JonathanBurton

Daniel Hertzberg

The bad times are back for actively managed U.S.-stock mutual funds.

Investors had been pulling huge and growing amounts of cash out of these funds each year for almost a decade, even as the U.S. market hit new highs. Then they withdrew only a relatively modest sum in 2013, likely because domestic stocks were robust and showed lower-than-average volatility, says Shelly Antoniewicz, senior economist at the Investment Company Institute, the mutual-fund trade group.

Now the respite is over — and investors are making up for lost time. Actively managed U.S.-stock funds have seen more selling than buying for seven consecutive months, with about $70 billion out the door for the year through September, according to estimated data from investment researcher Morningstar Inc.

‘Active management has never been in worse repute’ John Rekenthaler, vice president of research at Morningstar.

Yes, investors are still sinking money into U.S. stocks. But increasingly they are doing it through traditional index mutual funds and exchange-traded funds that track a specific market benchmark or sector, without the variability of a fund manager’s hand. While active stock funds have been seeing uninterrupted outflows, passive U.S.-stock funds have collected inflows for eight months in a row.

Meanwhile, other broad categories are booming, too. Investors are piling into bond funds and both active and index international-stock funds.

‘Darkest of days’

“Active management has never been in worse repute,” says John Rekenthaler, vice president of research at Morningstar. “This is the darkest of days.”

Investors are sour on active U.S.-stock managers for good reason: performance, or the lack of it, particularly during the 2008-09 U.S. market slide.

“Investors got burned,” says John Bogle, founder of index-fund giant Vanguard Group and an outspoken advocate for index investing. “They’re not going to make the same mistake.”

Fund shareholders had believed — and indeed many fund companies intimated — that seasoned professionals would shelter them from market storms by selling stocks and “going to cash,” thereby saving their portfolios.

In reality, most stock managers in 2008 lost as much as or more than the average. And their performance wasn’t impressive when the market picked up again.

Just 26% of domestic stock-fund managers were able to deliver higher returns than their respective index benchmark over the past five years through June, according to S&P Dow Jones Indices. Even more sobering, in this same bullish period, 87% of large-cap stock-fund managers failed to beat the S&P 500 SPX, -0.61%  .

“They haven’t in the aggregate outperformed the indexes,” says Rekenthaler, about U.S. stock-fund managers. “If you moved over from active to passive in 2009, you’re not regretting that decision.”

The new approach

The result? U.S. active managers destroyed the trust of both individual investors and financial advisers, neither of whom want to pay up for active management that can’t beat an index.