Nervous investors pulled $60 billion out of stock funds in the third quarter, adding more woes to investment managers who are being battered by a secular movement that continues to exert downward pressure on fees. According to Morningstar, the net outflow amount represents the most money exiting stock funds in any quarter since 2009.
Investors flocked into bond funds and cash amid uncertainty over worsening trade tensions with China, potential fallout over the Brexit crisis and increasing consternation concerning a slowdown in global growth.
The recent investor migration into bond funds bodes ill for asset managers, as fees for fixed-income products are cheaper than those for equity products. The diminishing fees for bond products follows on the heels of a pronounced and inexorable industry trend toward rock-bottom fee structures. Indeed, Charles Schwab (SCHW, Financial) just fired a shot across the bow of its discount online brokerage competitors with its announcement last week that it is offering customers commission-free online trading.
The third-quarter exodus of approximately $60 billion represents the largest percentage drop for two consecutive quarters since 2011. This is a marked contrast from the prior period last year, when stock funds experienced a net inflow of $20 billion according to Morningstar. Bond funds raked in $118 billion, almost double the net inflows from the same period in the prior year. Long-dormant money market funds took in a record $225 billion — the largest cash infusion in over a decade.
Actively managed funds were hit especially hard, continuing the evolving and implacable trend of outflows from fund managers, who seek to beat the market, into negligible cost index funds. The shift appears to be accelerating, leaving active funds with a diminishing asset base and a concomitant loss of fee income. According to a recent Morningstar report, even though there’s $11.7 trillion in assets under management in active funds, a significant increase from 2009, for the trailing 12 months ending in September, 66% of actively managed equity funds were in outflows. The fact the net outflows occurred during a bull market is an ominous sign.
Another troubling sign for active funds: the third quarter saw a $15 billion net outflow from actively managed international equity funds; by comparison, passively managed international equity funds experienced $19 billion in net inflows. This investor fund reallocation is especially painful since fees for international stock funds are far greater than management fees for domestic equity offerings.
A recent Kiplinger report presented an historically sobering view of the actively managed fund industry. The report noted that even though "index mutual fund assets account for just 20% of all mutual fund assets, actively managed U.S. stock mutual funds have seen net outflows— more money has gone out the door than has come in—every calendar year since 2005, while index mutual funds have seen net inflows.”
On Tuesday, investment Goliath BlackRock Inc. (BLK, Financial) reported that its third-quarter earnings per share decreased by 5%. While this beat the consensus estimate by 1%, it can hardly be considered a robust quarter. The company’s revenue of $3.7 billion was in line with analysts’ expectations. However, its quarterly net cash inflows of $84 billion fell far below Wall Street's projections of $100 billion.
Disclosure: I have no positions in any of the securities referenced in this article.
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