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Many times over the past decade or so, obituaries regarding actively managed mutual funds have been penned. Skittishness about the fate of active management in fund form is well—founded, which is unnerving in its own right.
First, the low-cost, passive fund revolution – one led in large part by exchange traded funds – has chased advisors and investors from higher cost equivalents. Second, and compounding the first issue, is the fact that many active managers, particularly in the equity space, have struggled to consistently beat their benchmarks. Some market participants, including advisors, interpret that as paying up for disappointing performance.
With those factors in mind, it’s understandable that some investors believe active management’s future is dim.
“They’ve suffered net withdrawals in nine of the past 10 calendar years. Indeed, roughly 60% of firms with at least 75% of their assets in actively managed funds (a threshold herein used to define an active shop) have suffered outflows over the trailing five-year period through December 2024,” notes Morningstar’s Adam Sabban.
Active Management Can Survive
The belief that active management is on its last legs was arguably fostered in hasty fashion. As Sabban points out, the asset management business is asset-lite, has high margins and fund issuers, assuming managers are decent at their jobs, can offset outflows by generating returns on the remaining invested capital.
He outlined four scenarios – strong bull market, average market setting, weak market climate and overt bear market – noting the industry could grow in three of those four situations. Regarding market shifts, an active shop’s success depends largely on what asset class is its point of emphasis.
“Fixed-income shops were more resilient than their equity counterparts but noticeably less so than alternative shops, which appear least vulnerable to the whims of the market,” observes Sabban.
Point is active management isn’t going to disappear overnight and it’s future isn’t as glum as some detractors perceive it to be.
“Despite the steady drip of outflows from active funds, many shops can survive, and some may yet grow,” writes Sabban. “Those facts will change if the pace of outflows grows more severe and market appreciation can’t make up the difference, but even then, active management won’t exactly disappear overnight.”
Sourcing Survival
Interestingly, Sabban’s report didn’t mention ETFs. That’s arguably surprising because passive ETFs are widely regarded as one of the “killers” of the active mutual fund industry. The surprise is amplified because it is ETFs that are acting as a rejuvenator of sorts for active management.
Translation: fund issuers long known as purveyors of actively managed mutual funds are finding new life by bringing their active approaches to ETFs and/or converting existing products to the ETF wrapper. So what was once seen as a death knell for active mutual funds, that being ETFs, is now the source of rebirth.
Those moves are being felt across the ETF landscape as five of the top 15 issuers as measured by assets under management are firms that have deep roots in active management, some of which are converting well-known mutual funds to ETFs.
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