Fidelity Suffers Massive Active Funds Outflow

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Includes: FCNTX, FDGRX, FLPSX, MWTRX, PONAX, PRCIX, PTTAX
by: Zacks Funds

Summary

According to Morningstar data, US-focused mutual funds and exchange-traded funds have seen $78.8 billion worth of outflows in the first seven months of 2015.

Fidelity Investments witnessed the biggest outflows on the active side for both July and 1-year period.

The Fidelity Contrafund Fund, the Fidelity Growth Company Fund and the Fidelity Low-Priced Stock Fund accounted for outflows of $2,360 million, $2,111 million and $1,463 million in July.

We present 5 funds that were in the Top-Flowing Active Funds list.

In our previous article, we discussed that domestic equity-focused funds are facing tough time in terms of fund outflows. According to Morningstar data, US-focused mutual funds and exchange-traded funds have seen $78.8 billion worth of outflows in the first seven months of 2015. Continued transfers from open-end mutual funds to collective investment trusts at Fidelity triggered much of the outflows. This is higher than any full-year outflows since 1993. The money had instead been poured into international funds.

This time, we will look into the flows in active and passive funds; which in fact shows how outflows in active funds have led to record dismal numbers.

The active funds saw outflows of $20,446 million in July, while inflows of $6,175 million were recorded on the passive side. Over the last 1-year period, $158,607 million flowed out of active funds, while the passive funds added $140,836 million.

Inflows into passive funds failed to offset the outflows from the active U.S. equity funds. In July alone, estimated net outflows from U.S. equity funds increased to $14.3 billion from $8 billion in June.

Outflows a Trend Now?

According to the Morningstar Direct U.S. Asset Flows Update, passive U.S. equity funds saw inflows of $166.6 billion, while active U.S. equity funds lost $98.4 billion in 2014.

Reportedly, 2014 was one of the worst years for active managers. Based on Standard & Poor's 2014 SPIVA Scorecard (S&P indexes versus active funds), only 23% of actively managed domestic stock funds were reported to have outperformed the Standard & Poor's Composite 1500 in 2014.

Separately, Morningstar had revealed earlier that indexed equity vehicles, mutual funds and exchange-traded funds attracted $1 trillion in the five years ending March 31st. On the other hand, active management saw redemption of $266 billion over the same period.

Many active managers run at a disadvantage against the indexed funds owing to higher costs of active management, efficient capital markets and intense competition. While a spokesman for Fidelity Investments called it a "cyclical trend", a MarketWatch article notes that it is not cyclical, as investors are starting to understand this being a permanent trend.

Fidelity Investments Witness Huge Outflows

Fidelity Investments witnessed the biggest outflows on the active side for both July and 1-year period. Again, much of Fidelity's outflows indicated continued transfers from mutual funds to collective investment trusts.

Fidelity witnessed outflows of $10,101 million in July and $18,928 million over 1-year period. The Fidelity Contrafund Fund (MUTF:FCNTX), the Fidelity Growth Company Fund (MUTF:FDGRX) and the Fidelity Low-Priced Stock Fund (MUTF:FLPSX) accounted for outflows of $2,360 million, $2,111 million and $1,463 million in July.

Ironically, earlier this year, Fidelity ads had been vocal about the "power of active management". Fidelity promoted via an ad featuring Joel Tillinghast, speaking in favor of active management and how its top stock pickers outperformed rivals. The Tillinghast managed Fidelity Low-Priced Stock fund claimed in the ad that it has outperformed the Russell 2000 index by 4.66% on annualized basis since its inception in 1989.

A Bloomberg Markets Global Poll of financial professionals showed 42% were in favor of indexed products as the better option for retirement savings. Instead, only 18% supported actively managed funds. The waning popularity of actively managed funds was thus a wake-up call for Fidelity, which has built its reputation on active management.

For the 1-year period, Fidelity saw outflows of $18,928 million on the active side, while passive funds accumulated $23,015 million. Franklin Templeton Investments and PIMCO were also big losers over the 1-year period. They witnessed outflows of $10,422 million and $176,451 million, respectively.

Bottom & Top Flowing Funds

Below we present 5 funds that were in the Bottom-Flowing Active Funds list:

Source: Morningstar
*Note: T. Rowe Price New Income witnessed $1,160 million of inflows over 1-year period.

However, these funds have encouraging year-to-date and 1-year returns. They also carry favorable Zacks Mutual Fund Ranks. The Fidelity Growth Company carries a Zacks Mutual Fund Rank #1 (Strong Buy). It has returned 8% year to date and 14.6% over the last one year. The Fidelity Low-Priced Stock and the T. Rowe Price New Income Fund (MUTF:PRCIX) carry a Zacks Mutual Fund Rank #2 (Buy) and have year-to-date return of 3.8% and 0.6%, and 1-year return of 6% and 1.6%, respectively. The Fidelity Contrafund also carries a Buy rank and has a year-to-date return of 7.8% along with 1-year return of 10.9%. The PIMCO Total Return Fund (MUTF:PTTAX) carries a Zacks Mutual Fund Rank #3 (Hold).

Below we present 5 funds that were in the Top-Flowing Active Funds list:

Source: Morningstar

Here, both the PIMCO Income Fund (MUTF:PONAX) and the Metropolitan West Total Return Bond Fund (MUTF:MWTRX) carry a Zacks Mutual Fund Rank #2 (Buy).

However, Morningstar notes that inflows into PIMCO Income were not sufficient to offset outflows from PIMCO Total Return. PIMCO Total Return has lost $122.5 billion since September 2014. The fund family itself has seen substantial outflow as PIMCO's total outflows since January 2014 was at $212.8 billion.

Nonetheless, Morningstar opines that the numbers proving PIMCO Income to be a better performer is not completely fair. The Morningstar Direct U.S. Asset Flows Update mentions: "PIMCO Income is in the multisector-bond category as opposed to the intermediate-bond category, and it can afford to look for alpha by having much higher allocations to emerging-markets and high-yield bonds, for example".

Mutual funds would definitely want to see more inflows than the outflows. For that to happen, the domestic strength is of particular importance. China has sparked many concerns recently, and if investors decide to keep the money within the domestic boundaries, it would help domestic-stock focused funds to see inflows. However for active funds, it is getting difficult, as many active managers run at a disadvantage against the indexed funds owing to higher costs of active management, efficient capital markets and intense competition. Nonetheless, a turnaround would definitely cheer up the active funds.

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