. In sector equity, passive funds hold 46% of assets. In commodities, indexing accounts for 64% of assets.
Heres how assets are flowing into and out of all long-term funds and eight fund categories. View the slideshow version here.
Source: Morningstar Direct Asset Flows, all data as of end of August, 2014.
ALL LONG TERM
Active: $126.37B
Passive: $345.00B
Total Assets
Active: $9.87T
Passive: $3.98T
Ratio of Active/Total Assets: 71%
U.S. EQUITY
U.S. Equity is a category that includes funds of large, mid-cap and small stocks in style groupings of growth, value and blend. The group also includes leveraged net long funds. During the year ended August, passive flows have trounced active.
1 Year Estimated Flows
Active: -$55.31B
Passive: $131.1B
Total Assets
Active: $3.66T
Passive: $2.13T
Ratio of Active/Total Assets: 63%
SECTOR EQUITY
Sector Equity includes 14 industry groupings from communications through utilities, as well as a miscellaneous sector. Over the past year, passive funds in this category added $43.1 billion vs. $17.7 billion for active.
1 Year Estimated Flows
Active: $17.69B
Passive: $43.15B
Total Assets
Active: $0.38T
Passive: $0.33T
Ratio of Active/Total Assets: 54%
INTERNATIONAL EQUITY
International Equity includes country- and region-specific funds as well as generalized foreign funds. The latter are split into large and small/mid sizes as well as into growth, value and blend styles. Passive strategies took in 52.4% of the past years net flow into this category, but active managers still hold 68.4% of assets.
1 Year Estimated Flows
Active: $95.75B
Passive: $105.51B
Total Assets
Active: $1.62T
Passive: $0.75T
Ratio of Active/Total Assets: 68%
ALLOCATION
The Allocation category includes descriptive sub-categories such as conservative, moderate and aggressive. It also includes target date funds and convertibles. Active funds dominate this category with 96% of assets and 94% of the past years flows.
1 Year Estimated Flows
Active: $47.33B
Passive: $3.03B
Total Assets
Active: $1.13T
Passive: $0.05T
Ratio of Active/Total Assets: 95%
TAXABLE BOND
The Taxable Bond fund category holds a wide range of fixed-income subgroups, including governments, corporates, high-yields and emerging-markets. Maturities range from long to ultrashort. Also in the category are preferred stock funds and bank loan portfolios. Passive flows were strong over the past year at $63.1 billion vs. active at a little less than $10 billion.
1 Year Estimated Flows
Active: $9.97B
Passive: $63.07B
Total Assets
Active: $2.34T
Passive: $0.60T
Ratio of Active/Total Assets: 80%
MUNICIPAL BOND
The Municipal Bond category includes national portfolios, broken out by maturity, as well as single-state categories. Larger issuers, including California and New York, get their own sub-categories. Over the past year, $10.7 billion flowed out of active muni funds while $2.3 billion was added to passive funds in the category.
1 Year Estimated Flows
Active: -$10.68B
Passive: $2.27B
Total Assets
Active: $0.55T
Passive: $0.02T
Ratio of Active/Total Assets: 96%
ALTERNATIVE
Alternative includes bear market funds, market neutral portfolios, volatility funds and a group of trading portfolios. The latter attempt to return a fixed multiple (or an inverse fixed multiple) of a benchmark over a short time period. Active strategies dominate both fund flows and assets here.
1 Year Estimated Flows
Active: $32.13B
Passive: $3.66B
Total Assets
Active: $0.16T
Passive: $0.05T
Ratio of Active/Total Assets: 76%
COMMODITIES
Commodities include agriculture, energy, industrial metals, precious metals, broad basket and miscellaneous. Investors have taken money out of both active and passive strategies over the past year.
1 Year Estimated Flows
Active: -$10.10B
Passive: $6.74B
Total Assets
Active:$0.04T
Passive: $0.07T
Ratio of Active/Total Assets: 36%
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