The death of active investment management has been greatly exaggerated, and not just because the worm may turn against passive when the bull market sours. Part of the problem is a special type of investment product used almost exclusively inside 401(k)s and other employer-sponsored retirement plans.

Abigail Johnson Fidelity Investments Chief Executive Officer

U.S. equity mutual funds just suffered $16.9 billion in outflows (for the week ended 10/19), their worst net flows in five years, Trevor Hunnicutt of Reuters reports. Yet an ICI spokesman tells the wire service that a big part of the active mutual fund outflows picture is actually conversions into another product structure, collective funds.

Fidelity has been publicly reminding folks of this shift for at least a year and a half. Collective funds (also known as collective investment funds, collective trusts, collective investment trusts, or CIFs or CITs for short) are pooled investment vehicles regulated under banking law instead of by the SEC under securities law. They are not governed by the Investment Company Act of 1940 but by state and federal banking laws and regulators, and they can get away with this by being institutional-only products used mostly inside 401(k)s. The appeal, for medium-sized employers and up, is that a collective fund can have more flexible (and cheaper) pricing but with the same strategy as a comparable mutual fund. Indeed, Fidelity and many other fund firms with a defined contribution investment-only (DC I-O) presence offer collective fund versions of their mutual funds.

For all the fee compression talk in the retail investing world, the 401(k) space has been facing enormous fee compression pressures for years, and collective funds are one tool that 401(k) plan advisors (KPAs) and plan sponsors have been using to control costs without compromising investment choices. The ICI spokesman didn't give Reuters any specific numbers behind the shift yesterday, but in July 2015, for example, nearly two-thirds of Fidelity's net active mutual fund outflows were actually conversions into collective funds.

So, the active-passive shift isn't as bad as it looks ... if you're a fund firm with enough DC I-O business that folks use your collective funds. Yet like the rest of the active-passive shift, the collective fund conversion trend is all about lowering costs. 

Edited by: Neil Anderson, Managing Editor


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