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October 7, 2016

U.S. Fund-Flows Weekly Report: Funds Suffer Worst Weekly Outflows of the Year

by Pat Keon, CFA.

Lipper’s fund macro-groups (including both mutual funds and exchange-traded funds [ETFs]) suffered for the fund-flows week ending Wednesday, October 5, their worst weekly net outflows of 2016. The total negative flows of $34.4 billion surpassed the previous amount of $33.3 billion for the fund-flows week ending March 31, 2016. This past week’s outflows were driven by money market funds (-$28.5 billion) and equity funds (-$9.1 billion). Taxable bond mutual funds (+$2.9 billion) and municipal bond funds (+$325 million) were both able to take in net new money for the week, somewhat reducing the overall net outflows.

The S&P 500 Index finished down 0.54% in what was a mixed week of trading. The market’s performance was hampered by hawkish comments from the Federal Reserve about a potential interest rate increase and on multiple overseas concerns. Two different Fed presidents spoke out early in the trading week, saying they expect the U.S. economy will be ready for a rate increase in the near future as long as the economy continues to grow as forecasted. Controversy around Deutsche BankAG (a German entity), specifically a potential $14-billion fine by the U.S. Justice Department for past dealings with mortgage securities, made investors question whether the firm’s balance sheet is healthy enough to weather the storm. This news gave rise to fears of a banking contagion similar to that experienced during the global financial crisis of 2008. “Brexit” was back in play as U.S. markets reacted negatively to a speech given by U.K. Prime Minister Teresa May stating that the U.K. will start the process of leaving the European Union around the end of March next year.

Equity mutual funds accounted for the lion’s share of the net outflows from the equity group; they witnessed $7.7 billion leave their coffers, marking their thirtieth straight week of net outflows. Both domestic equity funds and nondomestic equity funds took fairly significant hits, suffering net outflows of $5.0 billion and $2.7 billion, respectively. Equity ETFs contributed $1.4 billion to the total net outflows of the equity group. Contrary to the mutual fund side, almost all of these outflows came from domestic equity products (-$1.3 billion), while the nondomestic group experienced only minimal negative flows (-$76 million).

The majority of the net inflows for the taxable bond funds group went into ETFs (+$2.3 billion), while taxable bond mutual funds received $600 million of positive net flows. Major beneficiaries of the positive flows were ETFs in Lipper’s High Yield Funds classification, taking in $1.7 billion of net new money, and Core Plus Bond mutual funds, which had net inflows of $664 million.

Municipal bond mutual funds, with positive flows of $232 million, extended their consecutive net-inflows streak to 53 weeks. Funds in the national muni categories again benefitted the most from the net new money intake, with General Muni Debt Funds (+$93 million) and Intermediate Muni Debt Funds (+$80 million) leading the way.

The activity in the money market fund group (-$28.5 billion) appeared to be the result of the new money market fund regulations that will be live at the end of next week. Because of that, Institutional Government Money Market Funds took in $45.0 billion of net new money, while Institutional Money Market Funds saw over $74 billion net leave.

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