There’s been a ton of discussion about fund flows lately, whether it’s about the exodus from stock funds, the surge of cash into bond funds, or the ongoing thirst for emerging markets.
But Felix Salmon highlights what may be the most important trend of them all, which is the shift from active to passive management:
If you look at growth rates, the numbers are even starker. Actively-managed domestic mutual funds saw an outflow of $44 billion in the first seven months of 2010, which was 1.45% of their total value. Equity ETFs, by contrast, saw an inflow of $21.4 billion, which was 3.12% of their total value. If you go back to 2009, the numbers are -2.07% and +10.78%, respectively. Yes, in 2009, the net inflow into equity ETFs (I’m not even including bond or commodity ETFs, here) was greater than 10% of their entire year-end value. Mutual funds, it’s fair to say, never see those kind of net inflows.
This shift is only just beginning. There’s more than $3 trillion invested in actively-managed domestic mutual funds, compared to just over $1 trillion in domestic index funds and domestic equity ETFs combined. On the international side, there’s $1.2 trillion in actively-managed mutual funds, compared to $218 billion in international ETFs, and just $97 billion in international indexed mutual funds.
Of course, this means a secular decline in the money management business, and as Salmon notes an increase in stock market correlation (i.e. all stocks moving the same way). As we’ve noted before, already, if someone tells you it’s a “stock picker’s market” then they’re lying to you.
How that plays out will be pretty fascinating. One knock-on affect we’re seeing is a surge in interest in more “macro” assets, whether it’s forex, commodity futures, as investors hunt for something that offers a bit more action than stocks that all move alike.
It may even have an interesting effect on some individual stocks, as investors crowd into the stocks that actually move. Anyway, it will be fascinating to watch.