The Diminishing Role of Active Mutual Funds: Flows and Returns

Vol. 21, No. 4, 2023
James X. Xiong, Thomas M. Idzorek and Roger G. Ibbotson

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/underperformance 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 and 12/2005, but it was a negative −0.10% between 1/2006 and 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.