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The Dow Jones industrial average is at an all-time high, the economy is chugging along, and unemployment is so low in Boston that some businesses are having a hard time filling positions.
So why is the mood so grim in the halls of investment management companies? Putnam Investments and Grantham, Mayo, Van Otterloo & Co. recently resorted to layoffs, and Loomis, Sayles & Co., a 90-year-old company renowned for its bond funds, canceled the annual Christmas party — a classic sign of belt-tightening. With the new year here, more cutbacks surely are coming.
It’s a challenging time for active stock- and bond-pickers at these firms and their competitors. Customers through November of last year took $321 billion out of actively managed stock funds across the country, while pouring $266 billion into cheaper index-based portfolios that don’t depend much on human talent — or risk human failings.
The indexing trend isn’t new, but it accelerated after the 2008 financial crisis, when most fund managers failed to avoid sharp losses. As a result, business might never again be the same for an industry that’s driven wealth and jobs in Massachusetts for more than a century.
“What we’ve seen in the last 18 to 24 months really is unprecedented,’’ said Kevin Quirk, a principal with Casey Quirk, a Darien, Conn.-based unit of Deloitte that does management consulting for investment firms.
All the money flowing into index funds at companies like Vanguard Group has helped drive up the value of the Dow and the Standard & Poor’s 500 index. But it has diluted the profits of firms staffed with professionals who research and hand-select investments. Even Boston-based Fidelity Investments, whose reputation was built on active funds, is now competing hard for less lucrative index accounts.
Worldwide, investors have pulled $1.8 trillion out of actively managed funds over the past five years, according to a recent report by Casey Quirk, and that’s expected to continue at an even faster clip through the rest of this decade. In fact, everywhere but China, growth for investment firms is slowing, according to the report, and revenues and profits are taking a hit.
Loomis Sayles customers withdrew $5.1 billion from mutual funds in the first 11 months of 2016, according to Morningstar Inc. in Chicago.
The firm, a $245 billion unit of Natixis Global Asset Management in Boston, took steps to trim expenses, such as canceling the holiday party and putting a hiring freeze in place to avoid laying off any of its 670 employees. Through attrition, its head count declined by 18 people last year.
“We are a people business, and our employees are our most essential asset,” spokeswoman Meg Clough said. Loomis chief executive Kevin Charleston had predicted a tough 2016, she noted. And the outlook for the new year is not much better.
Active bond fund managers are holding up better than their counterparts running stock portfolios, according to Morningstar data. But overall, 43 percent of new money flowing into investment firms over the next five years is projected to go into passive index funds, according to Casey Quirk.
Employers that offer 401(k) retirement plans and advisers who build portfolios for clients are under pressure to use these lower-cost funds. Even the managers of the elite Harvard endowment have turned to indexes for US equities, unable to outperform them at a reasonable price.
In November, Boston’s Putnam — a unit of Great-West Lifeco and Montreal’s Power Corp. — eliminated 115 positions, or about 8 percent of its workforce, to save $65 million. Some of the employees who lost their jobs were investment veterans.
Among those to leave were Walter Donovan, Putnam’s chief investment officer since 2009, when he was hired away from Fidelity, and Robert Ewing, head of US equities and another Fidelity alumnus. As part of the reorganization, three executives were elevated to succeed Donovan, with duties split among them to oversee stocks, bonds, and global asset allocation.
“These are massive changes for the firm,’’ said Alec Lucas, a Morningstar analyst on equity strategies who follows Putnam. “It can be hard to make a case for a lot of the funds, relative to passive options.”
Putnam chief executive Robert Reynolds has defended the role of active managers, saying the best ones can outperform indexes. Regardless, Putnam customers through November withdrew $8 billion from the firm’s mutual funds, according to Morningstar, leaving $72 billion today. (Including institutional accounts, Putnam has a total of $154 billion in assets.)
Many firms, like Fidelity, are counting on rising interest rates, changing geopolitical factors, and revamped tax and trade policies under President Trump to stir a comeback for active managers. During a more volatile period, they say, their services will be more in demand.
“Fidelity has managed through these cycles before, and we believe that experienced, proven active managers will make up ground when the pendulum swings,’’ said Adam Banker, a spokesman for the third-largest US mutual fund company, with $2.1 trillion under management.
Customers took out a net $21 billion from Fidelity funds during the 11 months that ended in November, according to Morningstar.
Beyond layoffs and other cutbacks, mounting pressure to maintain profits will probably result in more firms being sold, analysts and regulators say. Such deals already are happening, especially below the sector’s top-tier firms. Companies with less than $300 billion in assets are vulnerable, analysts say.
Boston’s Pioneer Investments was passed in December from one foreign financial giant to another, as UniCredit SpA of Milan sold the longtime mutual fund manager for $4.1 billion to France’s Amundi SA.
London’s Henderson Group bought Janus Capital Group Inc. of Denver in October, and Eaton Vance Corp. of Boston agreed to buy the assets of Calvert Investment Management Inc., a socially responsible money manager.
“You’re going to see more of these deals get done,’’ said Kevin Quirk, the consultant. “There’s a fair number of companies in this city that will likely be affected by this.”
LPL Financial, a national network of financial advisers based in Boston, tried and failed to find a buyer last year.