The shift to low-cost passive investments like ETFs is reshaping the asset management industry, driven by active funds’ underperformance, higher fees, and the dominance of tech stocks. Firms that adapt to these changing investor preferences will lead the evolving market.
In the U.S. stock market, a record $450 billion has been withdrawn this year from actively managed equity funds, where managers pick individual stocks.
Citing data from U.S. fund research firm EPFR, the Financial Times reported on the 30th (local time) that outflows from stock-picking funds have surpassed last year’s record of $413 billion. Most of these funds are believed to have migrated to passive investment vehicles like ETFs.
The trend reflects investors’ preference for passive strategies, as active funds have frequently underperformed market benchmarks during the tech-driven rally on Wall Street. Additionally, active funds charge significantly higher management fees. This has led older investors to withdraw funds, while younger, cost-conscious investors increasingly favor passive investment options.
Morningstar data shows that large-cap U.S. active funds had a one-year return of 20% and a five-year annualized return of 13% (after fees), compared to 23% and 14% for similar passive funds. The average annual management fee for active funds is 0.45%, nine times higher than the 0.05% charged by benchmark-tracking funds.
Adam Sabban, a senior research analyst at Morningstar, noted that “the investor base of active equity funds is skewed towards the elderly, while younger investors are more inclined to invest in index ETFs due to lower fees and simplicity.”
This shift has also created a divide in asset manager performance. While firms specializing in stock-picking, such as Franklin Templeton, T. Rowe Price, Schroders, and Abrdn, have faced significant challenges, passive investment giants like BlackRock have benefited from rising ETF inflows and strong performance.
Active managers are also falling behind alternative asset managers like Blackstone, KKR, and Apollo, which focus on private equity, credit, and real estate. According to Morningstar Direct, firms like T. Rowe Price, Franklin Templeton, Schroders, and Capital Group (managing $2.7 trillion) have seen substantial outflows this year.
The dominance of U.S. tech giants—referred to as the “Magnificent Seven” (Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta, and Tesla)—has further compounded challenges for active managers, who often underweight these companies in their portfolios.
Stan Miranda, founder of Partners Capital, explained the difficulty for active managers: “Institutional investors hiring highly skilled teams often find it challenging to justify holding stocks like Microsoft or Apple, which are already widely owned and thoroughly analyzed. As a result, they tend to focus on smaller, lesser-known companies, which can become undervalued compared to the ‘Magnificent Seven.’”
