Active managers have shed $22 billion in five years as index funds pull in a record $15.5 billion

Australian active fund managers have shed almost $22 billion over the past five years as a prolonged run of underperformance accelerates the shift toward cheaper, index-tracking products. Local equity funds alone suffered $6.6 billion of outflows in the past financial year, with roughly a third of that driven by funds shutting down entirely rather than investors simply redeeming, according to a Betashares analysis of Morningstar data.

Over the same period, funds tracking Australian indices pulled in a record $15.5 billion in the past financial year and $40.2 billion over five years - a divergence that comes down to performance as much as cost. Only a quarter of active Australian large-cap equity managers beat the S&P/ASX 200 in the year to June 30, the weakest showing in seven years.

What makes the run unusual is that market conditions have, on paper, looked favourable for stock-pickers. “Heightened single-stock volatility, earnings-season surprises, market leadership rotations and greater stock-level dispersion are often cited as conditions that favour active management,” said Tom Wickenden, an investment strategist at Betashares. “The very conditions stock pickers typically point to as an advantage were among the biggest contributors to their underperformance.”

The pain has been concentrated: this month Australian Unity was forced to close Platypus Asset Management after its flagship Australian equities fund lagged the ASX 300 Accumulation Index by 22.9% in the year to July 31. Much of the broader struggle traces back to how concentrated the ASX has become - the 20 biggest companies now make up 63.4% of the ASX 200, up from 61% at the start of the year, as money crowds into the market's biggest and most liquid names. “Passive funds are mandated to keep investing into these stocks at the top end of the market, so that is creating constant momentum,” said Morningstar's Zunjar Sanzgiri. “However, active managers may recognise some risk in this growing concentration and choose to avoid them.”

Commonwealth Bank's swelling index weighting caught out many managers who were underweight or avoided the stock on valuation grounds - only for CBA's weighting to later slide to about 10.5% of the ASX 200 amid concerns over slowing credit demand, falling property prices and rising bad debts. Some see the shakeout as an opening. “As performance beyond the big four banks starts to broaden, there will be more of an opportunity for active managers to actually add value beyond that of a passive investment,” said Sean Sequeira, chief investment officer of Australian Eagle Asset Management, which runs more than $1 billion across two Australian equity funds. “A lot of stocks outside the banks and miners have been repriced down, so there is an opportunity now, but it will take some time for it to result in a reversal of the trends in flows we've seen with active and passive funds.” BHP now accounts for more than 12% of the ASX 200 - roughly double its 6.25% weighting in Australian Eagle's own portfolio. “We like BHP and think there is upside potentially, but it requires a further increase in commodity prices, and the stock is not necessarily cheap relative to its history,” Sequeira said. “So we look for similar exposure elsewhere.”

A tax change has added fresh momentum to the shift. Since the Albanese government replaced the 50% capital gains tax discount with an indexation model in May, real estate has become less lucrative and investors have gone looking for new sources of income and tax-effective growth - a shift that favours ETFs, which net gains and losses internally, so a big rally in one holding can be offset by weaker performers elsewhere in the fund, potentially trimming the tax bill. Australian ETFs attracted a record $7 billion of inflows in August alone, beating the previous month's record of $6.8 billion. Income funds - high dividend-paying and bond strategies - were the biggest beneficiary, taking in $1.3 billion in August, ahead of the $1.2 billion that went into Australian equity products.

Local ETF providers now hold about $382 billion in assets, and the number of ETFs and similar products listed on the ASX has passed 500 for the first time - a scale that would have seemed unthinkable a decade ago, when active management was still the default choice for most Australian investors.