A strange thing is happening this year in active mutual funds: they are bringing in new money.
In the first four months of 2017 $324 billion flowed into the active mutual funds tracked by Citywire globally. This more than makes up for 2016’s $253 billion of outflows, and puts the industry on course to generate its best numbers since the credit crisis began.
That leaves the active sector only just behind the $374 billion of inflows into passive products in the same period. It would appear, then, that rumors of the death of active management are greatly exaggerated.
There has been a large surge in risk-on assets, with the broad global equity sector leading the pack with inflows of $33.7 billion.
Next up is the global bond sector, home to the juggernaut that is the Pimco Income fund, which has swelled as a result of more than $20 billion of inflows into the strategy globally this year, winning it the crown of largest active bond fund.
Floating-rate notes or loan-participation funds round out the top three with inflows of $21 billion.
Lagging the index
Of greater intrigue is what is going on below that. I have written at length over the past year about the tragedy that is passive flows into emerging market (EM) equities. The sector has been turning heads since the beginning of 2016, yet the de facto investment choice have been passive products, which has so far failed to truly keep pace with the index.
However, finally we are starting to see material inflows into actively managed funds in the EM sector, with nearly $20 billion globally this year.
Emerging market debt is also taking in new money with the same dynamics that are influencing equity markets, namely moderate reflation and robust growth rates in the West leading to more demand for investment in emerging markets.
European equities come in ninth place for 2017, having significantly benefited from a succession of positively received political victories throughout the continent, most notably in France, where moderate Emmanuel Macron beat far-right Marine Le Pen in the presidential race.
How the mighty have fallen
Let’s now turn to the elephant in the room. These global figures mask the situation in the US. When the rest of the world is taken out of the equation it leaves the American 40 Act market staring at a $35 billion loss.
This continues a trend from the past three years, which, if it carries on as predicted, will mean active and passive assets should reach parity before the end of the first quarter of 2018.
Nonetheless, there are some reasons to be optimistic about active management in the US.
First, global asset management is dominated by US companies, as such what is good news abroad is frequently good news for the US.
Second is the influx of assets gravitating towards global equities, where outperformance rates are much more compelling for active managers.
If investor behavior for the first few months of 2017 is an indicator for the rest of the year, and the rotation away from US equities towards global markets continues, active management may yet have a new lease of life.