FUND FLOWS SPOTLIGHT Investors Cut Costs by Eschewing Pricey Active Funds A recent Morningstar study of U.S. open-end mutual funds and exchange-traded funds found that investors paid lower fund expenses in 2019 than ever before. (See "Marking Two Decades of Falling Fund Fees," Page 18.) A look at fund flows illustrates how investors are voting with their feet. Active Cheapest Quintile Since 2000, net flows into funds charging fees that rank within the bottom 20% of their Morningstar Category group have continued to trend higher. In 2019, these funds saw net inflows of $581 billion. Passively managed funds accounted for 70% of the net flows into this group, while actively managed funds accounted for the remaining 30%. Passive Cheapest Quintile Remaining 80% Flows for the remaining 80% of funds have been negative for five years running. In 2019, these funds witnessed $224 billion in collective outflows. Expensive active funds have been the epicenter of outflows. During each of the past six years, the most expensive 80% of active funds have accounted for all the net outflows across all funds. Remaining 80% $500B 250 0 -250 -500 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Morningstar. Data as of 12/31/2019. Active Versus Passive Fund Strategies The percentage of U.S. actively managed funds that outperformed their respective Morningstar Style Index. < 20% > 40% Index Returns (06/30/2020) 81.7% -16.9 28.1% -3.4 22.4% 17.3 83.9% -21.8 54.0% -11.8 34.9% 8.8 Value Core Growth 28.8% -3.6 46.8% 8.6 17.4% 20.5 67.3% -2.3 20.9% 4.8 18.5% 17.8 82.5% -7.2 45.9% -0.4 40.3% 11.7 Value Core Growth 17.5% 6.2 14.0% 10.3 17.1% 16.0 34.7% 3.3 20.3% 6.0 18.1% 13.0 Mid 23.3 66.4% -1.1 39.8% 2.8 37.6% 9.5 Small 21.4% Large 8.1 Mid 15.9% Small -6.9 Large 42.1% 5-Year Mid 3-Year Small 1-Year 20 to 40% Value Core morningstar.com/lp/magazine Large Percentage of Actively Managed Funds Outperforming Index: Growth 79http://www.morningstar.com/lp/magazine