May 3, 2019

Despite New Market Highs, Investors Still Gravitate Toward Fixed Income Funds

by Tom Roseen.

The average equity fund has returned 16.13% year to date through April 30, 2019. However, investors continue to be net redeemers of equity funds (-$5.4 billion) while padding the coffers of taxable bond funds (+$107.9 billion), municipal bond funds (+$31.3 billion), and money market funds (+$7.7 billion).

Investors predilection for nondomestic equity funds (+14.8 billion) over their domestic equity brethren (-$20.3 billion) tells a story of investors possibly seeing buying opportunities over the pond compared to the U.S. market, which many think is getting a little long in the tooth. For the fund-flows week ended Wednesday, May 1, 2019, the S&P 500 was able to link together three consecutive closing highs, yet investors continued to be net redeemers of equity funds—withdrawing $1.8 billion for the week.

That is not to say that investors aren’t still injecting net new money into equity funds—they are—but they are being very selective. The Emerging Markets Funds classification has drawn the largest amount of net new money year to date, attracting $20.9 billion, followed by the go-anywhere domestic equity classification Multi-Cap Core Funds, which took in $14.8 billion so far this year, and the S&P 500 Index Funds classification, which drew a net $13.1 billion.

Interestingly, Multi-Cap Value Funds (-$9.5 billion) and Equity Income Funds (-$5.0 billion) appear to be the pariahs so far this year as investors continue to prepare for rising interest rates, despite some analysts betting on interest rate cuts this year after the Treasury yield curve inverted in March. As we have pointed out before, mutual fund investors continued to be net purchasers of taxable fixed income funds, preferring Core Bond Funds (+$42.3 billion), High Yield Bond Funds (+$15.1 billion), International Income Funds (+$10.0 billion), and Ultra Short Obligation Funds (+$9.5 billion).

There are still stark differences between the investment patterns of fund investors and authorized participants (APs, those institutional investors that are responsible for the creation and destruction of ETF shares). While fund investors continued to be net redeemers of equity funds, withdrawing a net $28.4 billion, they remained focused on taxable fixed income funds, injecting a net $72.5 billion year to date. In contrast, APs continued to embrace both equity ETFs, padding their coffers to the tune $23.0 billion thus far, and taxable income funds as well, injecting some $35.4 billion year to date.

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