FUND FLOWS SPOTLIGHT Pure Passive Funds More Popular Than Strategic Beta Over the past year through May, active U.S. equity funds have had outflows of about $195 billion, versus passive inflows of $174 billion. But there was also a similar divide within passive funds themselves: Most passive inflows have gone to broad-based market-cap-weighted index funds, both open-end and exchange-traded, rather than to strategic-beta funds. Strategic-beta funds are in some ways akin to active funds, as they focus on factors such as value, growth, and low volatility in order to beat broad-based indexes. During the past 12 months, $130 billion went to nonstrategic-beta passive U.S. equity funds- mostly market-cap-weighted index funds- while about $44 billion went to strategic-beta funds. Overall market share between these two groups roughly mirrors their share of inflows: Strategic-beta funds claim about 20% of passive U.S. equity assets. Kevin McDevitt is a senior analyst with Morningstar Research Services. Passive U.S. Equity Flows Nonstrategic Beta Strategic Beta $50M 40 30 20 10 0 -10 -20 2015 2016 2017 2018 Source: Morningstar Direct Asset Flows. Data as of 05/31/2018. Active Versus Passive Fund Strategies The percentage of U.S. actively managed funds that outperformed their respective Morningstar Style Index. < 20% Index Returns (06/30/2018) 10.2 54.9% 10.5 30.8% 20.5 67.5% 10.4 64.6% 12.6 41.6% 23.7 Core Growth 9.7 24.3% 11.1 16.3% 15.2 2.0% 11.5 30.5% 8.7 38.7% 10.7 52.8% 9.2 50.3% 9.4 35.5% 11.8 Value Core Growth 52.2% 10.0 33.1% 12.5 8.8% 17.7 4.6% 12.9 12.4% 12.4 33.6% 13.4 Mid 31.8% 23.2% 40.4% 10.8 35.2% 11.8 33.3% 13.7 Small 27.2 Large 15.7% Mid 7.6 Small 89.0% Large 8.8 5-Year Mid 3-Year 50.5% Value > 40% Small 1-Year 20 to 40% Value Core Large Percentage of Actively Managed Funds Outperforming Index: Growth global.morningstar.com/Morningstarmagazine 79http://global.morningstar.com/Morningstarmagazine