The flood of money pouring into stocks since the election isn't helping mutual funds, which somehow saw $3B of outflows in the last week. Equity ETFs, meanwhile, had $27B of inflows, according to Goldman Sachs - the largest weekly amount on record.
Equity mutual funds had outflows of $4.4B, making YTD outflows of roughly $120B.
"We've got to get rid of this," says hedge fund honcho and Trump advisor Anthony Scaramucci, speaking about the DOL's fiduciary rule.
Set to take effect in April, the Department of Labor's new rule would hold retirement professionals to a "fiduciary" standard in which they must put client interests ahead of their own, rather than the current requirement that they recommend "suitable" products.
The Obama administration argues the move would save investors $17B a year in fees and lost returns. Asset managers, however, will probably spend a lot more setting up systems to try and figure out how to comply with the new standard. In Scaramucci's vision, a Trump administration would instead impose a "self-auditing process" for registered financial advisors.
Former assistant secretary of labor under Bush, Bradford Campbell has no doubt Trump isn't a fan of the rule, but isn't sure it can be fixed on day one with the stroke of a pen. A Trump administration, however, would have plenty of available tools to modify or eventually remove it, he says.
With $250.6B of inflows through this year's first 10 months, Vanguard has already broken through the record level of inflows set during the entirety of 2015 (last year's total inflow was $236.1B). More than $200B of that amount has gone into low-fee index funds.
Vanguard's gains are generally at the expense of active fund managers like Fidelity, Franklin Resources (NYSE:BEN), Legg Mason (NYSE:LM), Gamco (NYSE:GBL), Janus (NYSE:JNS), and AllianceBernstein (NYSE:AB), to name a few.
Assets at rival BlackRock (NYSE:BLK) - a major player in both active and passive investing - recently topped $5T for the first time ever.
Passive investing top? Strictly a suburban outfit, Vanguard is nearing a deal for about 20K square feet of office space near Penn's campus in Philadelphia for a research and development hub.
It's the kind of headline that makes one wonder if the bottom might already be in for traditional asset managers.
The numbers won't surprise anyone who's been following along for any length of time: Over the three years ended Aug. 31, investors added nearly $1.3T to passive mutual funds and ETFs, while pulling more than $250M from active mutual funds.
"Stock pickers, archetypes of 20th century Wall Street, are being pushed to the margins," write Anne Tergesen and Jason Zweig. "The pressure has gotten so great that passive has become the default,” says former Fidelity CIO Philip Bullen.
And by the way, there's still plenty of room for the trend to continue - 66% of mutual and exchange-traded fund assets are still actively invested (down from 84% ten years ago).
Active fund firms that don't “position themselves for the sea change” will be “relegated to the dustbin of history," said Cohen & Steers (NYSE:CNS) in shareholder letter earlier this year.
In one of the highest quarterly amounts ever, investors moved $92B into ETFs in Q3, according to UBS, bringing AUM for U.S.-listed ETFs to about $2.4T.
For the year, $150B has flowed into ETFs, putting the vehicles on track for their third straight year of inflows north of $200B. The inflows stand in major contrast to either outright net exits or minimal inflows for mutual funds.
Still, even after doubling AUM since 2011, ETFs account for just 17% of mutual fund assets.
Just 9.5% of actively-managed large-cap domestic equity funds beat the S&P 500 in the five year ended August 31 - the worst 5-year record since 1999, according to Morningstar. By comparison, in the five years ended 2010, nearly 50% topped the S&P.
The lame results haven't gone unnoticed, with investors yanking $422B from roughly 3K mutual funds in the past five years, and putting that money and more into passive vehicles (ETFs).
In the year ended June 30, 85% of large-cap stock funds, 88% of mid-cap funds, and 89% of small-cap funds failed to match their bogeys. "Pretty appalling," says S&P's Aye Soe. "Given the choppiness in the markets we would have expected the active managers to come out looking better.”
Continuing to benefit from the trend toward low-cost, index-tracking funds, Vanguard Group pulled in $148B in the first half of the year, topping last year's record H1 haul of $140B.
The fund giant sports four of the top 10 ETF inflow recipients so far this year, the S&P 500 Index Fund (NYSEARCA:VOO), the FTSE Developed Markets ETF (NYSEARCA:VEA), the REIT Index Fund (NYSEARCA:VNQ), and the Total Bond Market Index Fund (NYSEARCA:BND).
Just 19% of large-cap U.S. stock funds topped the S&P 500 in Q1, according to BAML's Savita Subramanian. It's the worst performance on that metric since the data started being tracked in 1998.
The average large-cap fund trailed the S&P by 190 basis points, "a record spread of underperformance."
It was the March rally that helped do managers in, says Subramanian, noting one-third of them beat the market in January, and 27% in February.
"The lit match taken to active returns last quarter was likely the massive reversal – by the market, by sectors, by styles and by stocks – occurring within the quarter ... Crowded positions proved particularly damning in the Q1, with the 10 most crowded stocks underperforming the 10 most neglected stocks by almost 7 percentage points, an atypically high spread.”
It's another rough session for traditional asset managers today: Franklin Resources (BEN -1.8%), Legg Mason (LM -4.1%), Gamco (GBL -1.3%), Janus (JNS -1.6%), Invesco (IVZ -1.1%), Affiliated Managers (AMG -2.2%), Waddell & Reed (WDR -3.3%)
According to Thompson Reuters, investors yanked more than $60B from mutual funds globally during January, the worst month outflows since September 2008. European funds fared the worst, with $47B of net outflows.
The exits came, of course, as stock markets suffered their worst January in at least 20 years.
It's more bad news for asset managers like - Franklin Resources (NYSE:BEN), Legg Mason (NYSE:LM), Gamco (NYSE:GBL), Janus (NYSE:JNS), Invesco (NYSE:IVZ), T. Rowe Price (NASDAQ:TROW), AllianceBernstein (NYSE:AB), Affiliated Managers (NYSE:AMG) and Federated Investors (NYSE:FII) - but on the good side, the redemptions were met without any notable issues.
“Fundamentally, the outlook is quite negative for the asset management industry in 2016," says Citi's Haley Tam.
It's not just the booming ETF industry where price wars abound, but mutual funds are getting less costly as well. The average fund tracked by Morningstar charges 1.07%, down from 1.22% in 2005.
It's not all bad for mutual fund providers, who say they offer bargain prices on some products as "loss leaders" to get investors in the door where they can then be pitched more expensive funds and strategies. Still fund industry profit margins are slipping - 22% in Q3 from 25% a year earlier, according to DST Kasina.
Industry comments: "We’re not surprised at all to see passive managers compete on fees because that’s their only differentiator,” says AlianceBernstein's (NYSE:AB) Chris Thompson, whose company has boosted marketing efforts for its actively-managed strategies.
"We are in the business of increasing earnings,” says BlackRock's (NYSE:BLK) Mark Wiedman, whose firm's total stock market ETF now charges a barely-visible 0.03%. “Over time, the revenue growth from volume will outstrip the price cuts in these products.”