The Diminishing Role of Active Mutual Funds: Flows and Returns

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

JEL Classification: G10