Stampede out of active funds as investor withdrawals hit three-year high

This rate of withdrawal has seen passively managed funds continue to gain market share.

Funds and Investment Trusts July 10, 2019 by Tom Bailey

Investors have pulled a total of $30 billion out of active funds in the US and Europe since the start of 2019 to the end of May, the fastest withdrawal rate in three years, according to new data from Morningstar.

This rate of withdrawal has seen passively managed funds (both index trackers and ETFs) continue to gain market share.

Morningstar data shows passive fund market share increased from 35.5% to 37.5% in the US compared to a year ago.  

- M&G and Vanguard cut fees for active funds

Passive funds’ popularity continues to lag in Europe, but the continent has seen market share grow from 16.6% to 18.3% year-on-year. Within that figure, however, is a divide between countries, with passive adoption in Italy and France way behind that of the UK, Sweden and Ireland.

While passive funds gaining market share at the expense of actively managed funds is nothing new, active management has come under greater criticism, in the UK at least, following the suspension of the Woodford Equity Income fund.

More broadly, however, passive has been slowly gaining ground on active ever since the financial crisis. Investors have seemingly become disillusioned with active management as many funds failed to provide the sort of downside protection promised when the crisis hit.

At the same time, the bull market over the past decade has favoured large cap growth stocks, meaning that tracking the index has proved to be a rewarding strategy.

Added to this, there has been both increased investor focus on fund fees and a greater effort by providers to cut fees. According to research by Morningstar, passive investment funds have in the UK cut fees by 28% on average since 2013. Over the same period, active funds reduced charges by 18%.

Meanwhile, providers in the US have been even more aggressive in cutting their fees. Fidelity now offers users of its US platform two index trackers with zero fund charges.

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