Active vs Passive: A Sudden Shift in Investors’ Preferences?

By Dan Sondhelm via

If you only read the headlines for Morningstar’s latest Direct Fund Flows Commentary, you might walk away with the impression that investors who fled from funds in December 2018 have come back in force. And that the dominance of passive funds over active funds is finally beginning to crack. Now that happy days are here again, maybe it’s finally time for your boutique asset management firm to roll out its new funds and kick sales and marketing into high gear.

Then again, you might want to temper your optimism. Because if go behind the headlines of the Morningstar report, you’ll see that the numbers aren’t as impressive as they might seem when taken out of context.

Headwinds or Hype?

Let’s examine a few of the Morningstar report’s key takeaways to see why.

1. “Long term flows bounced back with $39 billion in inflows in January after $83 billion of outflows in December.”

Show this to the data analysts on your team and, if they’re worth their salt, they’ll tell you that such outliers should never be used to signal favorable trends. Market optimists might have you believe that the huge fund outflows in December were driven mainly by investors panicking during the end-of-year market retreat. But it’s just as likely investors were taking advantage of year-end tax-loss harvesting, selling shares as the market fell and repurchasing them in January after the 30-day wash-sale window had passed.

And the $39 billion in inflows seems less impressive when you compare it to the $132 billion in inflows to long-term funds in January 2018.  Look back over the course of the year and the figure is even less rosy, with only $56 billion in total net flows to long-term funds from January 2018 to January 2019 compared to $211 billion in inflows to money market funds during the same period.

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