by Tom Roseen.
Fund investors continued to pad the coffers of passively managed funds in the second quarter of 2019. While equity funds overall have fallen out favor with investors as uncertainty around free trade and global growth have placed a pall over the longest bull market in U.S. history, one needs to look a little deeper to understand where the money is flowing.
Obviously, a lot of money is being moved to the sidelines. For Q2, investors injected a net $111.6 billion into money market funds as the most recent market rally is starting to look a little long in the tooth and many financial pundits are prophesizing an imminent downturn.
However, despite the 2018 concerns of rising interest rates pressuring bond fund returns, investors continued to embrace bond funds. This trend has accelerated now that Federal Reserve Board Chair Jerome Powell has indicated the Federal Open Market Committee is likely to cut rates soon. For Q2, Lipper’s taxable bond fund macro-group experienced net inflows of $94.9 billion, while equity funds witnessed $8.0 billion in net redemptions.
Keep in mind the average equity fund returned 2.96% in Q2, while the average taxable bond fund chalked up a 2.20% return (and year to date, the spread is much wider: 16.04% and 5.49%, respectively).
Interestingly, when one breaks out the flows by passively managed funds versus actively managed funds, the story changes a bit. While we see fund investors have turned a cold shoulder to actively managed domestic and world equity funds—withdrawing $67.8 billion and $17.5 billion, respectively—they have warmed to the presumably lower cost passively managed alternatives—injecting $71.5 billion and $6.1 billion, respectively, into their passively managed counterparts.
While not quite as pronounced as the equity example, we’re seeing a similar pattern occurring on the taxable bond fund side, where actively managed taxable fixed income funds took in some $32.9 billion for Q2 2019, while their passively managed brethren took in $62.0 billion.
The one clear arena where actively managed funds continued to dominate the flows war was in the municipal debt fund macro-group, where actively managed munis attracted $20.9 billion while their passively managed cousins attracted just $2.0 billion for Q2.