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Actively managed funds trim holdings in face of ETF popularity

NEW YORK, June 4 (Reuters) - Actively managed mutual funds are becoming less active, according to a new worldwide study conducted by Nasdaq OMX Group that will be released Thursday.

As competition between passive and active fund managers heats up, active fund managers are holding fewer stocks and trading them less often in order to differentiate themselves from passive funds.

Over the last four years, the number of holdings in the average stock fund worldwide declined by 7 percent to 85 companies, according to the study, while the number of securities that a fund either bought or sold declined by nearly 30 percent over the same time.

The drop-off in activity is largely a reflection of the growing popularity of index funds and other forms of passive investing in which managers simply try to mimic the return of a benchmark index such as the Standard & Poor's 500, said David Levine, Nasdaq's global head of investor relations and analytics product management.

Levine conducted the study on behalf of companies who list their shares on Nasdaq and wished to have more information about their shareholders, he said.

"We would argue that the decrease in turnover is indicating that managers are more focused on their styles and core value propositions," Levine said.

This is aimed at distinguishing themselves from index funds exchange traded funds put out by firms such as the Vanguard Group and BlackRock Inc's iShares line that have eaten into the market share of active funds, Levine said.

With fewer companies in their portfolios, managers are more likely to have returns that deviate from their benchmark.

As a result, companies are watching the number of active shareholders decrease as portfolio managers focus their bets on fewer companies and buy and sell their shares less often. Approximately 35 percent of shares in General Electric Co , for example, are now held by passive funds, compared with 30 percent four years ago, Levine said.

The competition between active and passive managers for investor dollars has never been greater.

Since 2010, the percentage of investor dollars invested in actively managed funds has declined by 7 percent, to 76 percent of total mutual fund assets, Levine said.

Passive funds, by comparison, now make up 24 percent of total mutual fund assets, a jump of 34 percent from four years ago. Last year, passive funds took in $2 for every $1 sent to an actively managed fund, according to data from Morningstar.

The drop-off in trading and the number of companies in fund portfolios coincides with the jump in the number of so-called concentrated funds, those portfolios which include 30 or fewer stocks and are by definition not diversified.

Over the five years to December 2013, the assets invested in concentrated funds jumped from $44.5 billion to approximately $117 billion, according to data from Morningstar, a growth rate 67 percent greater than actively managed funds as a whole.

(Reporting by David Randall; Editing by Cynthia Osterman)