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Highlighting the ongoing shift to passive investment vehicles, actively-managed equity funds in the U.S. fund industry had their weakest January on record, Moody’s Investors Service reported.

The rating agency said that investors pulled a record US$46 billion from long-term equity mutual funds in January, even topping withdrawals during the financial crisis.

The negative outflows were somewhat offset by a strong performance for equity markets, which bolstered assets under management (AUM) and masked the effect of the poor sales, Moody’s noted.

Still, it said the outflows are negative for the sector, as they represent a loss in franchise strength and brand value, “particularly since it is occurring while the equity markets are robust.”

It’s also notable that the outflow occurred “during a period of relatively strong economic growth with volatility at relatively low levels,” it said.

For 2019, there was US$362 billion in net outflows from long-term equity mutual funds, Moody’s said.

Conversely, exchange-traded funds (ETFs) and passive funds enjoyed inflows of US$162 billion in 2019, it reported.

While an asset allocation shift away from stocks and toward bonds may explain some of the trends, Moody’s said that it views “the flows into both passive equity and passive bond funds as a clear market signal that consumers are continuing to show their preference for low-cost, passive beta products, regardless of changing market environments.”

In fact, the shift to passive funds is best seen as the emergence of better technology, Moody’s suggested.

“Passive, low-cost funds are a more efficient vehicle to channel earnings from corporates to shareholders because there is less earnings leakage from investment management fees to asset managers, trading costs to brokerages and other intermediaries,” it said.

“The underlying driver of flows into low-fee passive funds over higher-fee active funds is changing consumer preferences, rather than asset market trends, volatility regimes or macro factors such as quantitative easing or tightening,” it said.