Active management is down, but not for the count. Yet it is understandable why the sentiment around it is so bleak. As Morningstar’s fund flow reporting has shown for years, outflows have ravaged actively managed funds in the US. They’ve suffered net withdrawals in nine of the past 10 calendar years. Indeed, roughly 60% of firms with at least 75% of their assets in actively managed funds (a threshold herein used to define an active shop) have suffered outflows over the trailing five-year period through December 2024.
The graph below shows the distribution of active shops’ five-year compounded organic growth rates as a histogram, with the line representing the cumulative share of assets represented by firms in each column grouping. Most firms have experienced outflows at an average rate between 0% and 10% of assets per year. Of the firms enjoying inflows, many were confined to no more than 10% growth. Though some of the firms enjoyed strong growth, they tended to have smaller asset bases.
Not all active firms are in the same condition. About 67% of active equity shops have experienced net outflows over the past five years, versus 53% of fixed-income shops. And the rate of equity outflows also exceeds that of fixed income, with a median five-year organic growth rate of negative 4.6% versus negative 0.9%. Shops tilted toward alternatives fared better, with only about 21% in outflows over the same stretch.
Is active management doomed? Not exactly. Money management is a wonderful business. It has high margins, is capital-light, and can be done in an office from most places in the world. But its greatest feature is its operational leverage. Costs are relatively fixed, but revenues grow and decline with markets—assuming a firm charges fees as a percentage of assets. Since markets tend to go up over the long term, this can lead to tremendous profit growth. Even as active managers have endured punishing outflows, strong market performance has more than made up for them. Despite suffering more than $2 trillion in investor outflows over the trailing 10 years through December 2024, actively managed fund assets appreciated by more than $7 trillion. Contrary to the narrative that active management is going extinct, this data suggests it’s holding up all right.
For a firm to keep growing its asset (and fee) base, it must at least offset net outflows with appreciation. Roughly speaking, if an equity fund sheds 5% of its assets in a given year, it can break even if its portfolio increases by 5%. While asset class returns clearly can’t be controlled, active managers enjoyed some good luck as a strong equity market acted as a buoy. Overall, when considering market appreciation, the picture brightens for active managers. Below is a histogram of active manager five-year annualized growth in assets.
So, most active shops are growing despite outflows. However, very strong equity returns over the past five years skew these figures. A different market environment could change the math quickly.
Over the five-year period ended Dec. 31, 2024, the MSCI ACWI GR Index gained 10.6% annualized, which is above its 8.4% return from its 1988 inception through December 2024. Five-year US bond returns (as measured by the Bloomberg US Aggregate Bond Index) were poor at negative 0.3% annualized, well below their longer-term average since 1988 of 5.3%. How would firms fare if returns improved or weakened? The table below looks at various return scenarios relative to trailing five-year organic growth rates. A firm would be in danger of shrinking if its expected asset appreciation fell below its historical rate of outflows. I estimated a firm’s expected appreciation by calculating a weighted-average expected return based on the distribution of its Dec. 31 asset-class exposures across open-end fund/exchange-traded fund offerings, and a series of corresponding return assumptions for stock, bond, and alternative asset classes.
The table below depicts the results under four scenarios: An average scenario which uses the long-term average returns referenced in the paragraph above; a strong scenario which assumes asset class returns that are 50% higher than their long-term average; a weak scenario assuming returns 50% lower than the average scenario; and a bear scenario with returns 75% below the average scenario. A firm is considered to be in danger if its expected appreciation under a given scenario falls below its trailing five-year average rate of outflows.
The vast majority of industry active assets would still grow in three of the four scenarios. Even in a bear return scenario, 39% of the industry’s active assets and 46% of the firms would be above water.
Fixed-income shops were more resilient than their equity counterparts but noticeably less so than alternative shops, which appear least vulnerable to the whims of the market.
Despite the steady drip of outflows from active funds, many shops can survive, and some may yet grow. Those facts will change if the pace of outflows grows more severe and market appreciation can’t make up the difference, but even then, active management won’t exactly disappear overnight.
Disclosures
Basis for Return Assumptions
Equity—MSCI ACWI GR
Fixed Income—Bloomberg US Aggregate Bond Index
Alternative—Assumed 0.3 Beta X MSCI ACWI return
Allocation—Assumed 50/50 blend of equity and fixed income
Category Grouping Definitions
Equity—funds classified as US equity, sector equity, or international equity
Fixed Income—funds classified as taxable bond or municipal bond
Alternative—funds classified as commodities, nontraditional equity, miscellaneous, or alternative
Allocation—contains funds in the allocation category group
Fund Flow Data Universe
All flow data shown is taken from the aggregate market of US-domiciled open-end funds and ETFs, excluding money market funds, funds of funds, and feeder funds.
