Market pressures are adding to the woes of mutual funds active in the US

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Active US mutual fund sales suffered in 2022, as investors continued to demand cheaper products while inflation soared and the Federal Reserve continued to raise interest rates.

Investors pulled $879 billion from active mutual funds during the first 11 months of 2022, according to data from Morningstar Direct. Assets in these funds are down 18 percent from a year ago, to $12.2 trillion as of November 30, the database shows, due to = investors recovering and market depreciation.

Meanwhile, passive mutual funds recorded $51.6 billion in net inflows over the same period, according to the data provider. The funds had $4.9 trillion in assets, down 10 percent year over year.

Brendan Powers, associate director at Cerulli Associates, said investors have looked for safe havens during the volatile market, including money market and cash funds. He said they also sought out cheaper vehicles, such as passive ETFs.

This article was previously published by Ignites, a title owned by the FT Group.

Investors raised $24.8 billion in funds of funds during the third quarter, and another $69.9 billion in October and November, according to Morningstar database. They also placed $468.6 billion in passive ETFs during the first 11 months of 2022.

Active mutual funds have posted consecutive monthly net outflows since October 2021, according to Morningstar data. Meanwhile, passive mutual funds collected net inflows during all but five of those months.

Typically, when stocks suffer in a downturn, investors get conservative and move their money into fixed income, said Geoff Tjornhoeg, senior director of fund insights at Broadridge. But he added that fixed income strategies faced strong headwinds last year due to inflation and high interest rates.

Investors [last] Tjornhog said the year was hit with a double whammy of declining equity markets and poor fixed income performance, which led to huge inflows from bond funds.

Bond funds had net outflows of $483.3 billion in the first 11 months of 2022, according to Morning Star, and equity funds fell $294.3 billion.

Alternative Strategies, meanwhile, collected net inflows of $16 billion over the period — the largest out of all categories, the database shows. The funds’ assets amounted to $142.2 billion at the end of November.

Tjornhog said many companies are focusing their efforts on building their own ETF lines in order to meet the demand for such products. He said active strategies are expected to grow at a similar pace in 2023, or even pick up speed.

Providers launched more than 400 ETFs in 2022, according to ETF.com data, including at least 255 active funds.

Some companies, such as AllianceBernstein and Matthews Asia, entered the ETF space last year with new product launches.

Others, like JPMorgan Asset Management, have converted existing mutual funds into ETFs.

Switchers to mutual funds are often able to offer the same strategy at lower costs, said Nina Mishra, ETF director at Zacks Investment Research.

Mishra said some investors are moving their assets from active mutual funds to ETFs because they are disappointed with last year’s capital gains.

She said many actively managed mutual funds did pay out capital gains in 2022, although they were down significantly, and some investors are selling those mutual funds and buying similar ETFs.

Vehicle prevalence also plays a role. Ceroli-Powers said the companies offer the same strategies across a wide range of vehicles. “So, as the client moves from the mutual fund to another instrument, they may still be using the same strategy,” he said. “But it will look like larger flows from the mutual fund.”

In addition, many investors are building portfolios that are no longer solely based on active strategies, Powers said. Advisors, for example, are working to take advantage of index ETFs to help keep the costs of their overall portfolios low.

Powers noted that investors aren’t giving up on active management completely. Instead, they use it in areas or asset classes where they feel there is an edge or less available information, including taxable bonds, he said.

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