SSRN Id4539706
SSRN Id4539706
SSRN Id4539706
2023)
Abstract
U.S. active equity mutual funds have experienced net outflows since
around 2006. The AUM-weighted performance remains similar over time,
but equal-weighted performance (which emphasizes small AUM active
funds) has deteriorated. Inflows/outflows contribute to the over/under
performance of individual active funds. We estimate that the flow-impact
on annualized alpha for aggregated active funds industry was a positive
0.33% between 1/1991 – 12/2005, but it was a negative -0.10% between
1/2006 - 9/2021. If the current flow trend continues, the AUM of active
mutual funds will drop to 17% of the total AUM of equity funds after 15
years.
Keywords: active mutual fund, fund alpha, fund flow, flow impact
net returns for investors and did not halt the net outflow trend. We study
how both the performance and flows of U.S. active equity mutual funds
have evolved over the last 30 years and extrapolate from the past to
The great migration from active mutual funds into passive funds
started around 2006. Since then, we calculate that the cumulative net
outflows for U.S. active equity mutual funds were about 2.20 trillion
funds (ETFs) together have enjoyed 1.48 trillion dollars of cumulative net
1991), Fama and French (2010) finds that in aggregate, active mutual
1
As we will show later, estimates are based on fund data from Morningstar Direct. New mutual funds and
ETFs since 1/2019 are excluded because of the short history. Mutual funds and ETFs that are smaller than
$5 million dollars (as of Year-2006) are excluded. Cumulative net inflows from new ETFs alone are nearly
$0.4 trillion from 1/2019 to 9/2021. The net outflows from active mutual funds industry are nearly offset by
the combined inflows into index mutual funds and ETFs from 1/2006 to 9/2021 when new funds and new
ETFs are included.
active mutual funds relative to passive funds might suggest that the
market may become less efficient, and thus create opportunities for
flows may in fact impact the performance of active mutual funds. Lou
with stock-picking ability, but can cause significant price pressure. This
returns data, Staer (2017) finds that ETF flows exhibit a statistically
holdings. More recently, Gabaix and Koijen (2022) develops the Inelastic
Markets Hypothesis -- flows in and out of the stock market have large
active equity mutual funds. We break the 30-year period into two 15-year
prior to 2006 and net outflows starting in 2006. Along the way, we
update parts of the Fama and French (2010) results with the latest 15+
and net alphas) for active and passive funds in the most recent 15+ year
period? Second, how does small AUM active mutual funds’ performance
2
It happens that serendipitously the Fama and French (2010) analysis also ended in September 2006, which
seemed to correspond to a turning point for the active fund industry -- active mutual funds have suffered
steady outflows as well as relatively poor performance since then.
how does the fund flow influence performance for active mutual funds?
Fourth, what is the future of active mutual funds? The first three
Description of Data
Our study focuses on U.S. domestic equity funds and most of our
equity funds includes 4,638 active mutual funds, 350 index mutual
funds, and 528 passive exchange-traded funds (ETFs) with valid data. 4
and fund sizes or assets under managements (AUMs) for these funds
(both live and defunct), are all collected from Morningstar Direct from
aggregated from all of its share classes. Gross and net returns from the
3
Note that small AUM funds are not necessarily small-cap-stock funds, although small AUM funds tend to
hold small-cap stocks. Small AUM funds can hold large-cap stocks. Likewise, large AUM funds are not
large-cap-stock funds, although they tend to hold large-cap stocks. Large AUM funds can hold small-cap
stocks.
4
Morningstar Direct has a flag “Index Fund” for ETFs (“Yes” for passive ETFs, and “No” for active
ETFs). Majority ETFs are passive. Active ETFs are excluded because they constitute only a small portion
of the ETF space, and their history is short.
5
Morningstar assigns benchmarks based on the nine size–valuation squares that constitute the nine style
box representing the U.S. equity universe, the three valuation-based columns from the style box (blend,
growth, and value), the three size-based rows from the style box (large, mid, and small). The benchmark
returns for the nine styles are represented by the nine Russell index total returns: Russell 1000, Russell
1000 Growth, Russell 1000 Value, Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value,
Russell 2000, Russell 2000 Growth, Russell 2000 Value.
recently) with a history shorter than two years and nine months are
excluded.
other months are inflation adjusted by using the US CPI-U Index. The
million in September 2021. Monthly percentage flows for each fund are
mutual funds at the beginning, middle, and ending month of our data
September 2021.
6
Gross returns for different share classes for each unique fund are the same. Most of our analyses are on
gross returns. Net returns are slightly different for different share classes. The net returns for the oldest
share class are very close to the share-class-weighted net returns because AUM for the oldest share class on
average accounts for more than 70% of the aggregated AUM from all share classes.
350
300
Jan-91
250 Jan-06
Number of Funds
Sep-21
200
150
100
50
AUM (Million $)
(right y-axis) and the inflation-adjusted AUMs (left y-axis in log scale
persistent fund outflows in the second period. In each month, we sort the
active fund AUMs into percentiles and show the 5 th, 50th and 95th
selected percentiles have increased 115%, 230%, and 284% over the 30-
year period, respectively, even though they all appear flat in log scale.
The inflation-adjusted growth of the median active fund size has been
10000 2000
100 1000
10 500
1 0
Jan-91
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Jan-17
Jan-19
Jan-21
5th AUM 50th AUM 95th AUM Number of Active Funds
funds, index mutual funds, and ETFs) are summarized in Table 1. Gross
The top panel (Panel A) covers the 30-year period from January 1991 to
September 2021, the mid panel (Panel B) contains the January 1991 to
December 2005 (the first period) results and the bottom panel (Panel C)
second period. Each of the three panels is then subdivided with the top
section containing the results based on gross returns and the bottom
are annualized.7
7
Alphas are annualized as monthly alphas multiplied by 12. Standard deviations are annualized as monthly
standard deviations multiplied by square root of 12.
10
on geometric means (G.M.) during the first (1991 – 2005) and second
outperformed index funds by annualized 113 bps during the first period,
second period.
11
periods except the IDX3 alpha for index funds in the first
period.
that IDX3 alpha tends to be higher than IDX4 alpha for active
mutual funds in the first period; however, they are nearly the
3. The FFC estimated alpha is lower than simple alpha and IDX4
than that for index funds in the first period, but not in the
IDX3 gross alpha and IDX4 gross alpha for active mutual funds
12
gross and net returns for both active and index funds. Figure 2 shows
ratios for active mutual funds are about 70 bps higher than index funds.
Also, the asset-weighted expense ratios have slightly decreased over time
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
Jan-91
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Jan-17
Jan-19
Jan-21
during the first period. This is not surprising given that 1). active mutual
funds have higher expense ratios than index funds, and 2). the equal-
second period.
13
index funds by 0.12% and 0.09% in the second period for asset-weighted
0.42% and 0.21% in the second period for equal-weighted gross and net
and index funds are smaller than the differences in geometric means.
The results for the first period in Panel A of Table 1 are consistent
with those reported in the literature, especially Fama and French (2010).
In contrast with both the results of Panel A and those of Fama and
performance for active mutual funds in the second period is worse than
the first period. In other words, small AUM active funds tend to
outperform large AUM active funds in the first period, but not in the
second period.
(2000) reports some evidence that active funds perform better during
14
and the bad markets in the two periods for equal-weighted active and
index funds. Alphas for these selected periods are calculated as average
shown in Appendix. The three crisis periods are the Internet Bubble
3/2009) and the COVID Crisis (2/2020 – 3/2020). The bad markets are
defined as when S&P 500 returns are one standard deviation below its
mean (standard deviation and mean are measured over the full 30-year
period).
Table 2. Annualized Gross Alphas under Three Crisis Periods and Bad
Markets for Equal-Weighted Active and Index Funds
Internet Bad Markets Bad Markets
Bubble COVID in First in Second
Burst GFC Crisis Period Period
Simple
Alpha Active 3.22% 3.87% -3.01% 5.64% 0.91%
Index 0.49% 1.52% -0.95% -0.60% 0.16%
IDX3
Alpha Active 3.18% 1.03% -9.04% 3.27% 0.07%
Index 1.20% 1.25% -4.81% 1.43% 0.37%
IDX4
Alpha Active 2.99% 1.44% -8.68% 3.05% 0.27%
Index 1.40% 0.84% -5.17% 1.65% 0.17%
FFC
Alpha Active 2.90% -0.08% -10.67% 2.92% -0.99%
Index 1.63% -0.76% -4.57% 1.27% -0.94%
15
equal-weighted gross alphas during the Internet Bubble Burst and the
GFC, but underperformed index funds during the COVID crisis using all
four alpha measures except for IDX3 alpha during GFC. Active funds
bad markets in the second period. For IDX4 gross alpha, the equal-
active mutual funds has worsened for the second period at the
now investigate the distribution of individual alphas for all active mutual
funds in the two periods. The results are similar for all four measures of
alphas. Thus, to save space, we only report results for the IDX4 alphas
from now on. The IDX4 alphas are highlighted because they fall
16
returns after that month are included in subsequent tests (even if the
AUM subsequently drops below the threshold). In each period, funds are
months. Many funds do not have a full history for the 15-year period so
The loadings to the four IDX4 factors are estimated for each fund
and for each 15-year period. Figure 4 shows the distribution of t() for
the IDX4 alphas for the two periods in log scale so that the tails of the
distribution can be seen more clearly. For both gross and net alphas, the
entire t() distribution curve is shifted to the left from the first period to
in Table 1.
17
10
1
Frequency
0.01
-4 -3 -2 -1 0 1 2 3 4
t (alpha)
positive (t() >=2, superior funds) or negative (t() <= -2, inferior funds)
is much more than the number of inferior funds (3.32%) in the first
period, but the number of superior funds (6.00%) is nearly the same as
the number of inferior funds (5.69%) in the second period. With net
returns, the number of inferior funds (9.55%) is about the same as the
superior funds (1.74%) in the second period, which is not good news for
18
For example, Barber, Huang, and Odean (2016) finds that CAPM alphas
that aggregate net returns will be worse, thus outflows would seem
nearly unavoidable.
Figure 5 shows the active market share over the last 30 years,
where active market share is defined as the ratio of active AUM to total
(active + passive) AUM. We combine index funds and ETFs into passive
funds even though some cautions are in order. 8 We plot the active
8
Cautions are in order when ETFs are treated as passive funds. First, some ETFs attempt to replicate the
performance of what is essentially an active strategy structured as index; thus, shifting the active
management component to index construction. Wermers (2021) argues that some rules-based ETFs can be
considered as “quasi-active” strategies. Next, the short average holding period of ETFs and their large
trading volumes suggest that investors are using them to practice a form of active management.
19
AUM in active mutual funds has been in steady decline, dropping to 46%
as of September 2021. A simple linear fit of the trend over the complete
time period suggests that the active mutual funds will almost disappear
Figure 5. The Great Migration | Ratio of Total Active AUM to Total Active
+ Passive AUM
1.0
0.9
0.8
Active Market Share
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Jan-91
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Jan-17
Jan-19
Jan-21
Figure 6 shows that the cumulative dollar flows into active mutual
funds, index funds and ETFs. The fund dollar flow into a fund (Flowt) is
calculated from three quantities: last month’s AUM (At-1), this month’s
AUM (At) and fund net return (rt) via Equation (1):
9
Pedersen (2018) argues that Sharpe’s implicit assumption that the market portfolio never changes does not
hold in the real world because new shares are issued, others are repurchased, and indexes are reconstituted -
so even “passive” investors must regularly trade. Wermers (2021) suggests that the benefits of active
management are amplified in small- and mid-capitalization U.S. stocks.
20
Percentage flow is simply dollar flow divided by last month’s AUM (At-1).
The flows for active mutual funds have been negative since around 2006,
while the flows for index funds and ETFs have been positive for most of
the time. As mentioned earlier, the cumulative net outflows for active
mutual funds were 2.20 trillion dollars from January 2006 to September
2021. In contrast, the cumulative net inflows during the same period for
index mutual funds and exchange traded funds (ETFs) are 0.38 and 1.10
for active mutual funds is 0.65% (net inflow) from January 1991 to
December 2005 and drops to -0.33% (net outflow) from January 2006 to
September 2021. In contrast, the arithmetic average monthly net flow for
index funds and ETFs are 0.28% and 0.73% from January 2006 to
have largely been offset by net inflows into ETFs alone. The correlation
between dollar flows into the active mutual and index mutual funds is
23%, while the correlation between active mutual funds and ETF dollar
21
1.5
1
0.5
0
Jan-91
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Jan-17
Jan-19
Jan-21
-0.5
-1
-1.5
-2
-2.5
analysis on alphas sorted by fund AUM size for each month. More
calculate the IDX4 gross alpha, active mutual funds are sorted from
one of the five quintiles so that each quintile has nearly the same
adjusted return for month-t. The corresponding alphas are averaged with
equal weights for each quintile. This process is repeated in each month
and then averaged from 1/1991 to 9/2021 for both periods, and then
22
mutual funds for the entire 30-year period, and the two separate 15-year
periods are shown in Table 4. The results for the 30-year period are
roughly the average results of the two 15-year periods. The second to last
and large AUM funds. The last column of Table 4 shows t-statistics for
significant for the first period, but insignificant at -0.04% for the second
period.10
10
Note that the average alpha across the five size quintiles in Table 4 is slightly greater than the
corresponding IDX4 alpha in Table 1 in both periods. The difference is primarily because the number of
funds is different over time. The alpha or excess return for each fund in Table 4 is estimated by regressions
of the fund’s available data (often with a history less than the full period), while the alpha in Table 1 is
estimated by regressions of the aggregate returns. If all funds had data for the entire period, the average
alpha in both tables would be the same. For Simple Alpha, the average alpha in both tables is the same
because it does not require regressions.
23
The cumulative alpha differences between the small AUM and large
AUM active mutual funds are plotted in Figure 7. Small AUM funds
outperformed large AUM funds in the first period, but they slightly
that small AUM funds enjoyed over the first period disappeared over the
second period.
24
1.4
1.35
1.3
1.25
1.2
1.15
1.1
1.05
1
Dec-90
Dec-92
Dec-94
Dec-96
Dec-98
Dec-00
Dec-02
Dec-04
Dec-06
Dec-08
Dec-10
Dec-12
Dec-14
Dec-16
Dec-18
Dec-20
Figure 8 shows the rolling 12-month average percentage flows for
the small AUM and large AUM active mutual funds over the 30-year
period. It shows negative trend for both fund AUM groups. The slope of
the percentage flow for small AUM funds is about 2.5 times the slope for
the large AUM funds, indicating a much faster drop of percentage flow for
small AUM funds. Small AUM funds have higher average percentage
flows (3.75%) than large AUM funds (0.54%) in the first period. In
contrast, the average percentage flow for small AUM funds (0.74%) is not
far away from that for large AUM funds (-0.33%) in the second period.
Large AUM funds are much larger than small AUM funds, so they tend to
25
5%
4%
3%
2%
1%
0%
Jan-91
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Jan-17
Jan-19
Jan-21
-1%
-2%
of small AUM funds deteriorated in the second period? Our data includes
(2012) can be one of the factors that drives small AUM funds to
means that flows in and out of funds influence performance. It has little
outflows, liquidity is low and trading costs can be high, which can drag
26
funds, helping them to earn abnormal returns (see Coval and Stafford,
For the first method, the dependent variable is the fund’s factor-
month percentage flow: Flowt-1; fund’s last month alpha: Alpha t-1; and the
27
lagged flows, and lagged alphas for all active mutual funds. All regression
coefficients for the 30-year period are roughly equal to the average values
periods, but it is nearly cut by half in the second period. It means that a
Table 5. Regression of Alphas on Flows and Fund Sizes for Active Mutual
Funds*
Intercept Flowt Flowt-1 Alphat-1 Fsizet-1
1/1991-9/2021
(Both Periods)
Alphat 0.030 0.129 0.011 0.045 -0.001
t-stat 3.86 14.92 1.58 4.48 -3.59
1/1991-12/2005
(First Period)
Alphat 0.066 0.171 0.021 0.068 -0.003
t-stat 5.08 12.38 1.92 4.69 -4.86
1/2006-9/2021
(Second Period)
Alphat -0.004 0.089 0.002 0.023 0.0003
t-stat -0.49 9.12 0.20 1.67 0.63
*Percentage flows are monthly and IDX4 alphas are annualized
underlying fund holdings when funds trade. Our estimates show that the
average Amihud illiquidity measure (Amihud, 2002) for all U.S. stocks is
cut by nearly half from the first period to the second period, suggesting
the price impact of stock market is cut by half over the two periods. In
28
the first period, but insignificant (0.023) in the second period. This is the
which small AUM funds outperformed large AUM funds in the first
Once again, flows and alphas are contemporaneous. For each month, we
first sort the active fund universe into five quintiles based on fund size
(Small AUM S1 through Large AUM S5). Then, within each size quintile,
we sort the funds into five quintiles based on monthly percentage flow
(Low Flow F1 through High Flow F5). Thus, we have 25 composites (i.e.,
and then take average over the two 15-year periods. Table 6 Panel A
reports the double sort results for the 30-year period, while Panel B and
29
approximately the average of Panel B and C. Within each panel, the top
five rows report the average percentage flows, and the bottom five rows
Table 6. Double Sorts on Size and Flow for Gross Alphas for All Active
Mutual Munds*
30
size and alpha, and 2) between fund flow and alpha within each size
quintile. By taking average along each column of the bottom five rows,
one recovers the mid panel of Table 4 in which fund size is monotonically
fund flows. The only exception is that the average alpha for the lowest
flow quintile (1.43%) is higher than that for the second-lowest flow
31
(with monthly percentage flow of 18.98%) for the smallest AUM quintile is
associated with 5.98% alpha. A fund experienced high inflows can boost
its performance due to flow impact which has nothing to do with skills.
We estimate the flow impact using Table 6 (Panels B and C). The
five flow quintiles for small AUM funds in the first period. It suggests a
percentage flows and the spread in annualized alphas are 15.27% and
2.13%, respectively, for small AUM funds in the second period (Panel C).
On the other side, for large AUM funds, the flow impact is more
than doubled at 0.50 and 0.29 for the first and second period,
respectively. Note that the average AUM for large AUM funds is about
200 times more than that for small AUM funds (see Table 4). The dollar
flows will be more than 200 times higher for large AUM funds given the
11
Regressions tend to be dominated by small AUM funds because they tend to have large absolute values
of percentage flows. The flow coefficient is higher for large AUM funds.
32
words, net new inflows (or outflows) of 200 million dollars will have
higher flow impact than net new inflows (or outflows) of 1 million dollars.
AUM and large AUM funds for the two periods with the data taken from
Table 6 (Panels B and C). There are at least two factors that contribute to
the outperformance of small AUM active mutual funds in the first period:
(3.75%) is higher than that for large AUM funds (0.54%) in the first
period. Given the above-mentioned flow impact of 0.19 and 0.50 for small
AUM and large AUM funds, respectively, the flow impact on annualized
alpha is 0.71% and 0.27% for small and large AUM funds, respectively. 12
In other words, flow impact helped small AUM funds to outperform large
0.44%).13
12
The flow impact of 0.19 for small AUM funds is under-estimated because other factors played a positive
role. Assuming that other factors play no or less of a role in the second period, we can use the flow impact
ratio between small AUM funds and large AUM funds in the second period to disentangle the role of other
factors and infer the flow impact for small AUM funds in the first period. The flow impact for small AUM
funds (0.14) is about half of the flow impact for large AUM funds (0.29) in the second period. Using the
same ratio of 0.48 (=0.14/0.29), the flow impact would be increased from 0.19 to 0.24 (=0.48*0.50) for
small AUM funds in the first period, and the flow impact on alpha would increase from 0.71% to 0.90%
(=3.75%*0.24). In other words, flow impact may have contributed approximately 0.90% alpha to small
AUM funds prior to 2006.
13
Other factors played a positive role of 1.27% and 1.25% for simple alpha and FFC alpha, respectively.
Therefore, the role played by other factors depends on alpha models. In addition, the literature suggests a
few potential other factors: 1). Prior to 2006, active mutual funds exhibited some evidence of stock-picking
33
(the first period) are larger than the slopes for most of the flow quintiles
on the two solid lines (the second period). It indicates that the average
Figure 9. The Impact of Percentage Flows on Alphas for Small and Large
AUM Funds for the Two Periods
5%
3%
1%
-3%
-5%
It is interesting to note that there are three lines that cross the
origin point (large AUM funds in both periods, and small AUM funds in
the second period), except the dashed blue line (small AUM funds in the
first period). Crossing the origin point is consistent with the flow-driven-
skills (e.g., see Daniel et. al. (1997), Wermers (2000), Kosowski et. al. (2006)), and 2). von Reibnitz (2015)
shows that active strategies have the greatest impact on returns during periods of high dispersion, when
alpha produced by the most active mutual funds significantly exceeds that produced in other months. We
found that higher cross-sectional stock return dispersion in the first period is positively associated with the
outperformance of small AUM funds.
34
driven-return-effect for large AUM funds in both periods, and for small
The two most negative flow quintiles for small AUM funds in the
first period are associated with positive alphas, which is at odds with the
alpha for small AUM funds in the first period as mentioned above.
During the second period, both percentage flow and flow impact
have been lowered significantly for small AUM funds. The flow impact on
alpha is 0.10% (=0.74%*0.14) for small AUM funds and -0.10% (=-
0.33%*0.29) for large AUM funds, so that the flow impact helped small
shows that small AUM funds underperform large AUM funds by 0.04%.
second period, in contrast to a positive role in the first period. All these
period.
estimate the flow impact on the aggregated level for the active mutual
14
This flow-driven-return-effect is consistent with the Figure 5 of Gabaix and Koijen (2022), in which the
aggregate flow into the stock market has a linear relation with the return on the aggregate stock market, and
the relation approximately crosses the origin point.
35
flow for aggregated active mutual funds is 0.65% (net inflow) in the first
period and drops to -0.33% (net outflow) in the second period. Given the
period) for large AUM funds, the flow impact on annualized alpha is
positive 0.33% for the first period and negative -0.10% for the second
period, which leads to a change of -0.43% alpha across the two periods. 15
In other words, the negative flow trend has impacted the performance for
the active fund industry by negative 0.43% over the last 30 years. This
ratio difference (~0.70%) between active and index funds. The negative
Robustness Tests
using the other three alpha measures: simple alphas, IDX3 alphas and
15
The flow impact for large AUM funds is used because active mutual funds in aggregate are dominated by
large AUM funds.
36
that are greater than $5 million in AUM. Raising fund AUM threshold
the smallest AUM quintile, which does not change the conclusions for
the rest four quintiles in Table 4 and Table 6. The equal-weighted IDX4
gross alpha for active funds in Table 1 in the first period decreases from
1.06% to 0.53% when funds with AUM less than $100 million are
excluded, confirming that relatively smaller AUM funds did better in the
first period.
Equation (1) is used to calculate dollar flows for all the analyses so
far. Another more direct way is to use fund reported new sales and
inflows), and the cash resulting from share redemptions (dollar outflows),
respectively. We repeated all analyses with sales and redemptions for the
The flow impact on alpha is 0.72 and 0.60 in bad markets for the
first and second periods, respectively, which are much larger than the
corresponding values (0.50 and 0.29) for the full sample of the first and
16
Unfortunately, historical sales and redemption data only starts from 1999 in Morningstar Direct, so that
we can only test the second period.
37
the more recent 15+ years, is the active mutual fund industry likely to
remain large in the future? To forecast the active market share for the
the second period in Table 1 and flow information in the second period
from Figure 6.17 More specifically, the monthly geometric mean net
returns are 0.78%, 0.82% and 0.82% for active funds, index funds and
0.33% (negative), 0.28% and 0.70% for active funds, index funds and
Where r and f are the monthly geometric mean return and monthly
active AUM to total AUM. The active market share is forecasted to drop
to 17% after 15-years. The assumption for future market returns do not
change much the active share forecast because it has the same impact
17
Bootstrap simulations that draw flows and returns from the second period yield close results at the 50 th
percentile.
38
0.7
0.6
0.5
Active Mutual Fund Share
0.4
Forecast
0.3
0.2
0.1
0
has enjoyed spectacular growth since the late 1990s, a few recent
ETFs have on the underlying securities. For example, ETFs distort stock
Moussawi, 2018).
believe that they will disappear completely. Active mutual funds will
likely remain prevalent in 401(k) plans for the foreseeable future because
been argued that at some point as the ratio of active AUM to total AUM
39
Conclusions
The year 2006 marks a significant landscaping change for the U.S.
funds and ETFs have experienced continuous net inflows. This is the
during the last 15 years. Prior to 2006, small AUM active mutual funds
also diminishes.
small AUM funds in the first period: 1) higher percentage inflows, and 2)
higher flow impact. These two factors helped small AUM funds to
40
At the aggregated level for active funds industry, the flow impact
on annualized alpha is 0.33% for the first period and -0.10% for the
funds industry.
Finally, the fee difference of about 70 bps between active and index
down the net performance and drive the persistent outflows from active
mutual funds. If the flows for active mutual funds, index funds and ETFs
for the next 15 years are the same as last 15 years, active market share
Acknowledgments
The authors thank John Rekenthaler and the anonymous referee for their
helpful comments.
41
active mutual funds hold small amount of required cash but Morningstar
The FFC Alpha has been widely adopted in academic research for
Equation (4).18
h and m are loadings to the four factors. (+ et) is the factor-adjusted
return in month t, and we also call it alpha (for a month) in the cross-
18
Ri,t is the return on fund i for month t, Rft is the risk-free rate (the 1-month U.S. Treasury bill rate), RMt is
the market return (the return on a asset-weighted portfolio of NYSE, Amex, and NASDAQ stocks), SMB t
and HMLt are the size and value-growth returns of Fama and French (1993), MOMt is Carhart’s (1997)
momentum return. All the monthly factor returns are downloaded from the French Data Library.
42
with no cost. In addition, the FFC model suffers from biases. Cremers,
Petajisto, and Zitzewitz (2013) shows that these biases cause the
managers (who have a positive beta on SMB) and easy to beat for large-
returns well, producing alphas close to zero for all fund groups. The IDX4
One can argue that the MOM factor requires a lot of turnover and
thus it is a kind of active strategy. We also test the IDX3 model, which is
43
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