99 / 708
PIMCO Total Return
PTTRX
has seen a remarkable
$43
billion in outflows through the
12
months ended
January
2016
. Yet in percentage terms,
PIMCO
Total
Return’s
33%
outflow places it just
47
th on the list of
12
-month outflows within the Morningstar
500
.
Something big is happening.
A striking
17
Morningstar
500
funds suffered outflows
of at least
50%
of assets under management in a
year, and
80
shed
25%
or more. Even a single month
can bring big redemptions, as eight Morningstar
500
funds suffered an outflow of at least
10%
in
January alone.
Also, in January we saw something we rarely see:
a firm that subadvises a fund we covered was liqui-
dating. It isn’t just that
Aston/TAMRO Small Cap
ATASX
was merging into another fund but that
TAMRO
was closing up shop. Two years ago, the firm was
running
$1
.
3
billion. One year ago, it was running
$800
million, but at year-end
2015
, it was down to
$150
million.
If we had just endured a brutal bear market, then the
wave of redemptions would be par for the course.
But this comes after a tremendous equity rally and
therefore is unprecedented. True, we began
2016
with a sharp sell-off, but the outflow trend was well-
established before that, and the
2016
downturn had
little time to have an impact on flows through January.
The simple answer to this riddle is competition from
exchange-traded funds.
ETF
s have gained the
upper hand in the active/passive debate, even over
open-end index funds, which generally offer com-
parable cost benefits. More advisors are switching to
ETF
-focused strategies, and, when they get a new
client, they quickly sell the weakest-performing active
funds—possibly all the actively managed funds—
in the client’s current portfolio. Self-guided investors
are moving to
ETF
s, too.
Although you can find an
ETF
for just about any cate-
gory or asset class, the outflow trend has largely been
centered on domestic-equity funds. Actively managed
bond funds still pull in nearly all the new flows in that
asset class, and active foreign-equity funds still have
positive inflows. The argument for passive investing
applies similarly to all asset classes, so it would seem
that marketing and emotion at least play some role in
the current tilt. That said, there are some quirks to
bond indexes such as a heavy government weighting
in the Barclays Aggregate and challenges in tracking
high yield and muni indexes that do limit appeal on
the fixed-income side.
Yet the trend has more positives than negatives. Inves-
tors are moving to lower-cost investments, and that
ought to benefit their long-term returns. Competition
is heating up for investors’ dollars, and, to the extent
that they are throwing off subpar actively managed
funds for solid low-cost
ETF
s, that’s a good thing. On
the other hand, much of the cost savings is going to
advisors who preach the benefits of low-cost
ETF
s but
then charge additional fees that bring the investor
back to higher total fees.
This presents fund investors with a new challenge in
monitoring and selecting investments. You’ve got
Outflows Threaten
These Funds
Fund Reports
4
Fidelity High Income
Harding Loevner Emerging Markets
Matthews Asia Dividend
Vanguard Total World Stock Index
Morningstar Research
8
Making Sense of
Multialternative Funds
The Contrarian
10
Fund Companies Under Fire
Red Flags
11
Beware of Rising Volatility
Market Overview
12
Leaders & Laggards
13
Manager Changes and News
14
Portfolio Matters
16
Lessons From Your Tax Return
Tracking Morningstar
18
Analyst Ratings
Income Strategist
20
The Case for Core Bond Funds
Changes to the 500
22
FundInvestor 500 Spotlight
23
Follow Russ on Twitter
@RussKinnel
RusselKinnel, Director of
ManagerResearch and Editor
FundInvestor
March 2016
Vol. 24 No. 7
Research and recommendatio s for the s riou fund investo
SM
Continued on Page 2