October’s Long-Term Fund Outflows Highest Since 2015

Investors appear to have turned cautious, as October outflows of stock and bond funds registered the highest monthly level in more than three years, Morningstar notes in a new report.

October’s $29 billion in long-term outflows were the highest since August 2015, which saw $30.3 billion of outflows and was the last time the U.S. equity market was in the midst of a correction. These outflows represented 0.15% and 0.22% of long-term assets, respectively, according to Morningstar’s U.S. Mutual Fund and ETF Asset Flows report for October 2018.

While the dollar flows are large, their impact on overall assets is relatively small, the report emphasizes. It notes that the $102 billion that exited long-term funds at the height of the global financial crisis in October 2008 represented 1.4% of assets or nine times as much as October 2018’s outflow from a percentage standpoint.

In contrast with recent history, fixed-income funds were hit much harder than equity funds. A combined $19.2 billion left taxable and municipal bond funds, while just $2.2 billion exited equity funds, the report shows.

For taxable bond funds, October was the worst month since December 2015, with $14.2 billion in outflows — perhaps due in part to the Fed’s rate hike in September. High-yield bond funds were hit with $7.3 billion in outflows, while municipal bond funds had their worst month since December 2016, the report notes.

Active funds also suffered, registering their worst month since December 2016 with $46 billion in outflows. Passive inflows were modest compared with their history, especially if sector and leveraged groups are included. Across all four groups, passive collected $16.9 billion. By comparison, the report notes that long-term passive funds collected $37.9 billion in September.

Despite October’s volatility, equity fund flows were relatively resilient, with core strategies faring best. U.S. equity funds collected $3.6 billion, largely due to a $14.5 billion contribution from large-blend offerings, which led all Morningstar categories. Passive large-blend funds dominated these inflows, the report notes.

And while core strategies fared best, niche equity strategies fared poorly. Investors pulled $12.6 billion from sector equity funds in October, representing 1.4% of overall assets. According to the report, real estate and technology funds were hit hardest, with $3.5 billion and $3.4 billion in outflows, respectively.

Among top U.S. fund families, Vanguard continues to see the highest monthly firm inflows of $9 billion, followed by Fidelity with $6.9 billion in inflows.

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