Stock pickers are having the best year since the bull market began back in 2009, and investors are starting to take notice.
Active funds, which employ managers who move in and out of positions, hauled in $3.5 billion last week, the best showing in 2½ years, according to Bank of America Merrill Lynch. While a pittance compared with the massive outflows in recent years, the move represents at least an acknowledgement that the climate has gotten better for stock selection.
The move comes as 54 percent of active managers beat their benchmarks in the first half of 2017. Alpha generation has been difficult in a low-volatility environment, but managers benefited from being on the right side of the technology boom and staying away from sectors that have underperformed.
The active versus passive debate has heated up as investors' cash has flocked into exchange-traded funds. Rather than use active managers to pick stocks, ETFs mostly follow basic market indexes like the S&P 500 and various sectors, and carry lower fees than mutual funds.
ETFs recently eclipsed $3 trillion in assets under management — still a far cry from the $14.7 trillion in mutual funds, most of which are actively managed, but gaining substantial ground. In 2017 alone, ETFs have pulled in $247.7 billion on the equity side, compared with $62.7 billion in outflows from mutual funds, according to BofAML.
In a broader perspective, Morningstar data show that over the past 12 months, active funds across all categories [including bonds and commodities] have had $247 billion in outflows while passive funds have taken in $722.2 billion.
More recently, active managers may be benefiting from the pervasive worry that the current environment of extremely low volatility is signaling tumult ahead.
"As markets yawn to higher highs while registering lower lows in volatility, it's too easy to forget that, in fact, stocks do sometimes go down," Terri Spath, chief investment officer at Sierra Investment Management, said in a note this week. "Passive investing cannot protect against that. Tactical strategies can."
However, investors have hardly abandoned the move to passive. While it was a good week for active and perhaps the sign of a trend, ETFs nearly doubled the mutual fund intake with $6.4 billion of inflows.
Investor money continues to shy away from U.S. stocks as well.
Domestic equity funds across both passive and active strategies saw $800 million in outflows, the fifth-straight losing week, while emerging market funds brought in $2.3 billion, which marked the 18th consecutive week of inflows.