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Via Jefferies:
Only 43 per cent of active equity managers are outperforming their benchmarks as of [November 30] — a measure that has only been above 50 per cent for three of the last 10 years and not since 2017
Jefferies also highlights that as of end-October, assets under management for US-based ETFs and index funds exceeded the retail active AUM for the first time:
To regular readers neither of those charts will be surprising, but connecting the themes does give us an excuse to highlight one mild curiosity: passive fund flows are the mirror image of active fund flows.
It’s a much-studied trend that mutual funds gather assets at the start of a calendar year. Investors put aside year-end bonuses or seek to maximise tax benefits, then as December approaches they pull funds to harvest tax losses or dodge distribution tax. There’s some evidence that the turn of the year also acts as a prompt for investors to notice how much they’ve lost.
But for ETFs the fourth quarter is everything. Jefferies reckons the seasonality boost relative to average quarterly net flow in a given year across all domiciles is 32 per cent, and 44 per cent for those with a US domicile:
Even this under-emphasises how much passive flows are weighted towards December:
Why? Dunno. Having found no useful academic research on the ETF flow seasonality and located no one willing to venture a theory, we can only speculate that it’s a screw-you effect.
Maybe the end of year galvanises investors to ditch underperformers and cut costs, which shows up quicker in ETF data than in mutual fund factsheets. The average active fund consistently underperforms its benchmark, whereas ETFs and index funds mostly are the benchmark, so whenever the year-end scores are logged it’s an invocation to move funds from the former to the latter.
Now that we’ve passed the active-to-passive tipping point (at least for US-domiciled funds), will the withering accelerate or level off? And will the main driver of all investment activity, tax avoidance, become more visible in passive flows?
Or maybe the screw-you effect is nonsense and there’s a much better explanation for ETF seasonality, in which case the comment box is open.
Further reading
— Back into the active/passive trenches (FTAV)
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