Last month was one for the Wall Street history books — not only was it stocks’ worst December since the Great Depression, but it now appears to be pivotal moment when investors really gave up on active management.
According to data from Morningstar out Thursday, actively managed mutual funds experienced outflows of nearly $143 billion in December, their worst month ever. The record exodus brought the yearly outflows to $301 billion, just shy of 2016’s $320 billion.
“December outflows spanned asset classes, with taxable-bond funds faring worst. [Active] large-growth and large-value funds continue to get hit the hardest, likely losing assets to passively managed, core large-blend funds,” Morningstar senior analyst Kevin McDevitt said in a note on Thursday.
Investors, at the same time, fled to cheaper passive strategies amid the brutal sell-off as the higher expense of active management put extra pressure on their returns. Passive funds reeled in nearly $60 billion in December alone, according to Morningstar.
Among active strategies, bond funds bled the most in December with $44.3 billion outflows, the data showed.
“This is notable because taxable-bond funds had been a rare bright spot for active managers. But as investors pulled money in 2018’s fourth quarter, it came almost entirely from active taxable-bond offerings…while they were essentially flat for passive vehicles,” McDevitt said.
Passive strategies continue to gain popularity as the market for index funds has reached $6 trillion, while the market for exchange-traded funds has ballooned to $3.6 trillion in assets. The indexing industry on Wednesday lost one of its most prominent figures — Jack Bogle who was the creator of the world’s first ever index mutual fund, the First Index Investment Trust.