US mutual fund launches hit by changing landscape
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Industry shrinks in 2016 as investors begin to shift into exchange traded funds
The number of new mutual funds launched in the US fell sharply in 2016, reflecting the crisis of confidence in active management and the shift by investors into exchange traded funds.
The number of mutual funds shutting down has also jumped to levels not seen since the financial crisis, according to the latest figures from the research group Morningstar.
The result is that the total number of US mutual funds is on course to fall in 2016 for only the fourth year out of the past 20. From 8,190 funds at the start of the year, Morningstar recorded just 8,061 at the end of November.
The industry has only previously shrunk after large stock market sell-offs, but the reduced interest in mutual funds this year comes even as investors have enjoyed decent returns from stocks and bonds.
The difference this time is that investors have absorbed years of data showing that most active managers fail to keep up with the passive, index-tracking funds which are more commonly available in ETF form.
“People with active US equity funds in particular are much less forgiving of underperformance,” said Russel Kinnel, director of manager research at Morningstar. “Investors, advisers, financial planners — everyone in the investing food chain — is shifting over to passive and that is reflected in the flows and in the much more modest fund launches.”
Asset managers launched 269 mutual funds in the first 11 months of 2016, on course for a sharp fall from last year’s 523. This year’s figure is set to be the lowest in more than 20 years.
Mutual fund closures have hit their highest level since 2009. By the end of November, 301 funds had returned money to their investors and shut down, while a further 97 were merged with other more successful funds.
Mutual fund closures exceeded new launches in 2016
With money flowing out of actively-managed funds at a rate of about $30bn a month over the past year, asset management companies have concentrated their marketing effort on new passive products.
The number of ETFs and other exchange-traded products in the US has risen from 1,843 at the start of 2016 to 1,945 at the end of November, according to ETFGI, a research group.
Swelling assets in ETFs, now totalling $2.5tn in the US alone, have made them a profitable product for asset managers, if not as profitable as mutual funds. Although ETFs typically bring in lower fees than mutual funds, they also have lower expenses.
Several asset managers have taken steps to shore up their margins this year as fees come under pressure.
BlackRock and Pimco are among those to have laid off staff, and Denver-based Janus Capital agreed to merge with Henderson of the UK. Janus subsequently said that it would merge its famous Janus Twenty and Janus Forty US mutual funds.
The allure of star fund managers, which first drove the growth of mutual funds in the 1980s and 1990s, has waned as investors have been able to make side-by-side comparisons between their stockpicking records and the performance of index trackers.
A 14-year body of data from the S&P Indices Versus Active scorecard found that most US equities managers underperform the index, regardless of the category of fund and regardless of the timeframe. Over the past 10 years, for example, 87.5 per cent of domestic equity funds underperformed.