Trends in the land of mutual funds

The 2016 Investment Company Institute (ICI) fact book is out, revealing a treasure trove of data about the world of mutual funds and ETFs. If this sort of thing interests you, keep reading and then make sure you get the whole enchilada from ICI here.

Some incredible highlights:

Traditional long-term mutual funds had net cash outflows of $123 billion in 2015, absolutely eaten by ETFs. 2015 was the first negative year for long-term funds since 2008.

MF net new cash flow

This, despite the fact that index mutual funds (not ETFs, just passive mutual funds) actually had $166 Billion in net INFLOWS during 2015.

Index fund flows 6-2016

This means that traditional active management lost around $280 billion in Assets Under Management last year, or about $2.5 billion in management fees. Cumulatively since 2007 active strategies have lost roughly $800 billion in AUM. Today 22% of equity mutual fund assets are in index funds and ETFs as traditional active strategies lose share rapidly.

active v passive flows 2015

Index as percentage

Unfortunately for them, 31% of index fund assets are tied to the dumb S&P 500, a rather inelegant way to own passive equities.

SP500 Index allocations 6-2016

Households still own $12 trillion in long term funds including 401(k)s, variable annuities and 529s. But ETFs have exploded since the financial crisis, from just 700 some products in 2008 to over 1,500 in 2015, representing growth in assets from $531 billion then to $2.1 trillion today. In 2015 alone ETFs took in $231 billion in new issuance.

ETF new assets

Best of all, mutual fund expenses are falling as investors wise up to internal costs and plow money into less expensive vehicles. The overwhelming majority of assets in all categories of mutual funds are in the cheapest funds:

Assets in lowest quartile costs

In short:

Vanguard has eaten asset management, and investors are waking up. Vanguard is dominating flows and putting fee pressure on anyone else who wants to be in the game. Do you think Schwab and iShares would be offering products for 0.04% if Vanguard wasn’t around? In a new world of pay-to-play, firms have to buy market share by giving away product, except for Vanguard because they are an at-cost operation. Everyone else is selling loss leaders in hopes of buying brand recognition for more expensive, more esoteric sector slice-and-dice ETFs. While we’ll internally bicker and argue about what really constitutes “index” and “passive” investing, the trend is obvious and generally quite good for investors, if they can avoid the worst of the new product batch and keep their behavior in check. It’s a tough day to be Janus or Oppenheimer or FranklinTempleton, that much is clear.

Continue Reading:

2016 Investment Company Factbook (ICI)

Dumb Indexing


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