The Biggest Mutual Fund Stories of 2019
These 8 events were attention-getters.
Has it been a year already? Purely by the numbers, it's been a great year. The 100 largest funds are up an average of 18.5%. That's a pretty sweet return.
Beyond the numbers, though, there certainly are some low points, too. Let's look at some of the biggest stories in the fund world. Also, be sure to read Ben Johnson's report on the biggest stories in the exchange-traded fund world in 2019.
Jack Bogle RIP
The biggest story has to be the death of Jack Bogle at the age of 89 in January. The Vanguard founder clearly did more for fund investors than anyone else in history.
Since I shared these reflections on Bogle's life in January, a couple of things really stood out to me. I was struck by the hundreds of people who shared stories of meeting Bogle. Virtually every person shared a story about meeting Bogle and being inspired by him to go out and do their best for investors. It's remarkable that he maintained the evangelical zeal throughout his entire life.
If you know the story of Vanguard, you know how remarkable it is that it even came into existence. It required a unique set of circumstances as well as Bogle's vision to bring it into the world. But, reflecting on it today, I think that Vanguard isn't just unique to the fund industry but is unique to the world of business overall. A firm owned entirely by its customers that only charges its costs to customers is really remarkable. Yet, as Vanguardians are then quick to point out, the firm is very much for profit; it's just that it's for the profit of its customers rather than a corporate owner. That's quite a legacy.
Invesco Buys Oppenheimer
Invesco closed its acquisition of Oppenheimer Funds in May 2019. The firm moved quickly to alter its mutual fund lineup and move some investment professionals from New York to Atlanta. But for the most part, Invesco was looking to cut costs outside the investment professional realm. More job cuts came in the sales and back-office areas, for example.
On Dec. 13, Invesco announced a second wave of lineup consolidations that included the liquidation of 36 ETFs.
Oppenheimer ran its investment side with a pretty lean staff, so there was not a lot of cost savings to be had there. In fact, Invesco paid handsomely to lock up key managers and analysts at Invesco through 2022. Given the importance of its star managers to keeping assets of the firm, that's no surprise.
A Rising Star Leaves T. Rowe Price
Managers leave their firms all the time, but Henry Ellenbogen's departure from T. Rowe Price was a pretty big surprise. He ran the then-Gold-rated T. Rowe Price New Horizons (PRNHX), which had enjoyed great results. The mid-growth fund was at the heart of T. Rowe's strong performing growth lineup, so it smarts from that perspective. But it also smarts because T. Rowe Price has some other growth managers not far from retirement age. Ellenbogen was 46 when he left and, thus, someone the firm might have been expecting to depend on even more in the future.
An Unhappy Surprise for American Funds
The mutual fund industry has had a few scandals in its time, but American Funds has generally maintained its squeaky-clean reputation. That's why it was a surprise to learn about an American Funds manager leaving because of conflicts-of-interest issues. A BBC News story reported that Mark Denning had multiple conflicts of interest including a family trust that owned holdings that overlapped with portfolios he ran for Capital Group aka American funds. In addition, he invested in a company whose CEO was married to his daughter. Apparently, he didn’t disclose any of this to American Funds.
We haven't yet seen evidence that Denning's actions harmed fundholders at American. While the news is disappointing, we still have a high opinion of American Funds.
Growth Beats Value
Talk about an evergreen story. Once again, growth is set to outperform value for the year. Through Dec. 11, the average large-growth fund is up a little over 28% and the average large-value fund is up a little less than 22%. Growth also outperformed in 2018 and 2017, but not in 2016. Over the trailing three years, the average annualized 16.4% return for large-growth funds was nearly double that of large value. Large growth is beating large value over the trailing five years by nearly 400 basis points each year and over the trailing 10 years by over 200 basis points a year.
AQR's Cliff Asness argues that most of growth's outperformance over the past decade was for good reason because their fundamentals were improving faster than value stocks'. However, he argues that, over the past two years, growth simply outperformed because of rising prices rather than improving fundamentals. Value managers have to hope he is right and that the much-awaited value rebound is just around the corner.
Passive Beats Active
The other mega-trend going on in the fund world is the move to passive from active. Through November 2019, passive funds have had $413 billion in net inflows for the year. Meanwhile, active funds have suffered $50 billion in net outflows. Those figures include ETFs and open-end funds. Active funds haven't had net inflows since 2014. The last time that active funds had higher net inflows than passive was 2010.
Although domestic-equity has long been the biggest draw for passive, index funds are starting to turn the tables in international equity as well as fixed income. In the first 11 months of 2019, passive international equity funds had net inflows of about $15 billion compared with net outflows of about $4.5 billion for active international-equity funds. Active taxable-bond funds still outdrew passive taxable-bond funds, but this year the margin was only about $3 billion through November.
Anarchy in the U.K.
One of the biggest mutual fund stories of the year took place in the United Kingdom. One of the best-known mutual funds there became a huge mess, and private holdings proved to be a poor match for a vehicle that was supposed to provide daily liquidity. You can read John Rekenthaler's take about it.
Bill Gross Rides Into the Sunset
Bill Gross' departure from Pimco was like a sonic boom across the investment landscape. It drove unprecedented outflows from flagship Pimco Total Return (PTTRX). Yet his retirement a few years later at Janus was a rather quiet event. Although many investors fled Pimco, few followed him across the street to his new digs at Janus. And it was easy to see why. He began with a very small staff, performance was unimpressive, and when he joined Janus he wouldn't commit to staying for a definitive time period.
But let's remember that he did accomplish remarkable things at Pimco. He spurred the institutional total return approach that was uncommon in retail mutual funds but soon became the norm in the wake of Pimco Total Return's tremendous success. He helped build an organization with great managers, analysts, quants, and traders. And Pimco Total Return's performance enriched legions of investors small and large.
Editor's Note: This article is a corrected version. A reference to historical flows was changed.
Russel Kinnel has a position in the following securities mentioned above: PTTRX. Find out about Morningstar’s editorial policies.