With the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) falling 1.3% in late morning trading and adding to recent falls, listed fund managers are taking a beating.

Platinum Asset Management Limited (ASX: PTM) has seen its share price sink 4.6%, BT Investment Management Ltd (ASX: BTT) share price is also down 4.6%, while Magellan Financial Group Ltd (ASX: MFG) has seen its share price fall 3.9% and its Magellan Flagship Fund Limited (ASX: MFF) share price sink 3%. The Perpetual Limited (ASX: PPT) share price is also down 3%.

Since the start of this year, Platinum’s share price is down 17%, BT’s share price has lost 16.5% and Perpetual’s share price is down 11.7%, against the index’s 7% fall.

If you thought the market sell off was a contributing factor you’d be right, but there are also other factors at play.

During a falling market, the value of the funds under management (FUM) shrinks – and fund managers almost universally charge a management fee based on a percentage of assets. Lower FUM means lower fees.

Another important factor is that many investors tend to make the worst decisions during market falls, withdrawing their funds from the market and sticking them into banks accounts and term deposits. That compounds the fall in FUM from the falling markets, further cutting FUM and fees the managers charge.

More than $4 billion was withdrawn from unlisted active large cap funds in just the first 10 months of 2015 according to Morningstar. Interestingly, much of that was used to buy shares or low-cost exchange traded funds (ETFs) according to Morningstar’s Tim Wong.

In the US, investors pulled more than US$200 billion out of US-based actively managed funds and poured more than $400 billion into exchange traded funds that track broad indexes, according to the Wall Street Journal and Morningstar. It was the first net outflow since the 2008 financial crisis – again exhibiting the odd behaviour of investors.

The rationale behind taking funds out of actively managed funds is that investors think they can do it better by investing directly – or that they can improve their performance by at least matching the index’s performance. ETFs tend to charge a fraction of the fees active managers charge.

Foolish takeaway

ASX-listed fund managers saw similar results during the GFC when markets plunged before everyone piled back in again as the market recovered. However, research has indicated that investors achieve much worse performance than the funds they invest in, because they tend to chop and change and end up selling at the worst time (bottom) and buying back in at or near the top. A better idea would be to just leave the funds where they were and ride the storm out.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.