Investor Shifts Herald ‘Irreversible Decline’ for Mutual Funds | PLANADVISER

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The decline in mutual fund use appears set to continue across both retail and institutional investors, according to a recent Broadridge Financial Solutions study and flow tracking from data and insights provider Simfund.

For its part, Broadridge recently released results of a retail investor analysis that mined the activity of more than 40 million individual U.S. investors across investment vehicles, including mutual funds, exchange-traded funds and individual equities. When considering asset ownership by product as a percentage, mutual funds (38%) for the first time fell below stock holdings (39%), while ETFs continued a steady climb to reach 23% of assets.

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“The mutual fund space has long-term threats—there’s no disguising the decline,” says Andrew Guillette, vice president of global insights at Broadridge. “Mutual funds used to be more than half of investments in 2018, and now they’re below equities …. That shift has been rather dramatic, especially among the younger generations.”

Among retail investors, the shift away from mutual funds is partly the well-known story of cost savings, with ETFs providing lower-cost, tax-efficient investment options. But another key factor is the rise of more personalized investment options seen in separately managed accounts, model portfolios and direct indexing, Guillette says.

“When advisers put fees together, every basis point saved is a point earned,” he says.

Eroding Asset Class

In its report, Broadridge noted that mutual funds are facing an “irreversible decline” among retail investors.

Baby Boomers hold the most mutual funds as a percent of assets at 39%. That doesn’t fall off too far for Gen X (37%), Millennials (36%) or Gen Z (37%). But those cohorts do show greater asset allocation to ETFs as compared to the Boomers, according to Broadridge’s study.

In the defined contribution space, the shift away from mutual funds has been playing out similarly in large part due to the rise of collective investment trusts.

CITs, which have less regulation to contend with, can offer target-date fund investing at lower costs to DC plan sponsors. As of March, Morningstar pegged CITs as representing 49% of the in-plan target-date market, putting them on track to overtake mutual funds.

In a separate analysis of long-term mutual funds, business intelligence firm Simfund shows net monthly outflows for every month but for two dating back to the start of 2022.

In 2024, its data shows total net outflows of about $38 billion, with April seeing the largest asset loss for mutual funds at $41.9 billion.

The outflows were countered by one month of inflows, with February clocking a positive $15.7 billion. Simfund, like PLANADVISER, is owned by ISS STOXX.

Guillette of Broadridge notes the rise of ETFs as taking over mutual funds in the broader investment landscape. According to the firm’s Global Market Intelligence group, ETFs have seen inflows of $2.6 trillion since 2018, whereas mutual funds have seen outflows of about $2.5 trillion.

“The trend, then, is for asset managers to adopt and create ETF lineups, not the other way around,” he says. “They are going where the business is.”

Equities Rising

The investor deep dive survey, Guillette says, gives further granularity on where individual investor assets across age, gender, and a host of other factors.

One surprising result of this deep dive, he notes, is the rise of equities in investor portfolios. The 39% of equities among investor portfolios represents a 10-point jump from five years ago.

Broadridge’s report notes the increase of online brokerage use among investors contributing to more investment in equities and ETFs; a trend that stemmed in part from the pandemic and the rise of trading platforms, such as Robinhood.

But Guillette is quick to point out that investment via advisers is still much more common and looks to be holding steady: when considering asset ownership, 77% of Broadridge’s investors have received financial advice, and 23% identify as self-directed.

The study, he says, actually shows a lot of opportunities for asset managers and advisers to continue to find ways of personalizing products and offerings to take advantage of the trends.

“It’s interesting that, as sophisticated as we are as an industry we don’t know the end retail investors very well,” Guillette says. “Our viewpoint is that investors are diverse, and more and more investors want a personalized experience, so understanding the nuances is important input in terms of building scale for the industry.”

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