U.S. Actively Managed Large-Cap Funds Remain In Secular Decline

For the fund-flows week, ended February 19, 2020, investors were once again net redeemers of large-cap funds (including ETFs), withdrawing a net $3.1 billion. Large-cap mutual funds witnessed net outflows of $2.3 billion, while their ETF counterparts handed back some $752 million. Looking back to 2019, we see that large-cap funds were the pariahs of the equity universe, handing back a net $66.2 billion for the year, their third largest net outflows on record.

However, the headline numbers are a little misleading. Despite the average large-cap fund (+29.80%) posting eye-popping returns for 2019, large-cap mutual funds suffered net redemptions of $98.1 billion, while their ETF counterparts enjoyed net inflows of $31.9 billion. For January 2020, the trend continues, with large-cap funds suffering net redemptions of $17.5 billion and large-cap ETFs attracting $4.6 billion.

Total net assets in large-cap funds have been in secular decline since the beginning of the new millennium, but the outflows from large-cap funds are not offset by the inflows into large-cap ETFs. As I have stated in other segments, I really don’t think this is a case of investors just turning away from actively managed large-cap funds in favor of passive management, but really a case of diversification. Collectively, large-cap funds still account for about 11.1% ($2.8 trillion) of all the open-end fund assets under management in the U.S. ($25.9 trillion as of Dec. 31), with large-cap mutual funds (excluding S&P 500 funds and ETFs) accounting for $2.4 trillion of that sum, and their ETF brethren making up the rest.

While passively managed funds and ETFs have become a popular choice for investors, actively managed large-cap funds’ total assets under management are half the total for the entire ETF market ($4.4 trillion in the U.S., including bond ETFs and equity ETFs).

As part of most Baby Boomers’ core and satellite asset allocation scheme, large caps became disproportionately too big a piece of the pie. As a result, RIAs are now having their clients reallocate from large-cap funds to other non-correlated asset types, such as fixed income funds and non-domestic equity funds.