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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Investors pulled a record $450bn out of actively managed stock funds this year, as a shift into cheaper index-tracking investments reshapes the asset management industry.

The outflows from stockpicking mutual funds eclipse last year’s previous high of $413bn, according to data from EPFR, and underline how passive investing and exchange traded funds are hollowing out the once-dominant market for active mutual funds.

Traditional stockpicking funds have struggled to justify their relatively high fees in recent years, with their performance lagging behind the gains for Wall Street indices powered by big technology stocks.

The exodus from active strategies has gathered pace as older investors, who typically favour them, cash out and younger savers turn instead to cheaper passive strategies.

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“People need to invest to retire and at some point they have to withdraw,” said Adam Sabban, a senior research analyst at Morningstar. “The investor base for active equity funds skews older. New dollars are much more likely to make their way into an index ETF than an active mutual fund.”

Shares in asset managers with large stockpicking businesses, such as US groups Franklin Resources and T Rowe Price, and Schroders and Abrdn in the UK, have lagged far behind the world’s largest asset manager BlackRock, which has a large ETF and index fund business. They have lost out by an even wider margin to alternatives groups such as Blackstone, KKR and Apollo, which invest in unlisted assets such as private equity, private credit and real estate.

T Rowe Price, Franklin Templeton, Schroders and $2.7tn asset manager Capital Group, which is privately owned and has a large mutual fund business, were among the groups that suffered the largest outflows in 2024, according to Morningstar Direct data. All declined to comment.

The dominance of US big tech stocks has made it even tougher for active managers, which typically invest less than benchmark indices in such companies.

Wall Street’s so-called Magnificent Seven — Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta and Tesla — have driven the bulk of the US market gains this year.

“If you’re an institutional investor you allocate to really expensive talented teams that are not going to own Microsoft and Apple because it’s hard for them to have a real insight into a company that’s studied by everyone and owned by everyone,” said Stan Miranda, founder of Partners Capital, which provides outsourced chief investment officer services.

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“So they generally look at smaller, less-followed companies and guess what, they were all underweight the Magnificent Seven.”

The average actively managed core US large company strategy has returned 20 per cent over one year and 13 per cent annually over the past five years, after taking account of fees, according to Morningstar data. Similar passive funds have offered returns of 23 per cent and 14 per cent respectively.

The annual expense ratio of such active funds of 0.45 percentage points was nine times higher than the 0.05 percentage point equivalent for benchmark-tracking funds.

The outflows from stockpicking mutual funds also highlight the growing dominance of ETFs, funds that are themselves listed on a stock exchange and offer US tax advantages and greater flexibility for many investors.

Investors have poured $1.7tn into ETFs this year, pushing the industry’s total assets up 30 per cent to $15tn, according to data from research group ETFGI.

The rush of inflows shows growing use of the ETF structure, which offers the ability to trade and price fund shares throughout the trading day, for a wider variety of strategies beyond passive index-tracking.

Many traditional mutual fund houses, including Capital, T Rowe Price and Fidelity, are seeking to woo the next generation of customers by repackaging their active strategies as ETFs, with some success.