For Active Managers, Lower Fees Only Dull the Pain

August 28, 2019
By Christopher Davis

Active funds haven’t gotten much love in recent years—flows went negative in 2015 and stayed that way in the ensuing years—and the lack of affection has cut across funds at all price points. With fund buyers increasingly cost conscious, funds with the highest expense ratios have bled assets. But this frugality hasn’t helped the lowest cost active funds, which have been in redemption mode as well. (One exception: In 2017, net flows to funds with bottom-quintile expense ratios inched into positive territory.) Investors who care most about price went to passive alternatives instead. Even the lowest cost active funds are many times more expensive than the market-cap weighted index alternatives that now carry near-zero (or even no) price tags.

This isn’t to say costs don’t matter. Investors left more expensive funds at a greater rate than cheaper ones, as the figure below illustrates.

From 2015 through 2018, outflows from funds in the fourth highest fee quintile were nearly twice those from the second lowest. But lowest quintile fared far better than the second lowest. Net flows from funds in the lowest expense quintile accounted for just 2% of the nearly $800 billion in active fund redemptions. By contrast, funds from the second lowest were 17% of the total. (Outflows from the most expensive quintile appear comparatively modest, at $94 billion, but this group didn’t have a lot of assets to begin with.)

Just as merely average performance has become a deal breaker, middle-of-the pack price tags no longer cut it. Investors yanked about $300 billion from funds with middle-quintile expense ratios from 2015 to 2018—38% of the total. That’s a turnabout from the prior three years when the middle expense quintile was the best-selling grouping. Now, being in the middle of the road means getting run over.

As active flows went negative, cheaper funds fared best.

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