Active manager asset flows & share class changes

Over the past decade, many investors have decided to move their money from higher priced active managers to lower priced passive managers.  A passive manager just aims to mirror the performance of an index.  The most commonly referred to index in the 401K space is the S&P 500 Index.  Active managers have responded to this tidal wave by trying to offer lower priced share classes, collective investment funds that pool active and passive investments, or they have penned white papers on the value of active management.

Despite these efforts, managers like T. Rowe Price, have experienced heavy asset losses:  T. Rowe Price asset flows .  These losses have created a very difficult environment for these managers as they try to maintain profitable positions while having liquidity to deal with net redemptions.  Many managers are also employing “smart beta” strategies which incorporate aspects of passive management but with different valuation metrics.  Dimensional Fund Advisors has been active in this space since the early 80’s and are a bit of a hybrid of both.

With the DOL fiduciary rule, many firms are also now offering stripped down share classes that don’t pay additional revenue to intermediaries.  This makes those options more acceptable to lower cost investors while also eliminating many of the inherent conflicts that active managers have had within their distribution channels.  While the active vs. passive management disparity will continue forever, what is missed in this discussion is that all investment decisions are active in nature.  You always determine how much to have in stocks vs. bonds.  You always determine what portion to invest in big companies versus small.  You also determine what percentage to invest domestically or internationally.  The passive vs. active discussion focuses on how you populate that asset class but having exposure to it in the first place tends to be the most important factor in determining investment success.