Throughout the first half of 2018, we have seen a massive divergence in fund flows as International Equity has dominated U.S. Equity. As we can see in the table below, International Equity has attracted $60 billion in positive net flows YTD across all mutual funds, both active and passive strategies; U.S. Equity on the other hand, has lost an almost identical amount, posting outflows of -$58 billion. On the surface, it appears that many U.S. investors have reallocated some of their domestic equity exposure overseas.
Diving into the data a bit further, the distribution of flows between active and passive strategies tells an interesting story. While U.S. Equity has suffered huge outflows at the aggregate level, this has come solely at the expense of active management which lost -$87 billion YTD; passive strategies have attracted $28 billion in positive in-flows. Looking at International Equity, the YTD distribution of that positive $60 billion is roughly equal with the active/passive split at 45%/55%, respectively. The trend, however, tells a different story. While the first quarter of 2018 saw active management surprisingly amass more in-flows than passive ($25.5 billion vs. $17.9 billion), the second quarter was an enormous reversal as passive strategies attracted over 90% of all net flows. Safe to say, the Q1 love affair with active management did not last long. How the second half of 2018 plays out is anyone’s guess, but if the current trend persists, then 2018 will look a lot like 2017 in which passive strategies trounced active management.
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As international equity investors, the team at R Squared Capital Management (former team at Julius Baer / Artio Global) utilizes fundamental and macro analysis in our quest to correctly identify structural tailwinds and headwinds at the geographic, sector and company levels.
FROM THE DESK OF RICHARD PELL
Richard Pell is CEO and Portfolio Manager at R Squared Capital Management.
Richard co-founded R Squared Capital Management in May of 2013. Prior to that, he was Chief Executive Officer and Chief Investment Officer of Artio Global Management LLC, a position he held since 1995 when the firm was part of the Julius Baer Group. Richard also served on the Board of Directors at Artio.
To read Richard's full bio or other RSQ team members, click here.