Passive funds batter active products during 2020 ‘wild ride’

BlackRock and Vanguard have topped the leader board of best-selling mutual fund managers globally this year, benefiting as investors fled well-known active investment houses in favour of cheap passive products.

Big US managers Invesco, Franklin Templeton, Pimco, T Rowe Price and Capital Group, which are best known for actively choosing securities, all suffered net redemptions of between $17.9bn and $32.2bn in the first six months of 2020, according to Morningstar, the data provider. The figures are based on sales of open-ended funds, including exchange traded funds, globally.

In contrast, BlackRock gathered almost $74bn across its mutual funds, with its iShares exchange traded fund arm accounting for the lion’s share of sales. Vanguard had net inflows of $67.7bn, while State Street Global Advisors, another asset manager with a large passive business, had inflows of more than $20bn. Passive funds track an index of shares, rather than taking active bets on which securities will outperform.

“The figures show a clear shift to passive managers, with iShares, Vanguard and State Street all benefiting from large inflows as more investors shift away from active fund managers,” said Ryan Hughes, head of active portfolios at AJ Bell, the UK-based investment platform.

Amin Rajan, chief executive of CreateResearch, an asset management consultancy, said: “Passive funds are on a tear — again. The widely held belief that the active houses will outshine them in a period of market turmoil has yet to be supported by the data.”

While there has been a long-running trend of investors turning to index products for equity exposure, they are now also increasingly willing to use passive funds for fixed income, hitting big bond managers such as Pimco in the process, according to Tony Thomas, senior manager research analyst for Morningstar.

Investors globally added a total of $98bn to fixed-income index funds in the first six months of 2020, but pulled $50bn from non-index products. “Fixed-income funds and [asset managers] have had a wild ride in 2020,” said Mr Thomas.

He added that at Vanguard, there was a “tug of war between equity and fixed-income flows in the first half of 2020”. “While both asset classes saw net inflows in the six-month period, Vanguard’s equity strategies had $43bn of outflows in the second quarter, while the fixed-income suite had $76bn of inflows,” he said.

In State Street’s case, the bank-owned fund manager benefited from strong demand for its SPDR Gold Shares ETF, which accounted for the majority of its inflows.

The data also show that some active managers did well, including JPMorgan Asset Management with inflows of $21bn. Mr Thomas said that if short-term money market funds were included then JPMorgan had “gathered an astonishing $154bn in the first six months of 2020”.

Invesco said that over the past year investors had been reacting to market news — including the global pandemic, uncertainty over the UK’s exit from the EU and US-China trade tensions — by de-risking.

“Invesco has been impacted by this de-risking to an outsized degree,” the company said. “Looking forward, we anticipate that Invesco’s strong performance in high-demand investment capabilities will drive improved flows.”

T Rowe Price said Morningstar’s data did not take into account client transfers from its open-ended funds to other investment products, such as investment trusts and separate accounts, which totalled $8.8bn in the first six months of this year.

“While transfers can show up as fund outflows, they have no impact on our overall assets under management and do not represent redemptions,” said T Rowe.

Franklin Templeton highlighted comments made by chief executive Jenny Johnson when announcing first-quarter earnings. “Flows were impacted by industry-wide pressures that resulted in elevated redemptions this quarter; however, we are encouraged by the rebound in long-term sales, particularly in US retail,” it said.

Capital Group and Pimco declined to comment.