Christine Benz and Russ Kinnel of Morningstar discuss the wave of assets moving out of actively managed funds and into passive index funds. According to Kinnel, of the Morningstar 500 (generally the largest, most well-known 500 mutual funds), 17 those funds saw assets fall by 50% or more over the last 12 months. The flight of assets out from actively managed funds is not a solely a function of relative underperformance either says Kinnel, and the outflows signal a broader trend of investors having less of an appetite for higher fee products.
Kinnel explains that outflows can be very problematic in cases where a fund’s holdings are largely in illiquid assets. Illiquidity was a major issue with the Third Avenue Focused Credit fund, which shuttered in 2015 after large redemptions came in and resulted in the fund limiting withdrawals. An example of a bond fund that has seen large outflows but has handled it well, is the PIMCO Total Return fund. On the equity fund side, large outflows from small cap funds are something investors should keep their eye on, says Kinnel. Furthermore, a mutual fund firm that experiences significant redemptions could start to see layoffs or merging of various funds and strategies, which may not be optimal for an investor who has purchased the fund for a specific type of exposure (i.e. small cap value).