Fascinating Morningstar Article - Mutual Fund Flows

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
munemaker
Posts: 4174
Joined: Sat Jan 18, 2014 6:14 pm

Fascinating Morningstar Article - Mutual Fund Flows

Post by munemaker »

I found this article totally fascinating. I am sure readers will let me know if I am interpreting any of this incorrectly.

link: https://corporate.morningstar.com/US/do ... an2017.pdf

12/2016 Market share:
- Vanguard: 22.7% (12/2015 = 20.8%)
- American Funds: 8.4% (12/2015 = 8.4%)
- Fidelity: 8.2% (12/2015 = 8.5%)
- Schwab (funds & EFTs combined): 0.8% (12/2015 = 0.7%)

Observations:
1) Investors are catching on to Vanguard passive mutual funds.
2) Most fund companies have net outflows and are losing market share with Vanguard enjoying the gain. Significant exceptions are: iShares and State Street which seem to be doing ok (both known for passive investing, I believe).
3) American Funds (number 2) and Fidelity Investments (number 3) both experienced significant net outflows of funds from 2015 to 2016 and a loss in market share.
4) Schwab is absolutely tiny compared to Vanguard and Fidelity. In the forum, we talk about Vanguard, Fidelity and Schwab as equals, but Schwab is not in the same league as Vanguard and Fidelity.

I would think many of these fund houses would be getting desperate. I bet this has something to do with the layoffs announced at Fidelity today.

Would appreciate review and comments from others.
mhalley
Posts: 8506
Joined: Tue Nov 20, 2007 6:02 am

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by mhalley »

Fidelity goe out of its way to make its low cost index funds hard to find. Looks like they need to do some work there, because they have a great selection, even surpassing vanguard for some funds.
User avatar
Topic Author
munemaker
Posts: 4174
Joined: Sat Jan 18, 2014 6:14 pm

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by munemaker »

mhalley wrote:Fidelity goe out of its way to make its low cost index funds hard to find. Looks like they need to do some work there, because they have a great selection, even surpassing vanguard for some funds.
All of my assets were with Vanguard (other than cash and my 401k). Recently I retired and moved my 401k to Fidelity. Fidelity made the transfer really easy. I received a number of calls letting me know how it was proceeding, etc. One employee who called me was a CFA. His role was to help me decide how to invest the money. I told him this 401k is part of a larger portfolio and I was planning to put the entire amount in the total stock market fund. He went into a pitch about how certain active fund managers consistently beat the market, and about their smart beta funds. His mission was clearly to move me out of index funds. He asked how he could help. I told him he could help by being available if and when I had any questions. I could tell by the tone of his voice that he was disappointed.
alex_686
Posts: 7093
Joined: Mon Feb 09, 2015 2:39 pm

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by alex_686 »

munemaker wrote:4) Schwab is absolutely tiny compared to Vanguard and Fidelity. In the forum, we talk about Vanguard, Fidelity and Schwab as equals, but Schwab is not in the same league as Vanguard and Fidelity.
But for us, why does size matter? Ultimately it comes down to how efficient the fund is, low fees and low tracking error. Now, while it may be easier for a large fund to run a efficient portfolio this does not preclude a small fund from hitting the mark.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
User avatar
nedsaid
Posts: 13938
Joined: Fri Nov 23, 2012 12:33 pm

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by nedsaid »

Wow. Vanguard is really doing quite well. Active managers must be quite worried.
A fool and his money are good for business.
pkcrafter
Posts: 14403
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by pkcrafter »

Thanks for posting the article, it is interesting, but also brings a warning. First, why are investors piling into index funds? Because they have learned about costs and long term performance? I doubt it. They are piling in because of recent outperformance just as they did in the late 90's. When this party ends, those short-sighted investors will sell index funds and find some active value funds that will look better.

Fidelity, in a very aggressive campaign, has dropped index fund ERs and is no doubt operating those funds in the red to stop investors from moving out and to attract more investors who would have otherwise gone to VG. Fidelity is also making an aggressive attempt to "upgrade" investors to higher fee programs.

Schwab's strategy is to claim they don't charge anything for their robo service and low cost index funds, but they insist you hold some cash which they use to make money. It sounds like a good deal, but I'm sure some investors would not like being told they must hold cash. Even with that, Schwab is still a decent option.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
User avatar
Topic Author
munemaker
Posts: 4174
Joined: Sat Jan 18, 2014 6:14 pm

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by munemaker »

alex_686 wrote:
munemaker wrote:4) Schwab is absolutely tiny compared to Vanguard and Fidelity. In the forum, we talk about Vanguard, Fidelity and Schwab as equals, but Schwab is not in the same league as Vanguard and Fidelity.
But for us, why does size matter? Ultimately it comes down to how efficient the fund is, low fees and low tracking error. Now, while it may be easier for a large fund to run a efficient portfolio this does not preclude a small fund from hitting the mark.
I was thinking about this. Would a larger firm have more resources to better serve the client in some way, especially a firm that is owned by its clients rather than investors who expect a profit? Would they be less likely to fold in a major downturn? I don't really know, but you think there would be some advantage of scale.
alex_686
Posts: 7093
Joined: Mon Feb 09, 2015 2:39 pm

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by alex_686 »

munemaker wrote:I was thinking about this. Would a larger firm have more resources to better serve the client in some way, especially a firm that is owned by its clients rather than investors who expect a profit? Would they be less likely to fold in a major downturn? I don't really know, but you think there would be some advantage of scale.
The conventional answer is that scale bring in efficiency, efficiency gets lower expense ratios. So, I would expect a larger firm to have a better expense ratio but it is not a sure thing.

IT has been flattening the playing field. Lots of stuff that firms would do in-house can now be farmed out. So everything has gotten better and cheaper. It takes a fair chunk of change to get a good web site up and running but spending 10 times the amount won't get you a web site that is 10 times as good.

I don't think you have to worry about a firm going bust. This almost never happens and when it does the fund is quickly merged into a larger fund. I have personally shepherd 2 smaller fund families get absorbed by a larger fund family.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
robertalpert
Posts: 455
Joined: Wed Aug 22, 2007 10:09 pm

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by robertalpert »

munemaker wrote:
All of my assets were with Vanguard (other than cash and my 401k). Recently I retired and moved my 401k to Fidelity. Fidelity made the transfer really easy.
Does Vanguard accommodate transferring in from a 401K?

What is primary reason you chose Fidelity for your 401-k transfer destination?
User avatar
Topic Author
munemaker
Posts: 4174
Joined: Sat Jan 18, 2014 6:14 pm

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by munemaker »

robertalpert wrote:
munemaker wrote:
All of my assets were with Vanguard (other than cash and my 401k). Recently I retired and moved my 401k to Fidelity. Fidelity made the transfer really easy.
Does Vanguard accommodate transferring in from a 401K?

What is primary reason you chose Fidelity for your 401-k transfer destination?
Yes, I could have transferred my 401k to Vanguard. There were several reasons I chose Fidelity. I had two experiences with Vanguard Customer Service that I considered unsatisfactory. I reported these on a survey they sent me. I told them I like their product but their service is poor. To their credit, some manager sent me a snail mail addressing them; basically he said he can understand my frustration and is sorry for it, but that is the way they do things.

Aside from that, Fidelity offered me $1,200 to move my 401k to an IRA there. Sounds like a lot, but on a $800,000 investment, it is really insignificant.

The other reason is I thought it might make sense to have a second firm in case there was some short term problem with my Vanguard account. I could imagine a problem of some sort where maybe my account would be temporarily unavailable due to fraud, or a computer problem, or whatever. I don't have much of a pension and am hoping not to take SS until 70, so I need access to some money to live on. Paranoid? Maybe, but I know this occasionally happens at banks while a problem is investigated, so I imagine it could happen at Vanguard, and perhaps it does from time to time.
User avatar
Topic Author
munemaker
Posts: 4174
Joined: Sat Jan 18, 2014 6:14 pm

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by munemaker »

alex_686 wrote:
I don't think you have to worry about a firm going bust. This almost never happens and when it does the fund is quickly merged into a larger fund.
I am not really worried about that, and I know my funds would be protected, although you could temporarily lose access to them during a transition period.

It seems intuitive that there must be some advantage to investing with a much, much larger company that does not have a profit motive, compared to investing with a much, much smaller firm that is responsible for generating a profit for an owner. I don't know what that advantage might be, and I was just speculating.

One thing I wonder about is if Fidelity and Schwab reluctantly offer low expense ratio index funds at a loss to compete. Compare that with Vanguard who invented the low cost, index fund concept, enthusiastically promote them and essentially force others to offer them, potentially at a loss. Wouldn't it make more sense to go with the champion of low cost investing, rather than a firm that is forced into it?
alex_686
Posts: 7093
Joined: Mon Feb 09, 2015 2:39 pm

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by alex_686 »

munemaker wrote:It seems intuitive that there must be some advantage to investing with a much, much larger company that does not have a profit motive, compared to investing with a much, much smaller firm that is responsible for generating a profit for an owner. I don't know what that advantage might be, and I was just speculating.

One thing I wonder about is if Fidelity and Schwab reluctantly offer low expense ratio index funds at a loss to compete. Compare that with Vanguard who invented the low cost, index fund concept, enthusiastically promote them and essentially force others to offer them, potentially at a loss. Wouldn't it make more sense to go with the champion of low cost investing, rather than a firm that is forced into it?
You are thinking about 2 different things, size and profit v. not for profit.

Lets talk size first. At what point do you think a firm will hit scale? Increased scale brings increased efficiency. But as you grow bigger the marginal benefit falls. A 1 billion AUM firm is obviously more efficient that a 100m AUM firm. But how much more efficient is a $2.3 trillion firm (Fidelity) vs. a $4 trillion firm vs. a $5.4 trillion firm (BlackRock)? I am going to venture not much.

Now lets talk profit v. non-profit. Passive index funds are a commodity product. You make profit by keeping your margins tight. And I do think Fidelity and Schwab make a profit off of their funds. Not large, but a profit. Do people like selling a commodity product with wafer thing margins? Amazon and Wal-Mart have made a killing doing so. And they may not like it but that is what the market conditions are.

With margins being wafer thin I don't see a huge advantage in being a not for profit. I like Vanguard, I think it gives them a edge, but not a decisive edge.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
User avatar
Portfolio7
Posts: 911
Joined: Tue Aug 02, 2016 3:53 am

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by Portfolio7 »

My 401K is at Fidelity, so I moved all our IRAs and past 401Ks there also. Have not regretted that move at all. The on-line interface is great, customer service is great, there are great funds and ETFs, low cost and otherwise if you dabble, and the local office was able to help me set up a Roth IRA for my under-age son. I'm new to the ETF trading thing, our 401Ks have always been all mutual funds, but the learning curve seems to not have hurt our investments any. Now, we're invested about half Vanguard funds and half DFA funds in our two 401Ks, where most of our savings are, and then there's another 10% in IRAs, all in ishares (Blackrock) ETFs. Fidelity will try to get you hooked up with an advisor, finding ways to up your fees, but I've always politely declined, and I'm happy with the very low-cost options available.
"An investment in knowledge pays the best interest" - Benjamin Franklin
afan
Posts: 5281
Joined: Sun Jul 25, 2010 4:01 pm

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by afan »

Schwab "grew up" as a brokerage firm and later made it's push into funds. Much of the money held at Schwab is in individual securities or a mix of funds from various issues. Comparing the total of Schwab mutual funds to Fidelity and Vanguard is misleading. Schwab overall is larger than those figures would imply.

I do worry that Schwab and Fidelity, having higher costs, may some day find they cannot afford to keep competing with Vanguard on price. They seem stuck right now. Keep their prices competitive and lose money or watch those assets flow out the door. At some point, I fear, they will raise prices to break even, trapping investors who are in taxable accounts.

Although it is true that more investors have become aware of the outperformance of index funds, the performance itself is hardly new. It was the observation that active funds trailed the market, based on long term data available many years ago, that lead to the creation of index funds. Their superior performance has been demonstrated just as the academics predicted. The notion that the better performance of index funds is some recent and hence fleeting phenomenon is more marketing nonsense from desperate active firm's trying to hold on to profitable business.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
jbolden1517
Posts: 868
Joined: Sun Jul 09, 2017 2:53 pm

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by jbolden1517 »

afan wrote: I do worry that Schwab and Fidelity, having higher costs, may some day find they cannot afford to keep competing with Vanguard on price. They seem stuck right now. Keep their prices competitive and lose money or watch those assets flow out the door. At some point, I fear, they will raise prices to break even, trapping investors who are in taxable accounts..
i wouldn't worry. I think the robo advisor is likely how Schwab competes. They can now time the flows of billions of dollars. Which means their trading desk can easily trade in their funds on a "heads we win, tails the customers lose" type strategy. Combine that with the profits from the cash and they might be close to 1% gross revenue on money management. And then of course as they move up market with Schwab bank they can start providing all the value added services like taking on credit card risk themselves. They are already providing a rich suite of lending products: http://www.schwab.com/public/schwab/banking_lending

Also let's not forget options trades are booming and they own OptionsHouse. People who are used to trading (including shorting) options in their 20s once they are in the 50s and have real money?

They are well on their way to being a mini-JPMorgan.
kommisarrex
Posts: 101
Joined: Mon Oct 25, 2010 11:45 pm

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by kommisarrex »

jbolden1517 wrote:
afan wrote: I do worry that Schwab and Fidelity, having higher costs, may some day find they cannot afford to keep competing with Vanguard on price. They seem stuck right now. Keep their prices competitive and lose money or watch those assets flow out the door. At some point, I fear, they will raise prices to break even, trapping investors who are in taxable accounts..
i wouldn't worry. I think the robo advisor is likely how Schwab competes. They can now time the flows of billions of dollars. Which means their trading desk can easily trade in their funds on a "heads we win, tails the customers lose" type strategy. Combine that with the profits from the cash and they might be close to 1% gross revenue on money management. And then of course as they move up market with Schwab bank they can start providing all the value added services like taking on credit card risk themselves. They are already providing a rich suite of lending products: http://www.schwab.com/public/schwab/banking_lending

Also let's not forget options trades are booming and they own OptionsHouse. People who are used to trading (including shorting) options in their 20s once they are in the 50s and have real money?

They are well on their way to being a mini-JPMorgan.
I hadn't considered this before. Can a company with robo-advisors use its knowledge of the algorithm to front those trades on its own trading desk? Seems like that would regulated, no?
acanthurus
Posts: 398
Joined: Sun Aug 04, 2013 8:02 am

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by acanthurus »

Removed
Last edited by acanthurus on Tue Oct 31, 2017 5:47 pm, edited 1 time in total.
Swansea
Posts: 989
Joined: Sat Feb 13, 2016 5:16 am

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by Swansea »

Vanguard has experienced growth recently from under 1 trillion to 4.4 trillion. During the tenure of McNab headcount was reduced 10%. That certainly would affect customer service. Data from the WSJ article today.
User avatar
tennisplyr
Posts: 2717
Joined: Tue Jan 28, 2014 1:53 pm
Location: Sarasota, FL

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by tennisplyr »

I'm in Vanguard (75%) and Fidelity (25%). Does anyone else believe they shouldn't have all their eggs in one basket??
Those who move forward with a happy spirit will find that things always work out.
selftalk
Posts: 1096
Joined: Thu Mar 08, 2012 10:08 am

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by selftalk »

pkcrafter is right in that when the big bear strikes then the short sighted hot money that chased returns and good performing fashions in the market and bought the respective index funds and index etf`s with their low expense ratios will panic and sell just like it always has happened in history. That`s human nature and that`s why "stay the course" is simple yet so hard to do.
acanthurus
Posts: 398
Joined: Sun Aug 04, 2013 8:02 am

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by acanthurus »

Removed
Last edited by acanthurus on Tue Oct 31, 2017 5:48 pm, edited 1 time in total.
User avatar
djpeteski
Posts: 1012
Joined: Fri Mar 31, 2017 9:07 am

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by djpeteski »

So I like Fidelity a bit better than Vanguard, but I have money at both.

A few weeks ago I inquired what benefit I could receive from moving money from Vanguard to Fidelity, about 65K. I was hoping to get about $200.

The Fidelity rep told me that there were no promotions at this time and to call back in September.

Odd that they are losing market share to Vanguard, but are not willing to provide incentives to slow the process.
User avatar
nisiprius
Advisory Board
Posts: 42212
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by nisiprius »

pkcrafter wrote:...Thanks for posting the article, it is interesting, but also brings a warning. First, why are investors piling into index funds? Because they have learned about costs and long term performance? I doubt it. They are piling in because of recent outperformance just as they did in the late 90's. When this party ends, those short-sighted investors will sell index funds and find some active value funds that will look better...
Which, because they are index funds, will have minimal impact on Vanguard or other holders of these funds. I'm sure you understand this but for anyone who doesn't, here's why.

If there's a general selloff of stocks throughout the market, then of course the market goes down and everyone's stock holdings go down.

If there's a general disillusionment with the stock of one company, or even one sector, then there's a selloff in that company or sector, and the price of that stock or sector goes down, and anyone with a concentration in that stock or sector has the value of their holdings go down. If the people who sell use that money to buy something else, it goes up and everyone who holds only other stocks sees of their holdings go up. And people who are invested in total market index funds see no change.

If there's a disillusionment in total market index funds, but not in stocks and general, and people sell off Total Stock and buy an equal dollar-value amount of actively managed funds or individual stocks, the total number of dollars in the market doesn't change--it just shifts around out of one bunch of stocks to another.

If the number of dollars in the market doesn't change, then the value of Total Stock doesn't change. If, say, people dump Total Stock and load up on healthcare, then in the market itself more of the dollar value is concentrated in healthcare--and people who own Total Stock will see its value stay the same, but according to the holdings list in the semiannual report, more of their value will be in healthcare stocks than before. We just see the places where our money is invested shift around, mirroring what happened in the total market.

Certainly, depending on the speed and so forth, such an outflow would be bad for Vanguard as a company--layoffs, etc.--and might be a transactional challenge. But those are relatively small details. Oh, sure, hypothetically, if 99% of all Total Stock shareholders decide to redeem all their shares on the very same day I'm sure that would be a catastrophe; but the once-$300-billion PIMCO Total Return Fund was able to deal with losing 2/3rds of its assets in about two years, without its causing any obvious problems for fund shareowners.

A flight away from index funds would not pose a problem for anyone who prefer to stay in index funds--the fair-weather-friend indexers won't do us harm by leaving, apart from hurting our Vanguard-fan pride.

Taking PIMCO Total Return as our model, one can imagine passive investing in general and Vanguard in particular ebbing back to half their current size over the next five or ten years, and apart from wistful nostalgia among Bogleheads I don't believe there'd be any major financial consequences to us.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
AllieTB1323
Posts: 270
Joined: Tue Mar 24, 2015 10:17 am
Location: Desert Washington State

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by AllieTB1323 »

tennisplyr wrote:I'm in Vanguard (75%) and Fidelity (25%). Does anyone else believe they shouldn't have all their eggs in one basket??
My thoughts exactly. I worry more about the backend IT function than I do about liquidity.
pkcrafter
Posts: 14403
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by pkcrafter »

Nisiprius, I didn't write that correctly. This is what I wrote:
When this party ends, those short-sighted investors will sell index funds and find some active value funds that will look better...
This is what I should have wrote, and apologies for my dim view to the "average" investor.

Short-sighted investors will sell index funds after a significant loss and they will stay out until the market has recovered and things look good again, then they will buy value funds that didn't drop so hard. A certificate should be required before any average investors are allowed to invest in index funds. :happy

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
jbolden1517
Posts: 868
Joined: Sun Jul 09, 2017 2:53 pm

Re: Fascinating Morningstar Article - Mutual Fund Flows

Post by jbolden1517 »

kommisarrex wrote:I hadn't considered this before. Can a company with robo-advisors use its knowledge of the algorithm to front those trades on its own trading desk? Seems like that would regulated, no?
Yes and they can do multiple layers of it. Think of it this way:
Tuesday the 12th ETF vendor X's trading desk gave $1m of ETF Y to create new shares. It sold those shares on the open market for a small profit.
Wednesday the 13th ETF vendor X's trading desk gave $1m of ETF Y to create new shares. It sold those shares to internal customers at the price it created them for.
Thursday the 14th ETF vendor X's trading desk sold 4 days calls on $1m of ETF Y. They immediately created new shares and 3 days later the calls were exercised against them calling those shares.
Friday the 15th ETF vendor X's trading desk sold 4 days calls on $1m of ETF Y. They immediately created new shares, 5 hours later they bought the call back at a profit and sold the shares to internal customers at the prevailing market price.

Does that questionable at all?
Post Reply