New York (Reuters) – Financial pundits shouted about record-high levels for the stock market in 2016, but for actively managed stock mutual funds there was another record, one they would rather keep quiet: the largest amount of net withdrawals ever recorded.
Benchmark equity indexes hit fresh peaks, and the S&P 500 is on course for an eighth-consecutive year of positive total returns. However, in the battle between active and passive funds to grab investment dollars in a record price environment, there was no contest.
U.S.-based actively managed stock funds suffered $288 billion in withdrawals year-to-date through November, the largest on record, according to Thomson Reuters Lipper service. The figure tops outflows of $139 billion in 2015 and $218 billion in 2008.
On the passive side, stock index mutual funds and equity exchange-traded funds each attracted about the same amount of new cash, more than $112 billion apiece in 2016, Lipper said.
Only 33% Beat Benchmark
Just 33% of active stock managers beat their benchmark this year, according to investment bank Jefferies, driving investors to lower-cost funds and ETFs that try to track indexes, rather than try to beat them.
"If we don't see that in 2017, chances are you've run out of excuses, and the market will simply come to the conclusion that markets are too efficient for the number of active managers that are out there, and the industry as a whole will need to shrink," said Jefferies analyst Surinder Thind, who covers asset management.
Performance will have to improve to bring investors back, according to Thind.
Withdrawals came from some of the industry's best-known actively managed funds.
Investors pulled $8.3 billion from the Will Danoff-managed Fidelity Contrafund. American Funds' Growth Fund of America had a similar net withdrawal, representing more than 5% of the funds' assets when the year began.
Outflows of $6.4 billion cost Fidelity Growth Company Fund, managed by Steve Wymer, more than a seventh of its assets, the data shows.
Next Cycle For Active Outperformance?
"Flows are a lagging indicator that will improve as the market enters the next cycle for active outperformance—which we believe we may be seeing," said Fidelity spokesman Charlie Keller.
As the equity rally has matured, stocks have started to move independently from one another, which active managers say creates new opportunities.
"It's less about interest rates and geopolitics and maybe more about what's happening in Company A's income statement versus what's happening in Company B's income statement," said David Lafferty, chief market strategist at Natixis Global Asset Management in Boston.
U.S. stock prices rebounded from a February low but stalled heading into the November election. President-elect Donald Trump's promises to cut taxes and financial regulations fueled a record-breaking rally.
Bond Funds Hold Their Own
In contrast, bond prices fell on fears those policies could unleash inflation, the bane of the fixed-income market. Even so, those concerns have not erased the net inflows for bond funds that accumulated through the first 10 months of the year.
In fact, both active and passive bond funds together in 2016 took in the most cash in three years.
Active bond mutual funds gathered $103 billion, while passive bond mutual funds and fixed-income ETFs took in $145 billion, Lipper said.
The money flowing into bond funds coincides with the U.S. Federal Reserve's interest rates rising from historic lows. While that could be a brake on economic growth, it does offer yield-starved investors some relief, but perhaps not enough.
"Investors are going to take a look at this sharp move in interest rates," said Jefferies' Thind. "Do they really want to be in bonds when we are potentially in a risk-on environment?"